Citi Trends, Inc. (CTRN) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Citi Trends First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Wednesday, May 17, 2017. I would now like to turn the conference over to Mr. Tom Filandro, Managing Director at ICR. Please go ahead, sir.

Thank you, Carlos. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it is available on the company’s website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company’s most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. As you maybe aware, Citi Trends, its directors and certain of its executive offices are in the process of soliciting proxies from the company’s stockholders in connection with Citi Trends’ upcoming 2017 Annual Meeting. Today’s earnings call will focus exclusively on our financial and operating results. Accordingly, during the question-and-answer session, we kindly ask that you focus your questions on our business and corporate financials. Additional information related to the proxy contest can be found on the SEC’s website or the Investor Relations section of the company’s corporate website. I will now turn the call over to Bruce Smith, Acting Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Bruce?

Thanks, Tom. Good morning, everybody and thank you for joining us today. Also on the call to participate in the question-and-answer session are our two recently promoted general merchandise managers, Christina Short and Brian Lattman. I am pleased to report a solid start to fiscal 2017 as we delivered positive comparable store sales and a 14% increase in adjusted net income. We have continued to maintain a sharp focus on delivering fashion-right and value-priced merchandise that resonates with our customer base, while extending complementary product lines that have proven to be successful additions in recent years. Now for details on the first quarter results. Total sales in the first quarter increased 3.2% to $200 million, including a comp store sales increase of 1%. During our last investor call in March, sales fell significantly below last year’s levels during the first 6 weeks of the quarter due to the IRS’s delay in income tax refund distributions. When such delays have occurred in the past, we have not been able to recover all of the lost sales once the refunds started to flow. As a result, we were very pleased with the recovery of more than the $24 million in sales that were lost during the first 24 days of the quarter. Combining the first quarter sales results with the 3.4% comp store sales increase in Q4 and now a 6% comp increase thus far during the second quarter demonstrates that our strategic merchandising direction is delivering solid results. The positive comparable store sales during the first quarter reflected an increase of 2% in the number of customer transactions and a 1% increase in the average number of items per transaction partially offset by a 2% decrease in the average unit sale. We have registered higher customer transaction counts in each of the past 5 years and it was good to see that momentum continue during the first quarter of the new fiscal year. In looking at comp store sales for the individual merchandise categories, the Home division again led the way with a 26% increase on top of a strong 22% increase in last year’s first quarter. We have now had comp increases in Home for 19 consecutive quarters, 16 of which were double-digit increases. Men’s sales were up 4% this year after being down 2% last year. Importantly, the positive momentum in the Men’s division continued from the fourth quarter when we had a comp increase of 6%. Accessories were up 2% in this year’s first quarter and up 4% in last year’s first quarter. Going back almost 8 years, Accessories have increased in 28 of the last 31 quarters. These gains, together with the strength in the Home business, have provided important additions to the breadth of our merchandise assortment for several years now and have built our total non-apparel sales to 37% of the company’s total. As in the fourth quarter, Ladies sales tracked the company average as they were slightly positive in the first quarter after being down 9% in the first quarter of 2016. Within our Children’s division, in a successful effort to improve turns and gross margin, we strategically pulled back inventory levels in our newborn, infant and toddler categories. As a result of the reduction in inventory, our total Kids sales contracted 6% compared to a decline of 8% last year. Excluding the newborn, infant and toddler results, our combined boys and girls businesses were up 1% during the quarter. To provide some color on how the first quarter progressed, our comparable store sales were down 21% in February, then up 13% in March and up 18% in April. Cost of goods sold as a percentage of sales increased 40 basis points in the first quarter due primarily to higher freight cost. SG&A expenses increased $2.2 million or 3.7%, with most of the increase being attributable to $1.6 million of proxy contest related expenses. As a percent of sales, SG&A expenses increased 20 basis points to 30.3%. However, the SG&A ratio actually decreased 60 basis points when adjusted for the proxy contest expenses as a result of continued tight management of our expense base. First quarter net income in 2017 increased to $8.9 million compared with $8.7 million in last year’s first quarter. However, this year’s net income was $10 million when adjusted for proxy contest expenses, representing a 14% increase over last year. Earnings per share were $0.60 in this year’s first quarter or $0.68 when adjusted for proxy contest expenses compared to $0.60 last year. In other first quarter developments, we successfully opened 6 new stores. And as mentioned in an earlier press release, we expanded our capital return program by increasing our dividend rate by 33%, authorizing a $25 million share repurchase program and announcing plans to return additional excess cash to investors in the future. Looking forward, we plan to continue growing the Home and Accessories businesses that have been so productive for us in recent years while maintaining our focus on providing our customers with highly fashionable apparel at great values in Ladies, Men’s and Kids. We are also looking forward to the next stage of enhancements to our merchandise planning and allocation systems, which are expected to be rolled out beginning at midyear. These enhancements are designed to improve our ability to better tailor the merchandise mix on a store-by-store basis and are a key part of our ongoing efforts to improve sales, gross margin and inventory turns. Carlos now will open it up for questions.

[Operator Instructions] Our question comes from the line of Patrick McKeever with MKM Partners. Please go ahead.

Thanks. Good morning everyone. Just a question on all the store closures in the department store space and specialty apparel, it’s a huge number and I am wondering what you are thinking in terms of the potential impact on your business, either from the liquidation sales but also perhaps from a merchandise availability standpoint, do you think there are opportunities to pick up some excess products and then how do you see things over the longer term?

Yes. Thanks for your question, Patrick. Historically, we have benefited in terms of excess product when other retailers have gone out. We expect that will continue this time. We have already had some indications that there is some product out there from some of those that you have heard about in the news. As far as liquidation sales go, I don’t expect that to have any meaningful impact at all and even if it did, it’s a very short-term prospect. We do not compete directly with the department stores. And so we are not in malls generally and therefore, we would expect that to be a big issue.

Where do things currently stand in terms of the percentage of your inventories that you would classify as off-price purchases or opportunistic purchases and where will that go or where could it go, I guess is probably a better way of phrasing it?

Yes. There is no significant plan at this point to change where we are at. I would say that it’s close to around 50% opportunistic and all price.

Okay. And then just anything out there on current fashion trends and how you feel you are positioned relative to some of those trends. And then I guess my last question is just anything – any kind of an update on the search for a permanent CEO?

Yes. Thanks Patrick. I will let Brian speak to trends, and then I will follow-up with the response to the CEO question.

Hi Patrick, the most exciting and consistent trend we have seen in apparel is in fashion denim. The trend is consistent across all of our apparel division and size ranges and the customers responded very well to the new fashion in Ladies, Men’s and Children’s. We are seeing a great reaction to rips and tears, new silhouette, lace-up detail and new exciting washes. This is also a very good sign for back-to-school as denim plays such a large part of the assortment at that time. The other category that it’s trending across all apparel division is fashion knits. This is a lot of excitement trends in fashion details that are driving our sales in a meaningful way. Do you want to…?

Yes. Thank you, Brian. So as far as your question about the CEO search, it has been ongoing for a little over a month now. So it’s in full gear. The Board has been interviewing candidates and there is nothing to report at this time other than that.

Okay. And actually if I could just squeeze one more, the AP ratio, why was that up as much as it was?

Yes. It’s a combination of a couple of things. Usually, accounts payable follows inventory either up or down. However at this point, we are relying less on next season buy inventory than we have in the past and we are doing that, basically in order to hold more in-season liquidity for opportunistic buys and as well as chasing the current fashion. Next season buy inventory often doesn’t have the accounts payable attached to it, because of the length of the time that the inventory is held. So the relationship between inventory and AP gets a little bit skewed when next season buy inventory moves around. And so that’s why – that’s part of the reason why you are seeing that. The second reason is that payables are simply higher because of the timing of receipts. With the sales coming later in the quarter, purchases also came later and that means those later purchases are still sitting on accounts payable at quarter end.

Okay, great. Thank you very much Bruce.

And I will turn it over back to you, Mr. Smith.

Okay. Thank you for joining us today. We will next speak to you after our second quarter in mid-August. Thank you.

Ladies and gentlemen that concludes today’s call. We thank you for your participation and ask you to please disconnect your lines.