Citi Trends, Inc. (CTRN) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Citi Trends CTRN First Quarter 2019 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 Thursday, May 23, 2019. I would now like to turn the conference over to Michelle [ph] McKee, Senior Associate. Please go ahead.

Thank you. Our earnings release was sent out this morning at 6:45 AM Eastern Time. If you have not received the 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 President and Chief Executive Officer, Bruce Smith. Bruce?

Thanks, Nicha [ph]. Good morning everybody and thank you for joining us today. Also on the call is our Chief Financial Officer, Stuart Clifford; and our two merchandising Senior Vice Presidents, Christina Short and Brian Lattman. First quarter sales results were challenging during the period of income tax refund activity and in particular our apparel business was disappointing. Historically, tax refunds have provided a substantial benefit to our first quarter sales, however this year that benefit was tempered by a daily in refunds as well as a 3% decline in the overall level of tax refunds. During the four-week period in which tax refunds typically benefit our sales, we experienced a decline in comparable store sales up 10% while comp store sales were flat for the other nine weeks of the quarter, much like we had seen in the last two quarters of 2018. The challenges during the period around tax refunds were compounded by weakness in our apparel merchandise categories. Sales of accessories and home merchandise continue to grow, but were not enough to offset the decreases in our apparel business. We have work to do to make the changes in apparel fashion that are needed for the back half of the year, but we are confident that we can execute these corrections particularly as we start to compare against the period of time when the weakness in apparel began in last year's third quarter. At the same time, we're in the process of reallocating inventory dollars to home and accessory lines that have consistently resonated with our customers. Now I'll turn the call over to Stuart to provide additional details on the results before I discuss future plans and expectations.

Total sales in the first quarter decreased 2.8% to $205 million including a comparable store sales decrease of 4.5% The decline in comp store sales during the first quarter was reflected almost entirely in a reduction in transaction counts, as a slight increase in the average unit sale was offset by a slight decrease in the number of items per transaction. And looking at comp store sales for the individual merchandise categories, the home division again led the way with a 5% increase on top of a strong 19% increase in last year's first quarter. Accessories were up 2% in this year's first quarter, and up 2% in the first quarter of 2018. Comp store sales in the men's division were down 5% after increasing 2% in last year's first quarter. Children sales were down 9% after decreasing 1% in the first quarter of 2018. And sales in the ladies division were down 11% after being up 3% last year. Gross margin in the first quarter was down 120 basis points, due primarily to the need to take more markdowns, in light of the decrease in comparable store sales. SG&A expenses increased $400,000 over last year's first quarter. However, when adjusting to remove the impact of this year's proxy contests expenses, SG&A expenses actually decreased $600,000 even with an increase in store count. SG&A as a percent of sales increased to 30.9% from 29.9% due to the proxy contests expenses and the deleveraging effect that declining sales has on the expense ratio. Net income for the first quarter of 2019 was $7.8 million or $8.7 million when adjusted for proxy contest expenses, compared to $11.3 million in last year's first quarter. First quarter earnings per diluted share were $0.65 this year or $0.72 when adjusted for proxy contests expenses compared to $0.83 in last year's first quarter. Finally, a brief note about our balance sheet. Following year-end, we completed the adoption of the new lease accounting standard using the transition method, which applied the standard as of the effective date. In so doing, we recorded $142 million in right of used assets, $145 million in lease liabilities, and a $2 million cumulative effect adjustment to retained earnings. Now I will turn the call back over to Bruce.

Thanks Stuart. And looking forward as we implement the corrections to apparel fashion and make shifts in the overall mix between apparel and non-apparel, we've been working with a retail consulting firm to analyze each critical part of our merchandising, planning and allocation processes and strategies. Also, as part of our efforts to address the current sales challenges in our apparel business, we are establishing a merchandising task force which will operate under the oversight of two directors with extensive merchandising experience. In other areas of the company we continue to work on a number of strategic initiatives. Just recently, we completed implementation of a new warehouse packing system at one of our distribution centers that we believe will result in savings of $500,000 on an annualized basis. Also, a project team consisting of our supply chain management and an outside consulting group recently completed the first of three initiatives to reduce our freight cost. The completed project was the rebidding of our inbound freight contracts, including the addition of certain new suppliers. We are currently working on the implementation of a transportation management system and the re-evaluation of our outbound freight alternatives with completion of both projects expected in the fourth quarter. Progress is likewise being made on rebidding several of our expense and capital line items. Another critical system implementation that we have mentioned in the past is a markdown optimization system, which we believe will help us improve our markdown strategy and importantly allow us to take markdowns at any level of the store hierarchy that we choose. This project is targeted for the end of 2019. From a real estate perspective, we expect to open approximately 20 stores this year including our first two in predominantly Hispanic markets. When considering our action plans together with our year-to-date trends, we expect comparable store sales to be down 1% to 3% in the second quarter, and up 1% to 3% in the back half of the year, leading to earnings per diluted share in a range of $1.30 to $1.50 for the full year. Melody [ph] we’d now like to open it up for questions.

Thank you [Operator Instructions] Our first question comes from the line of DeForest Hinman [ph] with Walt Huston and Company. Please proceed. Your line is open.

Hey, thanks for taking my questions. Can you just give us a little bit more color on ladies wear, and a miss there, what went wrong, what went right, and a little bit more color on what we're going to do to improve results in that category?

Sure. Thanks for your question. When we look back, we had a really strong 2017 where we were squarely hitting the fashion trends and I think importantly there were some trends out there to be had. Everything from distressed denim, to add two T-shirts, Pink splatter, gold foil things like that, that were really clicking for us. Then we came into the first half of 2018 and we still had comp increases 2% to 3% overall on top of 2017 strong results. And then as we got into the back half of 2018, it did become more challenging to do more on top of the 2017 levels in apparel, although our overall comp store sales were still slightly up less than 1% during the back half of last year. And then we got into the first quarter of this year and we saw comp sales results that were similar to the third and fourth quarters of last year. They were basically flat, except during that four week period that I've talked about around tax refund season. And tax refunds are a huge deal for us, because it is an inflow of money for consumers at a time when spring fashions are just hitting the stores. So ladies and the other apparel categories do tend to probably get hit worse than the non-apparel categories when there is either less or more money out there from tax refunds, but they were delayed this year and they were also lower than last year and that delay really created two problems; one was when the checks finally did get distributed they fell right on top of the first of the month checks that our customers often get and we think that probably in a lot of cases our customers made just one trip to the store instead of instead of two trips like they did last year, when the checks were more spread out. And then the second problem was this year when their refund checks went out it was, it was warmer last year than it was this year. Therefore, there was probably less of an urgency to spend that money on apparel including ladies this year than it was in 2018. But quite honestly, while the tax refund issues hurt us, we still know we weren't on point with fashion. And it's never really one thing. In some cases, we saw trends away from fashion more towards more basic core merchandise, so things like at leisure wear and cleaner denim looks. In other cases, we probably stayed too long with trends that had previously performed well, but were maybe on the downside slope of the interest level from our customers. And then in other cases, we tried to shift some new trends but they didn't reach the prior levels of the trends that they were replacing. So we've gotten off to a bit of a slow start in the second quarter too, although we also know that we were going up against in these two weeks really the best period of time in the second quarter. From here on out last year, the comps were flat in the second quarter, and then as I mentioned before the comps in the third and fourth quarters were barely, barely positive less than 1%. So it's all about staying close to the trends, seeing what is selling to the extent that we need to make changes from high fashion to maybe more conservative looks we'll do that. And that's where we are, and that's the plans for the rest of the year.

Okay, that's helpful. Can you give us some color on the collaboration between some members of the board and the merchandising team, what we hope to achieve with that structure?

Yes. So in addition to normal board responsibilities, these two directors will be spending more time with upper management within the company. So me as well as the top people in merchandising and planning and allocation in order to make sure that we're focused on the right things and have the right strategies in place.

Thank you for those questions. One moment please. Mr. Smith, I'll turn it back to you for any closing remarks.

Okay. Thank you everybody for joining us today and as always I'm available for one-on-one calls to the extent you want to call me later today or any other time. Thank you.

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