Citi Trends, Inc. (CTRN) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends’ Third Quarter 2017 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded Tuesday, November 21, 2017. I would now like to turn the conference over to Tom Filandro, at ICR. Please go ahead.

Thank you, Chris, and good morning everyone. 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. 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 General Merchandise Managers, Christina Short and Brian Lattman. There are a number of positives to report for the third quarter, starting with sales which were up 10% in total and up 7.4% in comparable stores. The comp store increases were consistent throughout the quarter, with growth of 7% in August and 8% in both September and October. The positive comp store sales in the third quarter reflected 4% more customer transactions, 2% more items per transaction, and a 1% increase in the average unit sale. Importantly, the average unit sale increased for the first time in 10 quarters. In fact, going back 25 quarters, we had only one increase in the average unit sale until this year’s third quarter. Also, with three quarters completed for fiscal 2017, we expect that this will be the sixth consecutive year in which we register growth in both the number of customer transactions and units per transaction. And looking at comp store sales for the various merchandise categories, the home area continued to be the strongest performer, up 29% on top of the strong 34% increase in 2016’s third quarter. This was the 17th consecutive quarter of double digit growth in our home business. Men sales were up at 8% this year, after being down 1% in last year's third quarter. Accessories, including footwear, were up 7% after being flat last year, and have now increased in 23 of the past 25 quarters. The ladies division was up 6% this year, and down 2% last year. And children sales were up 4% in this year's third quarter, after being down 7% in the third quarter of 2016. The combination of all five major merchandise categories being up at least 4%, together with higher transaction counts, units per transaction and average unit sale, is confirmation that our merchandising strategy is working across all of our businesses. In the first three quarters of the year, total sales were up 6.6%, while comparable store sales were up 4%. Cost of goods sold as a percent of sales improved 30 basis points in the third quarter as a result of a higher core merchandise margin related to the strong sales, partially offset by an increase in freight costs. For the year to date, cost of goods sold as a percent of sales has increased 10 basis points, due primarily to higher freight costs. SG&A expenses as a percent of sales declined favorably by 140 basis points in this year's third quarter, with the leverage coming primarily from the 7% growth in comparable store sales. Expenses were 6% higher than last year's third quarter, due primarily to a 3% increase in store count, normal expense inflation and the effects associated with increasing comp store sales and improving operating performance, including higher incentive compensation expense. Year to date SG&A expenses declined by 40 basis points as a percent of sales, or 90 basis points after adjusting for proxy contest expenses incurred in the first half of 2017. Our third quarter net income improved by $1.4 million to six $600,000 or $0.05 per share, compared to last year's loss of $800,000 or negative $0.06 a share. Year to date, we earned net income of $9.3 million or $0.65 a share, compared to $7.8 million or $0.53 a share earned in last year's first three quarters. However, this year's net income in the first three quarters was $11.1 million when adjusted for proxy contest expenses, representing year over year growth of 42%. In other third quarter developments, we successfully opened five new stores, relocated or expanded two stores, and closed one store. We also began the rollout of the next phase of enhancements to our merchandise planning and allocation systems, which are designed to improve our ability to better tailor the merchandise mix on a store by store basis. This is a major strategic initiative designed to support our efforts to continue the sales momentum, while also improving our gross margin and inventory turns. We believe that we're in excellent merchandise position, with inventory up only 2% after a quarter in which sales were 10% higher. And after the first three weeks of November, comparable store sales are up 7% on top of a 6% increase in the same three weeks last year. In further discussing the fourth quarter, as a reminder, fiscal 2017 is a 53 week year. Therefore, Q4 has an extra week. As discussed in an earnings call earlier this year, we expect that week to generate approximately $11 million to $13 million in sales, while from an earnings perspective, we would expect it to be close to breakeven. In other words, expenses for that week would approximate gross profit. Also for the fourth quarter, there are two expense items that will impact the year over year comparison, in addition to the effect of the 53rd week. One is approximately $700,000 of favorable insurance results from last year's fourth quarter that we do not expect will reoccur this year. And the other is higher incentive compensation accruals this year due to our strong operating performance in comparison to last year when incentive compensation was not earned by management. Although incentive comp expense is not expected to be significantly different from earlier quarters of this year, it could be approximately $1 million higher than last year's fourth quarter. Looking forward, our strategy continues to be focused on growing all areas of our business, by providing our customers with highly fashionable merchandise at great values. Our commitment to being the leader in providing value priced urban fashions is working. Our strategy has resulted in sales gains in all categories as we continue to successfully improve our apparel offerings and target our customers’ broader lifestyle needs. Now Chris, we’ll take any questions.

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

Thank you. Good morning, Bruce. A question on the e-commerce exit. Just wondering if you might talk through the thought process there. And also just talk about how your customers are interacting with you digitally, whether that's - I guess it's primarily with social media. So that's my first question. and then my second question is, I'm just wondering if you feel like you have - there's been any positive impact on some of the competitor, or just let's say retailer store closures. There have been so many this year. Wondering if you're seeing - you feel like there's a positive impact there, or if there's been some kind of a negative impact with liquidation sales. And then are some merchandise - incremental merchandise opportunities that are stemming from that particular dynamic? Thanks.

Thanks, Patrick. Starting with the e-com question that you asked. We did think it was important to test e-com to see if it could be profitable, but ultimately we didn't see the potential needed to continue operating it. So we are no longer selling merchandise on the Internet. We found it challenging quite honestly to be profitable selling apparel online at price points that are as low as ours. And as we know from our own stores, 60% of our sales in store for our customers are in form of cash, not charge card. Therefore there are some challenges to selling through the Internet in our business. I think you asked a related questions to that as related to advertising or communicating with our customer. Through the years, our advertising has evolved more from radio to mobile and social media, primarily to create brand awareness and drive people to the stores. We do allocate some of our advertising to new store openings, but the rest of it goes to branding. And you have to keep in mind there that we only have advertising expense of 0.3% of sales because we are an everyday low price retailer. So we don't spend money to promote merchandise or ads or anything like that. For the most part, it goes strictly to branding and new stores. And then your last question dealt with what we're seeing in the market as it relates to store closings and so forth. We haven't seen a lot of closings in our neighborhoods, in the markets that we serve. A lot of the closings that you're referring to tended to be more in the malls and the power centers, not in the strip centers in the neighborhoods and small towns that we operate. So we haven't been affected to any great extent at all by maybe what's going on in the malls. And then as far as merchandise and so forth, nothing big to report there. We have plenty of merchandise available to us, as we have for some time now. And so no issues as it relates to that.

Any update on the CEO search?

Patrick, there's nothing new to report there. The search does continue and the Board has reviewed a large number of candidates, but at this point is not yet settled on the best fit for Citi Trends.

Thanks, Bruce.

And there appears to be no further questions on the line at this time. Mr. Smith, I'll turn the call back to you.

Okay. I want to thank everybody for joining us today. Have a good day.

Ladies and gentlemen, that does concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.