Greetings. And welcome to the Citi Trends' Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Cody McAllister with ICR. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' third quarter 2024 earnings call. On our call today is Chief Executive Officer, Ken Seipel; and Chief Financial Officer, Heather Plutino. 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's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today 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 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, Ken Seipel. Ken?

Thank you, Cody. Well, good morning, everyone, and thank you for joining our Q3 earnings call today. Since we last spoke as most of you have seen, I've been honored to accept the permanent role of CEO here at Citi Trends and I'm really pleased to continue leading the company in this capacity which will allow us to continue to implement the strategies that we outlined back in last summer that have been aimed at driving business improvement and ultimately increase shareholder value. I also want to acknowledge the Board of Directors for providing a unique equity compensation structure that ensures my alignment with shareholder interest. Citi Trends is really unique and exciting growth opportunity. We have nearly 600 stores serving our African American customers directly within their neighborhoods. Our brand familiarity, customer loyalty, neighborhood store locations are really difficult to duplicate which gives us a defensible moat against their competition. With this solid foundation of differentiation, our future is well within our control and not dependent on external factors. Implementation and consistent execution of our redefined business strategy which includes an acute focus on our core African American customer, a strong product value proposition, with a balanced offering of good, better and best products, more extreme value treasure for our treasure hunt experience for our customers, disciplined expense management and compelling growth plans will effectively be the driving force for creating significant shareholder value. Our business results in Q3 are really an early indicator that our customers are responsive to our renewed focus and the resulting corrective measures in the business. And notably, we've seen that momentum continue into the fourth quarter with high single digit comp sales performance today. The strong customer response and the growing transaction count momentum give me optimism that we're really on the right…

Thank you, Ken and good morning everyone. First, let me add my congratulations to the many teams across the organization for the hard work that drove our third quarter results. I am encouraged by the positive trends that are beginning to develop across the business, particularly the mid-single digit comp store sales growth in the quarter and the 160 basis points of gross margin expansion. We continue to implement the strategies Ken laid out, creating new opportunities for top line expansion by quickly executing a refreshed inventory assortment with high demand brands and a more balanced, good, better, best approach. While there is still much work ahead, our initiatives along with our strong balance sheet are positioning Citi Trends to return to profitable growth. Turning now to the specifics of our third quarter results. Total sales in the quarter were $179.1 million with comp sales increasing 5.7% compared to the prior year period. The comp increase was driven largely by improved customer traffic and mid-single digit transaction growth as we introduced our new more strategic product selection and employed better allocation methods. Importantly, comparable store sales gained momentum as the quarter progressed, delivering sequential improvement month-over-month, and that momentum has continued through fourth quarter to-date, positioning us well for the holiday season. The markdowns taken in the second quarter certainly helped our Q3 sales results, particularly in September and August, contributing about 2 points of comp sales growth in Q3. That said, it's important to note that full price sales were up versus last year in each month of the quarter and we delivered our best comp performance in October as we exited our clearance event and delivered freshness to the stores. By the end of the third quarter, the markdown product was significantly sold through. As discussed in earlier…

Thank you, Heather. Well, in closing, I remain energized and optimistic about the future of Citi Trends Our third quarter results are an indicator of the work that we've done to create solid foundation and set the company up for long term success. In my time here, I've really enjoyed working with our talented and highly engaged employees and I look forward to further progress together as we pave a path and improve business performance and significantly increased shareholder value. With our acute focus on the core African American customer, intense leverage of competitive advantages, disciplined focus on operational improvements and strategic investment in growth initiatives, I am confident that we can build on our positive momentum and deliver a strong finish to fiscal 2024 and well beyond. Our holiday season is off to a great start and I want to extend my thanks to the Citi Trends team for planning and executing such a great start to the holiday period. I want to wish all of our team members and our shareholders a very happy holiday season and I look forward to updating you on our fourth quarter results in the new year. With that, I'll turn the call over to our operator Melissa to facilitate questions.

[Operator Instructions] Thank you. Our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Congratulations Ken on the appointment, and congratulations to the team on the improved results. I wanted to start by just coming back to the improved sales trend. So I think that I heard that the start of Q4 here in November was up high-single-digits on comps. So I wanted to understand just in terms of the guidance for the quarter, if there's an element of conservatism in the low-single to mid-single-digit guide for the quarter, or if there are some aspects to what you're going to lap in December and January that kind of lead, to a bit more conservatism?

Thank you, Jeremy. I'll answer a little bit from high level and certainly my other preliminary details. First off, November was really exceptional, compared to what we were expecting as we put new product and fresh product out. I mean, certainly the business took off, and we're just really pleased with customer response in November. Now to your point, around the conservatism, or the potential of that, there's a lot of holiday season ahead yet, and certainly through December. You might remember the company had a reasonably good December last year in terms of comp performance. And so, we also are against a little bit tougher comp, as well as we also appreciate the calendar shifts that are ahead. So, we're being a little bit more cautious about what December might bring, but still very optimistic around the overall Q4 numbers. Heather, would you add anything to that?

I think you nailed it, Ken. Jeremy, we will not be mad if that winds up being a conservative guide. I don't think you would be either, right. But to Ken's point, November was exceptional. Nothing really to comment on for the compare, throughout the quarter. December, again, the Ken's point was decent last year. The only thing I would say is that there's probably more opportunity for us than usual in January. On a comparison standpoint, the comp last year was particularly soft, as we came into a softer than expected tax refund season. So, we're set up and will be set up, to take advantage of all sales opportunities. But we're pleased with the way we started, a lot of - days ahead.

Great color. And just to clarify, a little bit more color on December. What portion of your Q4 sales comes in December? Is that roughly 40% of the quarter, or maybe even slightly more?

It's slightly more, Jeremy. I'd give it about 50%.

Yes. Okay, fantastic. And then just want to come back to the investments that you're making, and maybe hone in a little bit more on the shrink portion of those investments as well. So it sounds like you've got a plan in place. You're getting a little bit of help from a third-party on some strategy to improve that. Where is shrink in terms of kind of the impact, or the drag on your margin today versus, let's say, where it might have been five years ago? What's that gap that we're looking to close? Is it 50 basis points, is it something more like 100 basis points? Any color you might be able to share on that. And then the second part, is just kind of the timeline that you think is reasonable, to get it back to what you'd consider a normalized level.

Yes, no, thanks for the question. I'll start and then Ken, you can fill in where I name this here. On your question about what's the headwind on a full year basis, I'd probably assign it somewhere between 50 and 70 basis points of drag, compared to historical levels. On a quarterly basis, it's a little less than Q4 more like a, compared to last year was a 40% drag. I don't think I'm saying that right. Jeremy, hold on. No, it was actually an improvement to last year, sorry. So it depends on quarter-to-quarter. So, but on the full year again, a little less than a point. I think, the fact that we are mentioning as many initiatives as we are on these calls, and have [four] quarters tells you how maniacal we are on attacking this issue, right. We are leaving no stone unturned. We have teams within the company, who have been looking for every opportunity to improve shrink. And then the addition of this consulting firm, is really just to make sure that we aren't missing something. So we are attacking all levels, whether it, like I mentioned teams, is it using the systems that we have, like our Agilent system, which is the exception reporting that we use to be able to identify trends very quickly, and address them very quickly in store signage, right. To backdoor access protocols. So we're really into the weeds and it's appropriate, because this particular issue shrink is going to take being in the weeds to be able to tackle it. When we expect to see improvement, we're modeling improvement into 2025. Early days yet not ready to reveal 2025. But it will be gradual throughout the year, because this again, this is a journey I can tell you if I think about. I'm going to keep going, Ken, if you don't mind. If I think about Q3, part of our improvement in Q3, was because of the 211 physical inventory counts that we did in the quarter, and included in that were a number of stores that we were recounting. Because of higher than acceptable shrink rates earlier in the year of those stores, a portion of them continued to have higher than acceptable shrink rates. So we're pleased with the progress. But there's still opportunity. That's why I call that out. There's still opportunity to make sure that we are addressing shrink, at every level within the organization. It's a challenge.

That's great color. Let me shift gears here and talk about your store fleet. And Ken, as you've had a chance to really dive into the details a bit, you had some, some closures here in Q4. You've still got some conversions to CTx format that are going to happen over coming years. How should we be thinking about, kind of the store fleet on a go forward basis? Is this, kind of a - do we expect the store fleet to continue to shrink until we feel confident that, we've kind of scuttled all the maybe underperforming locations? Or is there a time where you've got some momentum in the business, and we think about kind of reopening the growth path for this story, and potentially add locations going forward. How are you thinking about the fleet?

Yes, for sure. No, good question. As we go forward, Jeremy, I'm really thinking about really the fleet in two ways. One, and that is in the refresh and the remodel. We've got about, I think about a third of our stores roughly not quite remodeled into the new only format. But we still have significant number of our higher volume stores that need to be remodeled. And so as we go into 2025, you can expect us to come out with a fairly aggressive remodel and refresh program, bringing our fleet up to standard across and where we've done so, we've achieved higher than average comparable sales. So, we're confident in the results in our customers' response to a fleet refresh. So that'll be a big part of our repertoire going forward initially. Simultaneous to that, we are actually behind the scenes right now doing some studies in various markets, and we will be returning to new store growth part and parcels. We had to fix our business model and get it to be a little bit more reliable, which is beginning to take shape. And now we're taking a look at really going into various key markets, and making sure that we can actually command market share where we deserve it. And some of those are existing markets, and some of those will be net new markets for us. But you can expect particularly in 2026 and beyond, but even a little bit in 2025, you can expect us to see return to a growth pattern. And then in regards to closures, basically cleaning and closing and relocating stores, is kind of a normal part of keeping a fleet healthy. There will be a little bit of that, but it's certainly not a target. We'll do, lease, maintenance where is required and we'll move out of bad locations. And move into better locations and so forth. That'll certainly happen. But I just want to make sure that you appreciate that we do have a very aggressive growth thought in mind right now. And as we were stabilizing our business model, you can expect us to get to being a growth company.

Yes, that's great color. Thank you. Just one clarifying question on the remodels. What's kind of the range of cost in remodeling into the, the CTx format of store, and what's the average?

Yes, the range of costs. You'll recall Jeremy, that we recently reduced our CTx remodel cost by about half. So when we first started the program, the remodel was about 250,000 on average. And in 2023 we, for the latter part, we developed a new remodel package, which the range is about 85,000 to 130,000. So I'd say the average, you can call it, call it maybe 110,000.

Great. Congratulations and best wishes here during the holiday season.

Thank you, Jeremy.

Thank you, Jeremy.

Thank you. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Hi, thanks guys. A lot of initiatives I can ask specifically about where you think SG&A is going to go, et cetera, but maybe I'll encompass it all in one question. What is the right long-term EBITDA margin for this business prior to COVID, it was 2017, '18, '19, between 5% and 6%. We won't think about the COVID years and post COVID years, probably not relevant, but obviously much lower than that now. Ken, where do you see long-term EBITDA margins for this business?

Good question, Mike. I think as I joined the business and started to kind of think about, setting forth a long range plan, which we're beginning to work through with our Board here shortly. One of the primary goals that we have is to return our EBITDA back to those historical levels that you mentioned. And frankly, we see a little bit of a path even beyond that. But certainly you could be thinking those historical levels, 5% to 6% range for sure are in our sites, and will be a part of our active near term plans.

Okay. To follow-up on that. And as part of that, looking at the SG&A specifically, if you pull out the one-time, the $1.6 million that they talked about, one-timers, I think you were at about $73 million this quarter. In next quarter you think you'll be about $76 million. In the past, the quarterly SG&A was usually around $70 million or so. I get why it might be permanently higher, because of inflation, et cetera. But is that $73 million? It sounds like it's probably somewhere between $73 million and $76 million. What do you think the long-term quarterly SG&A should be for this company?

Yes, Mike, I'll take that one. So $70 million was our run rate in 2023. Recall that in our Q4 call, we talked about the fact that we were increasing that rate to enact merit increases in stores and corporate. That brought it up to the $72 million, $73 million range. So if I think about the go forward, I would say $73 million per quarter is feeling like a - good earmark. And then flexing up accordingly to account for sales flows quarter-to-quarter.

Yes, okay.

Mike, I might add to that. I think you know this about the business already. But one thing about the SG&A base is it's highly fixed. Which means that as we start to accelerate ourselves and start to grow, we should see some significant leverage. So just appreciate that it's the number that Heather mentioned is directly correct, but just appreciate there's a good leverage on that as we continue to grow our top line.

Yes no, that's the whole idea. Just trying to figure out what that fixed cost number is, and then we can figure out the leverage. And so, I guess to that end, just one. I guess I'll ask this one. Let's ask this, Ken - you've had a lot of turnaround experience a lot of different places, I guess, just bigger picture. Can you compare this to some of the other turnarounds you've led? What's different, what's easier, what's harder? What have you learned from past turnarounds that you're applying here? I know that's, a big question that you could probably take an hour to answer, but a couple bullet points on how you see this turnaround versus others?

Yes, for sure. Yes, I give you the quick notes of that. So what's common here is that getting the company refocused on core customer, and really truly understanding the customer coming through the door, and doing a better job of adjusting the assortment, including some of the good, better, best things that I've talked about. And then treasure in the treasure hunt and all those things. Are really about redefining and getting our assortment, to match the core consumer. And then it started with us first understanding, who that customer is. So that's very much a common theme when you get into companies and turnaround, oftentimes they lose track of that. And so, we're getting refocused on that. What's unique here from places, the two things I'd say are unique. One, we did have a number of operational, fundamental and foundational practices that were broken or disconnected, more so than I've seen. We spent a lot of time. Q3, we kind of understated really how much work has gone into this, getting things fixed and repaired, including shrinkage, and some of those other things we mentioned. But the team has just done marvelous work in terms of really getting their arms around the things that, we need to do to run a solid and a consistently executable business model. So that's unique here, as much as work has been required to get that done. And the other thing that's been a positive surprise, is the quick response from customers and the changes we've made. Oftentimes, customer traffic is one of the more difficult things to change in a business. It takes time and repetition. But because of our neighborhood locations, and the love affair that our customer has with this brand, as we're starting to get things right, we're seeing pretty quick reactions. So that's why I'm a little bit euphoric about our November. We really delivered a good - step forward into our strategies there, and the customers responded quickly. So yes, so that's it. I could go on, like you said, for an hour, but those are probably the three big differences that I see here. One common thing with the customer, very unique in customer response positively, and then the opportunity for us to be operational solid. We have work to be done there.

Awesome. Great. Appreciate the caller.

Thanks, Mike.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Seipel, for any final comments.

All right, well, thank you, everyone. We appreciate your time and interest in Citi Trends today, and certainly wish everyone a very happy holiday season. Thank you and goodbye.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.