Citi Trends, Inc. (CTRN) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends’ Fourth 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 Friday, March 16, 2018. I would now like to turn the conference over to Tom Filandro, Managing Director at ICR. Please go ahead.

Thank you, Beatrice. 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 our Chief Executive Officer, Bruce Smith. 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 Vice President, General Merchandise Managers, Christina Short and Brian Lattman, our newly named Chief Financial Officer, Stuart Clifford. The momentum build by the Citi Trend’s team in the first three quarters of the year continued throughout the fourth quarter, as we capped off successful year on a number of fronts. First and foremost, comparable store sales increases were strong in the quarter and of the full year. Importantly, we registered growth across all comp metrics including transaction counts, average number of items per transaction and the average unit retail. In addition all five of our major merchandized categories contributed to the sales improvement. These results confirmed that our merchandizing strategy of consistently delivering fashion right, value priced merchandize in both the apparel and non-apparel offerings is resonating with our customers across all lines of business. Expenses were well controlled throughout the company, which combined with the increase in comparable store sales provided significant expense leverage. Inventory levels were also effectively managed, resulting in improvement in our inventory turnover rates, and we successfully opened 20 new stores and relocated or expanded 10 existing stores. The company’s performance led to an increase in our cash and investment balances to $105 million at year end. Our strong operating performance and financial strength together with our Board of Directors’ confidence in the business and their commitment to appropriately returning excess capital to shareholders has led the Board to authorize another share repurchase program and the amount of $25 million. Now I would like to review the details of our financial results for the fourth quarter and full year. Comparable store sales increased 5.6% in the fourth quarter and 4.5% for the full year. The full year comp sales improvement reflected an increase in the number of customer transactions of 2.5%, an increase in the number of items per transaction of 2%, and a slight improvement in the average unit retail. It is important to note that this is the first time in 10 years that the average unit retail has increased over the previous year. The improvement in the number of customer transactions and units per transaction continues a trend where we have now had six consecutive years in which we registered growth in both metrics. And looking at comp store sales for the various merchandize categories during the fourth quarter, the home area increased 11% on top of a 29% increase in 2016 fourth quarter. This was the 18th consecutive quarter of double-digit growth in our home business. The ladies business was at 7% in this year’s fourth quarter after increasing 3% in the same quarter last year. The men’s area was up 6% on top of a similar in last year’s fourth quarter and children sales were also up 6% in the fourth quarter of 2017, after being down 1% last year. Finally accessories which include footwear were up 3%, following a 2% increase in last year’s fourth quarter. For the full year, home led the way with a 21% comparable store sales increase followed by men’s’ and accessories each at 5%, ladies at 4% and kids at 2%. Gross margin in the fourth quarter of 2017 was flat compared to the same quarter last year. For the full year, gross margin decreased slightly about 10 basis points due primarily to higher freight cost. However we delivered full year gross profit dollar growth in excess of 8%. During the fourth quarter, we continue to significantly lever SG&A expenses, lowering our expenses as a percent of sales to 30.9% from 31.6% in last year’s fourth quarter. This leverage in the quarter was similar to what we experienced for the full year, where we had an 80 basis points improvement in the year-over-year expense rate comparison after adjusting for proxy contest expenses including the first half of 2017. In continuing down the P&L, we recorded a 1.6 billion charge and income tax expense in the fourth quarter, as a result of enactment of the tax cuts and jobs act in December. This charge was to re-measure the deferred tax assets on our balance sheet with the new 21% federal rate from the previous 35% rate. In effect this represented a one-time non-cash write down of these assets. Fourth quarter net income was $5.2 million, when adjusted to the effect of the income tax charge that net income increased more than 23% to $6.9 million from $5.6 million in 2016. Earnings per diluted share in the quarter were $0.38 in both years and adjusted for the impact of the new tax act, EPS increased over 31% to $0.50 per share in 2017. For the full year, net income was $14.6 million or $1.03 per share, compared to $13.3 million or $0.91 a share in 2016. When adjusted for the proxy contest expenses and the effect of the new tax act, the 2017 earnings per share increased 38.5% over last year to $1.26. Looking forward, we are well positioned for the spring season, reflecting a combination of strong fourth quarter sell-through of fall-winner products and the high quality flow of Trend right, value-priced, spring merchandize. Through yesterday our comparable store sales were up 3% for the first five plus weeks of the New Year, so we are off to a good start thus far in 2018. We also continued the rollout of the previously mentioned enhancements to our merchandize planning and allocation systems, which we expect will improve our ability to tailor merchandize assortments on a store-by-store basis. We plan to continue our strategy of focusing on growing both the apparel and non-apparel areas of our business by meeting our customer’s fashion needs at exceptional values. In our earnings release issued earlier this morning, we provided guidance for fiscal 2018 indicating an expected 2% to 3% increase in comp store sales. We expect that such an increase in comps would lead to a 3% to 4% increase in total sales when considering one fewer weak next year and a goal of opening 20 new stores. From an earnings standpoint, we expect earnings per share in a range of $1.50 to $1.70 versus the 2017 adjusted EPS of a $1.26. The 2018 guidance range includes $0.23 to $0.25 of expected benefit from the decline in the tax rate next year. Now Beatrice, we will open it up for questions.

[Operator Instructions] our first question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

I guess on the last point that you made on the benefit from the tax bill on 2018 earnings. It sounds like most of the benefit will flow to the bottom line. Is that correct or is there some reinvestment of savings back in to the business as well. So that will be my first question. And then just on the strong comp in the fourth quarter, the 3% first quarter to date of the guidance of 3% for 2018. It seems like that some of the volatility in same store sales that you’ve seen historically is dissipating and that the business has become or is becoming more consistent. So I’m just wondering if you might comment on that. And if that is the case, what do you think the major factors are behind the greater consistency and how should we think about the different quarters in 2018 from a same store sales stand point. There is some fluctuation of the comparisons, you know meaningful fluctuations by quarter, but should we think about more of a steady kind of in that 3% area growth rate for same store sales.

I’ll start with the question you asked about the tax changes. You’re correct, in the guidance we have showed that benefit all the way through the bottom line. It’s probably helpful to discuss some of the things that we thought about as well as what other countries are considering. And first I think we should probably discuss the amount. Remember that we have no foreign operations, therefore we’re not like some companies that are bringing money back in to the country, and been able to use that cash for other things. Our benefit will come annually from the federal rate decline in the 21% from 35% on free tax income of roughly $23 million last year that works out to about a $3 million benefit per year. And of course that you can see from our balance sheet where we have a $105 million of cash and investments, that $3 million benefit per year is not expected to make a meaningful impact on our financial position therefore we really just plan to use it as we do cash from operations or any other source will and use it to grow and reinvest in the company and where appropriate return capital to the shareholders. And then as far as your question about the sales volatility, you’re right, we’ve have seen that smooth out in the past year and half or so. We of course pass the period of time where the brands were really falling off dramatically and impacting our sales 4, 5, 6 years ago. So things have stabilized. The other key thing is that we have all five major merchandized categories going in the right direction, so we don’t have any area that’s pulling us back and likewise we don’t have the pressure from the average unit retail like we did for a number of years. I mentioned in my comments that we actually had 10 consecutive years of declining average unit sale, and so we always had that anchor around our necks, where we were having them more than make it up, and more transactions and more items per transaction. We’ve now gotten to a point where all three of those metrics are working in the right direction and we expect to continue to do that as reflected in our guidance. And I think you also asked volatility between quarters. I really don’t have anything to give there, there’s nothing that we know of that would be unusual. You know what our cost by quarter last year were, so you know what the comparisons are. But as far as our business goes and what we’re looking at, we’re not really pointing towards any unusual volatility between quarters at this point.

And just a couple of more on the longer term guidance that you gave, which is helpful. The store growth rate, the 2% to 3% square footage growth rate, why not grow a little bit faster than that just given the fact that the business has been more consistent and there should be a still pretty open ended growth opportunity given the relatively small size of the company and limited geographic footprint. And then on the operating margin, maybe you could comment on where you see the longer term operating margin potential both relative to city trends peak margin, which I think was around 8% and then also just where do you see the company’s’ margin relative to the big off priced chains, the Burlington, Ross, TJ. I think those margins are in the very high single-digits to even in to the mid-teens.

Yes, as far as your question goes regarding the growth rate, there’s a lot of factors that go in to that including on key factor that is we shop for real estate the same way we shop for merchandize and same way that we spend money for expenses and that is on an off-price basis. And so we are always looking for great deals when it comes to real estate in order to make those stores give us great returns on investment. So, yes, that teaches us from growing at maybe a higher rate. We are perfectly fine that because really what we’re looking to do is grow profitably, not just growing for the sake of growing. Another factor that goes in to this, when we were a smaller company, we were growing in some years 15% to 20% square footage, 50 to 60 stores a year. And there are issues that go along with that, when you’re trying to grow that fast and we’re cognizant of that. We learned it the hard way in some respects. And try to keep a nice steady growth rate growing. You question on the operating margin. There was probably a four year period back seven or eight years ago where we were consistently in the 5% range in terms of operating margin. That would certainly be a goal for us to get back to. And of course longer term we would strive to get to where much, much bigger our prices are, like you said high single-digits. Some of that high single-digit operating margin that those companies are able to achieve is because of the scale that they have. We are much smaller than them, but as we continue to grow it’s certainly a good and certainly good goal for us to keep in mind. But the key to it all is comp store sales, because with comp store comes expense leverage and with expense leverage comes a higher operating margin. And so we’ve got to keep the comp store sales go in the right direction.

Mr. Smith there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay, thank you. I hope everybody has a great day. Thank you.