Citi Trends Inc (CTRN) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Citi Trends second-quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, August 25, 2005. I would now like to turn the conference over to Mr. Tom Stoltz, Chief Financial Officer of Citi Trends. Please go ahead, sir.

Good morning, everyone. Also on the call today with me is Ed Anderson, the Company's Chief Executive Officer. By now, everyone should have seen our second-quarter earnings release that was sent out shortly after 4 PM Eastern Time yesterday. If you have not received the release, it is available on our Company website under the Investor Relations section and the subfolder Investors at www.CitiTrends.com.

You should be aware that the prepared remarks made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that the management -- and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed on them.

Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We refer all of you to the Company's most recent Report on Form S-1 as filed with the Securities and Exchange Commission for more detailed discussions of the factors that could cause actual results to differ materially from those described in any forward-looking statements.

Also note that all of the Company's per-share data have been adjusted to reflect the Company's 26-for-one stock split effectuated on May 11, 2005. Ed Anderson and I will give a brief presentation, after which we will address any questions you may have.

With that said, I would like to now turn the call over to Ed.

Thank you, Tom. Good morning and thank you for joining us this morning. This second quarter of 2005 was our first full quarter as a public company, and this is our first earnings release conference call. We were very pleased with our initial public offering, which we completed May 18, and are extremely pleased to report very strong results for the second quarter and first half of 2005.

I will present an overview of the quarter results and make a few comments about the Company's growth and future plans. Then, Tom will review the financial results in more detail and conclude with earnings guidance for 2005. Then, we will be happy to answer your questions.

In the second quarter, net sales increased 38.2% over last year. Comparable store sales increased 11.5% in the quarter, with each month of the quarter contributing stronger comparable sales than the relevant month last year. Please note that last year's second-quarter comparable store sales increased 0.3%, the weakest quarter of 2004. I will speak more about sales and the drivers of our sales in a few minutes.

Net earnings for the quarter were $381,000 or $0.03 per share. These results include a onetime pretax charge of $1,200,000 related to the cancellation of our management contract with Hampshire Equity Partners, our majority stockholder, which was discussed in our IPO prospectus. Without the effect of this onetime charge, our earnings per share for the quarter would've been $0.08 per share compared to $0.00 per share last year.

The second quarter of 2005 was a very positive quarter for the Company. Our merchandise gross margin rate increased; our ratio of SG&A to sales decreased -- in fact, we had expense leverage in all three principal expense areas -- stores, distribution and corporate; and new store sales exceeded our expectations. Most of these positives occurred because of or were helped by our excellent sales results.

Sales were generally strong across all major merchandise categories. Comparable sales increases for the quarter by category were men's, up 18.8%; women's, up 9.1%; children's, up 9.8%; accessories, up 7.3%; and home furnishings, up 33.8%. The common thread across merchandise categories was that nationally recognized brands' sales increased at a higher rate than other nonbranded merchandise.

As most of you know, we sell nationally recognized urban brands such as Phat Farm, Baby Phat, Rocawear, Apple Bottoms and Dickies. Our value-conscious customer has a strong appetite for current urban brands at strong value prices. Additionally, our comparable sales increases were driven by increased customer traffic, while our average price per item, as well as our transaction sizes, remained relatively constant with last year.

Momentum is a big driver of sales, both up and down. The positive results of fiscal 2005 were set up by the very successful fourth quarter of fiscal 2004. We had strong sales at the end of the fourth quarter and ended the fiscal year with very healthy inventories. We had appropriate levels of inventory, as well as low levels of clearance inventory as a percentage of the total. That healthy inventory set up the strong sales performance of the first quarter of fiscal 2005. Strong sales in the first quarter and the second quarter of 2005 have allowed us to keep healthy inventories and have kept the positive momentum going into August.

Total inventories at the end of the second quarter were 35% over last year's second quarter ending, and comparable store inventories were up 6% over the same time last year -- at the end of the second quarter last year.

We opened seven stores in the last week of the second quarter, bringing our total to 21 stores so far in 2005. We expect to open 40 new stores for the entire year. 2005 new stores average approximately 10,000 selling square feet and are consistent in size to the new stores we've opened since 2003. The 21 stores opened to date are located in the same 12 states in which we operated at the beginning of the year. This year's new store sales have exceeded our forecast and are running ahead of last year's new stores on a per-store basis. This new store performance is the result of our strong sales in general, as well as some very good store locations.

We disclosed in our prospectus that we plan to add an additional distribution center by December 2006. We have continued to work on that project. We have considered acquiring an existing building, as well as building a new facility. As you may recall, our existing facilities will support up to 300 stores. We intend to bring our additional facility online very methodically. We're not changing methods or adding a new warehouse management system. Initially, we will only add additional floor space, utilizing our current processes.

I'm telling you this as a reminder that some additional cost to bring the new facility online will be incurred, possibly as early as the second half of fiscal 2005 and on into 2006. We intend for the addition of this space to be as seamless to our business as possible.

And now, back to Tom.

Thank you, Ed. Again, we're very pleased to report to you our second-quarter financial results, our first full quarter as a public company. Our second-quarter results demonstrated strong topline and bottom-line result with both comparable stores and new stores performing well. Both sales and profits have exceeded our expectations.

As Ed mentioned, our total sales for the quarter were 59.4 million versus 43 million last year. This represents a 38.2% increase in year-over-year sales. Comparable store sales rose 11.5% versus 0.3% in the 2004 period. The monthly comparable numbers during the second quarter were as follows -- May, 11.1% versus 7.7% last year; June, 14.5% versus a decrease of 1.5% last year; and July, 8.5% versus a decrease of 3.6% last year. For the year to date, total sales were 123.1 million, or an increase of 35.1% over the prior year. Comparable sales were up 9% for the year to date. As Ed said, our 2004 and 2005 new stores have performed better than expected to date.

Moving on to gross margins for the quarter, we reported 36.6% compared to our prior-year rate at 34.7%. As Ed mentioned, nearly all of the increase was a result of well-positioned and balanced inventories, along with strong sales trends that resulted in fewer goods to clear and therefore reduced markdown levels.

Freight costs were up slightly as a percent of sales, and shrinkage remained constant as a percent of last year. Shrinkage during the last several years has been in the range of 2.5 to 3% at retail. As a reminder, our gross profits do not include distribution and/or occupancy costs, as some retailers report. For the year to date, gross margin was 38.1%, compared to 37.3% last year, with all of the improvement coming in the second quarter.

SG&A expenses were 35.8% of sales for the quarter, compared to 34.4% last year. As Ed explained, we paid a fee in connection with the termination of our management agreement with Hampshire Equity Partners in the second quarter, totaling 1.2 million on a pretax basis. Excluding the termination fee from our results, the SG&A was 33.8% or a 60-basis-point improvement over last year, despite the going public cost this year of approximately 300,000 in the quarter. Most of the leveraging was the result of higher sales than planned against some of the fixed costs in distribution and corporate.

For the year to date, SG&A as a percent of sales was 33.3%, compared to 33% last year. Excluding the termination fee, SG&A was 32.4%, compared to 33% last year, again despite about 400,000 in the going public cost in the year to date.

Each of the items previously discussed led to net income for the quarter of $381,000, compared to a $41,000 loss last year. Earnings per diluted share were $0.03 versus $0.00 last year, with 13.575 million shares outstanding. Excluding the onetime termination fee, net income was 1.1 million or $0.08 per diluted share.

For the year to date, net income was 3.6 million or an increase of 64% over the prior year at 2.2 million. Excluding the termination fee, net income was 4.4 million or an increase of 100% over the prior year. Earnings per diluted share were $0.30, compared to $0.20 last year, up 50%. The earnings per diluted share increase for the year to date is smaller than the net income increase because of the IPO shares issued during the second quarter of this year. Excluding the termination fee, earnings per diluted share was $0.36 or an increase of 80%. Our tax rate for the first half of the year was 37.3%.

Now, moving onto guidance for the last half of 2005, our position going forward on sales and earnings guidance will be to address the current trends each quarter and give you an update on our full-year expectations. Presently, we will not comment on expectations for 2006, as we need to see how our momentum carries us through the next quarter.

From a strategic growth perspective, our future goals are to continue to deliver annual square footage growth of approximately 20% through new stores, 3% comparable store sales increases and a range of low to mid-20% long-term profit growth. For the second half of 2005, we expect comparable sales to increase by approximately 3% and total sales increases ranging from 24 to 26%, as the comparisons become more difficult as we move into the fourth quarter of 2005.

We plan to open 19 stores in the second half, bring our year total to 40 new store openings. Gross margins should remain approximately constant to the second half of 2004, as margins improved last year as our sales improved, particularly in the fourth quarter, creating a tougher margin comparison. We do not expect leveraging in SG&A, particularly with the additional being public costs that we expect to incur during the second half of 2005. We expect 30 to 40 basis points of profit improvement related to interest income from IPO proceeds during the second half.

With all of this said, the full-year earnings per diluted share should fall in a range of $0.80 to $0.83 based on 13.4 million diluted shares outstanding. I will bring to your attention here that this $0.80 to $0.83 EPS range excludes the 1.2 million termination fee. The EPS range is $0.75 to $0.78 including this charge. We expect the full-year tax rate to be between 37 and 37.5%.

With that, operator, I will now turn the call back over to you to take any questions.

(Operator Instructions). Dorothy Lakner, CIBC World Markets Corporation.

Good morning, everyone, and congratulations on a great first quarter out of the box. Just a couple of questions. One, if you could give us a little bit more color on your new store performance compared to the older ones, just in terms of what volumes you're now expecting.

Secondly, you're I assume trying to be conservative in the second half of the year with the comp guidance still at 3%. Obviously, you did much better than that in the first half, but you do have more difficult comparisons in the second. My question would be what comp would allow you to leverage costs beyond the 3% comp that you are currently projecting?

And then lastly, there's been a lot of talk about impact from higher energy prices. Obviously, you haven't seen any of that so far, and I just wondered if you could share with us some -- why you think that is.

One more question, and that is you seem to be doing very, very well in the urban -- obviously with urban brands. Some other mall-based competitors are not, particularly in the men's business. And I wondered if you could just give us a little color on why you are doing well. Thanks.

Thank you, Dorothy. I'll take the first two questions and then I'll let Ed answer the last two. In regards to new store volumes, what we have seen on an annual run rate, the best we can estimate for '04 and '05, is pretty substantial increases. We told everyone during the IPO process about 1.2 to 1.3 million was going to be our new store sales volume that we would expect. We're running roughly 10% or so better than that right now for those two classes of stores, '04 and '05.

In terms of guidance for the last half of the year, yes, you are correct in what you said. The second part of that question was I guess at what point do we get leverage? I think anywhere north of 3%, we should expect to get some leverage in distribution and home office costs.

With that, then, I will let Ed address the energy and the urban brands questions.

Okay, I think I understand the question, Dorothy, as being with energy costs being up, are we expecting any impact on our business? Is that -- was that your question?

Yes, that was the question. Everyone seems to be talking about it and we just don't seem to be seeing it.

Well, I think it's absolutely true that our customer is feeling the impact of additional energy costs on their pocketbooks, as everyone else is. I think what's a little different with us is a couple of things. One, we've talked about our customers' propensity to spend a significant percentage of their budget on apparel in general and fashion apparel specifically. I think that -- I think there is some rebalancing of budget issues that obviously has been going on among our customer base. And secondly, our stores are operated in urban neighborhoods, and a lot of our stores are accessible by walking traffic or bus lines, and so I think those two things probably are helping us to some extent.

On urban brands, the fact that our urban branded business has continued to be good -- in fact, we mentioned earlier that it actually has increased at a higher rate than our average business for the first half of this year -- I really can't speak to why others have struggled in certain urban brands, and we want to be very careful that we don't talk specifically about which urban brands work particularly well for us versus other ones, for competitive reasons.

I guess what I would be interested in, particularly in the men's business, is if you could share with us -- I guess George is not there -- but just share with us what kinds of looks you are doing well with in men's?

Well, there has clearly been a trend -- and you are right; our chief merchant is not here on this phone call -- but it's clearly been a trend over the last year, year and a half, toward more cleaned-up, less cluttered looks, more solid colors of shirts and pants working in men's. That has been going on and that continues to go on in our business.

Next question.

Jeff Klinefelter, Piper Jaffray.

Congratulations on a good quarter. A couple of questions, Ed. If you could talk a little bit more on your new store productivity -- I understand running about 10% above your model. Any insights into these new markets for '05, how they are tracking, that might help us appreciate your potential as you go in over the next two years into these new markets?

And then also on the categories, very strong performance in men's. If I recall, your men's was very strong last year in the second half. As we enter the second half, do you see momentum coming or faster growth rates coming out of the women's, juniors and home area?

Well, just to reiterate with what Tom said, that our new stores in '04 performed at a higher rate than our average stores by at least 10% or so. And the note I made was that our '05 stores are actually performing somewhat higher than that. So our new store productivity on a per-store basis is running somewhat higher than our chain average, and that has been true since '04, and the good news is that that has continued with our '05 group of stores.

I would also add that on a per-foot basis, our new stores are tracking pretty comparable with our existing store group. So as we add new stores, we are getting a commensurate increase in sales.

Ed, has anything changed with those new markets that you've entered this year in terms of the types of locations you're going into, the types of peers that are in those malls? Anything that's changed in terms of your expansion that would explain this acceleration, other than perhaps a different population density?

The 21 stores we've opened so far in '05, again, as we said before, we have opened these stores in the same 12 states that we operated at the beginning of the year, and so we're operating essentially in the same general geographic territory we've opened before. We obviously have opened in new towns, and we back-built into some existing markets. We have not changed anything about the type of shopping center we're looking for. We've not changed anything about our demographics profile or our cotenant structure. And so these stores, again, as I pointed out earlier, the size of the stores is essentially the same and the kinds of markets we're going into are essentially the same.

I will pre-answer a question as far as new markets in '05. Again, most of the stores are in -- again, all of them are in existing states. Most of them are in existing general markets we've operated in before. The two new markets in -- real new markets in '05 so far have been Dallas, Texas and San Antonio, Texas. But again, Jeff, just to reiterate, no, the answer to your question is nothing is going to change. The size of the stores, the profiles, the cotenants are the same as they were before.

Okay, great. How about in terms of the product categories, maybe at a run rate, a percent of total that the categories represent here in '05 year to date, and should we expect to see the growth rates in some of the categories outside of men's accelerate a little faster, as men's is up against some tougher comps in the second half?

Okay, I guess that was your second question. You were asking about the men's comps and the fact that men's comps had increased into the second half of last year, and are we expecting any changes in that. We pointed out earlier that the comp sales for the second quarter -- and we showed you men's at over 18% in the quarter -- men's clearly had tougher comps in the first half of '04 than most of the other divisions did. So men's was going against some easier comps, and those comps do get more difficult as we go into the second quarter. But without promising sales different than what Tom has told you, we don't see any consequential changes in our mix going forward into the second half than we have had so far in the first half of '05.

Joseph Teklits, Wachovia Securities.

Nice presentation as well this morning, your first try at it. A couple of questions for you. Back to the nationally recognized brands driving the business, are you finding yourself able to get more merchandise that would be categorized as nationally recognized? Is being public helping you? Is just the exposure of being public helping you at all? Is that driving things a bit?

I don't believe the fact that we are public is really -- has changed our relationships with any suppliers. I think what has changed our relationships with suppliers are a couple of things. Our Company has grown in size, and as we've grown, we've become able to write larger orders and to make larger closeout buys, for example, and to be more important to a lot of suppliers. I think our size has helped us, and our general relationships over time -- relationships with a lot of branded manufacturers take some time to build, and I think that those relationships have been built over time, and that's resulting in our capability to buy correctly and to sell pretty consequential amounts of these brands.

So I'm just trying to figure out if also the percentage of your merchandise in your stores today, say, versus last year or the year before is more heavily weighted toward nationally recognized brands.

It is. What we do is -- and maybe this is the time to make the point here is our Company has -- we don't have any targets toward branded merchandise versus nonbranded merchandise. We basically let the branded sales take care of themselves, and if brands are hot, we sell the brands; if they are not as hot, we will back off -- back off of them. But -- and that is what has happened this year. We believe that our customer reacts to fashion first and brands second. And what's really been going on, we believe, is that the brands that we sell have actually been correct fashion-wise with the right styles and colors and looks, and we think that's as important as anything else. We're not forcing the issue with brands. It's basically finding its own level.

Okay, that makes sense. Two more questions for you, Ed. First, can you speak -- you said a little bit -- you said a little something about August, how the momentum continues. Can you speak at all to the fall season as just how it's beginning to play out so far? Is it different than you've seen in the past? Is it later, earlier, just any quirks to it that you are seeing?

And secondly, just to follow up on Jeff's question, you opened Baltimore Washington last year, and it's the furthest you've pushed north into a very significant metropolitan area. Can you comment on what you've learned up here and how those stores are performing?

Okay. Regarding the first question on how we see fall playing itself out versus previous falls, let's be careful here because August really kicks off fall, and we haven't talked much about August. I did say that the momentum from the first half of the year has continued into August. So I guess that's a positive comment about the beginning of the second half of the year. And we don't see at this point the second half of the year necessarily offering any different challenges than the first half of the year did. We have softer comps at the beginning of the second half of the year, but remember we ended the second half of 2004 on a very strong note back in December. So we don't see the second half necessarily playing out -- you heard Tom's guidance, and so I'm not backing away from what he told you, but we don't see it as far as anything else setting up differently.

As far as locations go and as far as specific real estate locations, you ask about Baltimore. Our Baltimore -- we have three stores in the general area of Baltimore -- two in Baltimore and one very near the District of Columbia. Those stores, to this point, have underperformed our expectations and the average of typical new stores. So the short answer to your question is that they have underperformed slightly.

What I would point out to you is that often, Citi Trends, probably more often than not, when Citi Trends opens a new market, our stores accelerate pretty quickly. Sometimes in larger markets, our sales don't take off as quickly. As you all know or may know, we advertise very little. Even at grand openings, while we do a grand opening advertising event, it's not a significant -- we don't spend a significant amount of money on grand opening.

There were a couple of markets -- I'll give an analogy here to try and answer your question -- a couple of markets we've opened in the last couple of years that we view to be sort of similar to Baltimore. One is Richmond, Virginia, and another one is Orlando, Florida. These new markets opened in '03 and '04, and got off to decent starts, but not really up to what we thought they might do.

I'll tell you that now, with a year-plus behind us in those markets, Richmond and Orlando are running near the lead in the entire Company in comp store sales increases this year, as customers have gotten to know Citi Trends and those stores are gaining traction.

We expect that eventually will happen in Baltimore. In fact, our recent results in Baltimore, we've seen positive results in the very recent couple of months. We're very confident of our ultimate success in that market. In fact, we've approved two additional locations in the Baltimore area that will be coming online, perhaps one this fall and one next spring.

Okay. Appreciate that, and good luck, guys.

Elizabeth Montgomery, SG Cowen & Co.

Congratulations on a really good quarter. I was wondering if you could comment on the performance of the stores -- the store in Houston, some of the newer stores that may be targeting the Hispanic consumers.

Okay. As you all know, the demographic that the Company works toward and where we locate stores has been predominantly African-American demographics. In Houston, their Hispanic population is significant in Houston, and we have located several stores -- I guess two or three stores in Houston, where the Hispanic population is actually greater than the African-American population. I will tell you that virtually all of the stores in Houston, irrespective of the demographic profile, have been successful so far.

And they are tracking in line with the average store across the base?

Absolutely, yes.

I had a question about merchandising on the men's side, or maybe not merchandising but the comp trend. I was trying to remember if in Q2 last year, that was the time that the men's business was having a lower average transaction price, right? Because of the fashion shift?

I don't remember us ever telling you that. I will tell you, though, that the men's business was difficult last year in the second quarter. Actually, the first half of last year, the men's business was running below the chain average.

Okay. Because I guess I'm a little bit surprised that the average transaction was flat, given that you were comping against kind of weaker or lower average transactions levels in the men's business last year, if I'm remembering correctly.

Okay, well, we don't have those statistics in front of us. And I don't really -- I'm not sure we'd even disclose transaction size by category if we did have them. But I don't remember that. I just remember that the men's business had been difficult among our businesses last year through the first and second quarter and then started gaining traction into the second half and has obviously continued through the first half of this year.

Okay. Thanks a lot. Good luck.

(Operator Instructions). Jeff Klinefelter.

Just real quick, I wondered if you could share with us the interest expense and tax rate information for the quarter. I noticed it wasn't in the press release, and I'm just wondering if there's some color that you can shed on that?

For the first half of the year, I think I said that the tax rate was 37.3%. Each quarter we look at where we are on the taxes and we adjust accordingly. As far as interest expense, let's see -- if my memory serves me, that was about a $55,000 expense for the quarter.

Pete Roberts, Morgan Keegan.

I am a broker in Lexington. Is there an outlet in this area that I could visit? And secondly, do you have an ideal sales per unit per store? It seems to me like when I did this on the offering, it was -- seemed small to me.

You are in Lexington, Kentucky?

Right.

We don't have any stores in Lexington, Kentucky today. We actually intend to go to Lexington, Kentucky next year, but we're not there today. The closest store to you today is in Nashville, Tennessee. As far as our new store size expectations go, Tom, go ahead and tell them the answer to that.

Well, the new store size selling square feet is around 10,000 feet in selling space in terms of, you know, unit. Is that what you were looking for, the square footage size? Or -- I want to make sure we answer your question correctly.

I'm not sure I can ask it correctly, but just a general idea of revenues per store annually or monthly or--?

Roughly 1.1 to 1.2 million is what the chain average is on a 12-month basis right now.

Thank you, sir. Gentlemen, at this time, there are no further questions. Please continue.

If there are no further questions, and we understand that to be the case, we thank all of you all for listening to us on this phone call. Thank you for your questions, and we look forward to our next phone call. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the Citi Trends second-quarter conference call. If you would like to listen to a replay of today's teleconference, you may do so by dialing 1-800-405-2236 or 303-590-3000 and enter access code 11037385. (Operator Instructions). Thank you all for your participation. You may now disconnect.