Citi Trends Inc (CTRN) 2005 Q3 法說會逐字稿

Good day and welcome to the Citi Trends conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer, Mr. Tom Stoltz. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us today. Also on the call today with me is Ed Anderson, Chief Executive Officer, and George Bellino, President and Chief Merchandising Officer.

By now, everyone should have seen our third-quarter earnings release that was sent out shortly after 4PM Eastern time today. 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 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 upon 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 S1, 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.

Ed Anderson and I will give brief presentations, after which all three of us 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 afternoon and thank you for joining us. We are all pleased to continue our life as a public company by announcing another very strong quarter. Our sales and earnings results were well above our expectations and continued the very strong momentum that we have been seeing. We will provide some additional details on this performance and then cover our outlook for next year.

I will present an overview of the quarter's results and make a few comments about the Company's growth and future plans. Tom will review the financial results in more detail and conclude with earnings guidance for both fiscal 2005 and 2006. Then we will be happy to answer your questions.

In the third quarter, sales increased 51.8% over last year to 69.9 million from 46 million. Comparable store sales increased 25% in the quarter, with each month of the quarter posting strong year-over-year increases. I will speak more about sales and the drivers of our sales in a few minutes.

Net earnings for the quarter were 2.6 million or $0.18 per share, nearly 16 times the net earnings of a year ago. This growth was a result of an across-the-board improvement in each functional area of the Company. Our merchandise gross margin rate increased. Our ratio of SG&A to sales decreased. In fact, we had substantial expense leverage in all three personal expense areas -- stores, distribution and corporate. And new store sales, the classes of 2004 and 2005 stores, continued to exceed our expectations.

Sales were strong across all merchandise categories. Comparable store sales increases for the quarter by category were men's up 28%, women's up 24%, children's up 24%, accessories up 18% and home furnishings up 40%. The common thread across merchandise categories was that nationally-recognized brands' sales continued to increased at a higher rate than other nonbranded merchandise. And of these strong sales, markdowns were significantly less than last year.

We sell urban fashions, including 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 fashions at strong value prices. This quarter's comparable sales increases were driven by increased customer traffic, as well as small increases in our average price per item and transaction size. In fact, 21% of the 25% comparable store sales increase came from increased customer transactions. We believe this increased traffic could continue to yield benefits into the future as we have attracted new customers to our stores.

While our sales certainly benefited from the post-hurricane traffic, we also benefited from strong sales momentum built up from the previous three quarters. Total inventories at the end of the quarter were up 34% over last year's third quarter and comparable store inventories were up 14% over the same time last year. Our sales momentum has continued into November. Our inventories are properly balanced and well-positioned for a successful holiday selling season.

We opened five new stores in the third quarter, bringing our total to 26 new stores so far in 2005. We expect to open 37 new stores for the entire year. The 2005 new stores are slightly larger in size than the new stores we opened since 2003. 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 on our strong sales in general, as well as some very good store locations.

Hurricanes Katrina, Rita and Wilma had a large impact on our quarter. Our thoughts remain with those residents and employees working to get their lives back to normal in those regions. While the storms caused us to lose over 400 store sales days, we experienced a rebound in sales that was unprecedented for us. While we could not have anticipated that this hurricane season would be even more destructive than last year, we likewise could not have anticipated the rebound effect that would result from our customers purchasing needed apparel and other items in the wake of the storms.

We experienced post-hurricane sales in affected markets that more than made up for loss of sales from closed stores in September and October. The hurricane impact was best demonstrated by the difference between our reported comparable store sales results for the entire company and for those stores not affected by the hurricanes. Sales in the non-affected stores were up 17 to 19% in the quarter, while overall comparable sales were up 25%. We currently have four stores that remain closed, two of which could reopen in the fourth quarter.

We announced in October that we had acquired a 286,500 square feet distribution center in Darlington, South Carolina. The new distribution center complements our two existing facilities in the Savannah area that total approximately 240,000 square feet. This additional distribution center space means that we now have enough DC capacity to support twice our existing sales volume. The facility has ideal access to major interstate highways and has available acreage for expansion. The building is located almost in the middle of our current market and is more convenient to our suppliers. Additionally, the Darlington County area offers a very attractive labor market.

With the cost of the facility, the improvements in new equipment ranging from 3 million to 4 million in the aggregate, we have been able to secure a first-class facility at a very attractive cost. The total cost of this facility is much less than the 12 to 15 million we would have spent to build and outfit a new building.

We are currently installing new racking and conveyors along with our existing warehouse systems. We will very gradually bring this building online, minimizing any potential disruptions. We will begin receiving and shipping small amounts in December. While we expect there to be some startup costs in the first few months, we do not anticipate those costs to be material. This was a very important announcement for us in this quarter as we build the infrastructure for our expected growth.

Now, I'll turn the call back to Tom.

Thank you, Ed. We are pleased to report a record third quarter for us, with strong sales and earnings growth. This afternoon, I would like to walk through several of our income statement items and then spend some time on our fiscal '05 and '06 guidance. As Ed mentioned, our total sales for the quarter were 69.9 million versus 46 million last year. This represents a 51.8% increase in year-over-year sales. Comparable store sales rose 25% versus 3% in the 2004 period.

The monthly comparable increases during the third quarter were as follows -- August, 20.3 versus 6.7% last year; September, 19.5 versus 1.7 last year; and October, 37% versus flat last year. For the year to date, total sales were 193 million or an increase of 40.7% over the prior year. Comparable sales were up 14.1% for the year to date.

Moving on to gross margins, for the quarter, we reported 38.7% compared to our prior-year rate of 36.7%. As Ed mentioned, nearly all of the increase was the 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 as a percent of sales were constant with a year ago, while shrinkage was down slightly. Shrinkage remained 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 38.3% compared to 37.1% last year, with the improvement coming in the second and third quarters as a result of reduced markdowns.

SG&A expenses were 33.3% of sales for the quarter compared to 35.6% last year, as payroll and occupancy costs were leveraged. Labor productivity improved substantially in stores and in our distribution facilities. The SG&A leverage was realized despite approximately 300,000 of being public costs in the quarter and a reserve taken for potential uninsured hurricane losses of 700,000. The Company is investigating the insurer's claim that the New Orleans area damages are from a separate flood event, and therefore require a much higher deductible.

For the year to date, SG&A as a percentage of sales was 33.3% compared to 33.9% last year. Included in this amount was the termination fee paid in connection with the Company's initial public offering in the second quarter, totaling 1.2 million on a pre-tax basis. Excluding the termination fee, SG&A was 32.7% compared to 33.9% last year, again despite about 700,000 of being public costs and a 700,000 reserve for hurricane losses in the year to date.

Each of the items previously discussed led to an earnings increase of nearly 16 times for the quarter to 2.6 million compared to 165,000 last year. Earnings per diluted share were $0.18 versus $0.02 last year, with 14.38 million weighted average shares outstanding.

For the year to date, net income was 6.3 million or an increase of 166% over the prior year of 2.4 million. Excluding the termination fee, net income was 7 million or an increase of 198% over the prior year and nearly as much as our net income for the entire year of fiscal 2004. Year-to-date earnings per diluted share were $0.49 compared to $0.22 last year, up 123%. The earnings per diluted share increase for both the quarter and the year-to-date periods is smaller than the net income increase, because of the idea shares issued during the second quarter of this year. Excluding the termination fee, earnings per diluted share was $0.55 or an increase of 150%.

Our tax rate for the year to date was 36.2%, adjusted down from the end of the second quarter to reflect tax-exempt interest and jobs tax credits earned. We expect a rate of around 36% to continue throughout '05 and '06.

Now, moving on to guidance for the remainder of fiscal 2005, we ended the third quarter with a store count of 226, including four stores remaining closed as mentioned due to the hurricanes. We plan to open 11 stores in the fourth quarter, bringing our year total to 37 new store openings and our stores in operation to between 233 and 235, assuming none to two of the closed stores are reopened in the fourth quarter.

We now expect the full year fiscal 2005 earnings per diluted share to fall in the range of $1 to $1.03, based on 13.3 million diluted shares outstanding, a full-year tax rate of approximately 36%, comparable store sales increases of 10 to 13%, the opening of 37 new stores and total sales ranging from 273 to 278 million. I would remind you that this EPS range excludes the 1.2 million termination fee. The EPS range for fiscal '05 is $0.94 to $0.97, including this charge.

Now, I would like to talk about our fiscal 2006 guidance. Our position remains unchanged with the factors (ph) of sales and earnings guidance. We will address the current trends of each quarter and give you an update on our full-year expectations. Our initial estimate for 2006 is EPS of $1.12 to $1.17. This is based upon full-year comparable store sales increases of between 2 to 3% and 14.5 million diluted shares outstanding.

We also expect to open 42 to 45 new stores and close two. This store opening plan will result in an increase of approximately 20% in selling square footage.

Our estimate for fiscal 2006 does not include the expensing of stock options, as required under FAS 123(R), which we estimate to be approximately 1 million to 1.5 million pre-tax or approximately $0.04 to $0.07 per share. In addition, gross margins for the year are expected to decline 30 to 40 basis points, as markdown rates increase to closer to historical norms. This decrease in gross margins is expected to be offset by SG&A expense leverage, primarily in corporate costs, and about 10 basis points of improvement in interest income year over year.

Our long-term goals are to continue to deliver annual square footage growth of approximately 20% through new stores, low to mid-single-digit comparable store sales increases and a range of low to mid 20% long-term profit growth. 2006 will be a challenging year for us, since we will be comparing against a truly phenomenal year to date in 2005.

One additional note -- adjusting our fiscal 2005 net income estimate for our projected diluted share count in 2006 results in a range of approximately $0.91 to $0.94 per share. Compared with next year's forecasted range, that would result in EPS growth consistent with long-term strategic goals.

Finally, we expect fiscal 2006 to more closely resemble fiscal 2004, in terms of its seasonality by quarter. Typically, our second and third quarters are much less profitable quarters than the fourth and first quarters. That was certainly not the case this year, as the positive impact from post-hurricane sales led to a record third quarter. With strong double-digit comparable sales increases in both the second third quarters this year and continued momentum expected for the fourth quarter, comparisons next year will be very difficult.

With that, operator, I would like to now turn it back over to you to take any questions.

(OPERATOR INSTRUCTIONS). Dorothy Lakner, CIBC World Markets.

Congratulations, although I think the word is probably insufficient for how well you have done. It's really just phenomenal. And I wanted to just maybe get a greater sense of the secret to your success. And just talking about the amount of branded goods that you're selling as part of the merchandise assortment or the percent of sales, however you think you could present it, versus where you were last year.

And just looking at the impact from the hurricane, you talked about customers coming in with FEMA coupons and so forth. I wondered how long you might expect that to continue, what you've seen in the past and how this year might be different. And then finally, when you talked about November sales continuing the momentum that you have seen, are you referring to the momentum you saw in the quarter overall in terms of the comp, or the very strong comp that you saw in the month of October, just to give us a sense of what you're looking for?

Thank you for the nice comment there at the beginning. I think I heard three questions from you. One is you're asking us, really, what is the content in our business and what is really driving our business. I mentioned in my comments that our nationally-recognized brands -- those brands like FUBU, Phat Farm, Rocawear and Baby Phat -- have increased at a higher rate than our nonbranded business has. I believe we have said before that our nationally-recognized brands, as a percentage of our total business, is in the range of 35 to 40% of our total across all categories on average. That range is still accurate. The numbers have increased this year over last year. We are not going to give you the exact number, other than to say it has increased and it is still in that range.

But do you also think that you're getting -- since it doesn't seem like it's perhaps increased an enormous amount. Is the kind of goods that you're getting better, more current and you have more brands that are what customers want than you had a year ago?

Well, it has definitely increased as far as current. We're getting more current brands than we did before -- the same brands with more current merchandise.

That was George Bellino, our Chief Merchant, speaking. We developed relationships with the branded manufacturers over time, and those relationships have continued to build. And as our company has gotten larger, our capability to buy larger quantities from these brands, and so it's a combination of the relationship building as well as our capability to buy more, and the fact that we have focused our merchants specifically on buying branded apparel. We have merchants that are dedicated to buying brands in women's and merchants dedicated to buying brands in men's.

On the FEMA money and the federal money, as well as Red Cross and Salvation Army money going into these hurricane-affected areas, we really don't have a good fix on how much longer this continues. We've heard that it's going to continue at some level in some of the areas but not all of the areas, as long as Christmas. But we don't really know that, and so we would be speculating.

But is it fair to say that this is much bigger than you ever seen before, for --?

There is no question that this rebound impact and the amount of money being put into these areas -- but I think it correlates to the amount of devastation, frankly, in these areas. Because I think what you have with not just the amount of wind damage that was direct from three separate hurricanes over less -- a 60-day period but also the phenomenal floods, which I think is very unprecedented. So I think the damage was unprecedented, the number of people that were left without homes is unprecedented, and the federal money and other money has gone with that.

So I think it has had an effect, and we did not see this coming. We have seen smaller rebound effects over the last few years, as far back as five or six years ago in North Carolina, last year in Florida. But you're talking about three or four stores being affected for a briefer period of time. The fact that this impact had a negative direct impact on about 38 of our stores, but we think stores in the surrounding areas ended up being a net benefit, as well. So we think we had probably 50 stores that had a positive impact from the storm, and the amounts and the timeframes are something that we had not ever seen before.

Your question about November -- we, as you know, don't like to talk too specifically into a month or quarter about results for a month. We will tell you -- and when we talked about that, we were not trying to be, I guess, too cute with the numbers. But our business has continued to be good, and I guess we're just going to leave it at that, at this point.

Elizabeth Montgomery, S.G. Cowen.

Congratulations. I apologize for this; I hopped on the call a little bit late. I just want to make sure I'm understanding correctly that you are actually taking your Q4 guidance up, as well, not just to reflect the upside from Q3?

Well, the full-year impact, as we said, is $1 to $1.03, and you know the actual results for the third quarter. So yes, you can deduce that the fourth quarter has gone up slightly in our expectations.

And that's despite the fact that the tougher comparisons in the men's business really began, really, in December but even more so in January?

That's correct.

And you have already gone into, I guess, what the explanation for that is, with the bigger shift towards the national brands?

Correct.

I guess my question would then be, if you could talk about maybe the early indications you have gotten on stores that are kind of in new demographic areas, and if you have a better sense of where the additional consumer traffic that are getting has been coming from?

You're asking about what our new store experience has been in new areas this year, I guess?

Well, more so how some of the stores that are in areas that have been targeting kind of a newer demographic have been trending, specifically the stores in Houston, if you are able to say where the additional -- or where the increased consumer traffic from your stores is coming from, whether it's within your core demographic or whether it's kind of people outside your target consumers?

Well, I think what you're asking is there are markets in our area where, as you all know, that our primary customer base are African-Americans. Over 70% of our customers across our company are African-American, with the bulk of the remainder being Caucasian and a lesser amount Hispanics. However, in some of our markets like Houston, for example, now in Dallas in San Antonio, we are in now markets where the Hispanic population is consequential, and we have stores in areas where the Hispanic population is as much as half of the total demographic. And we have, I guess, three or four stores in areas like that now, in Houston, Dallas and San Antonio. And these stores have tracked very well, and are doing at or above the new store average.

And is there any change that you can call out, in terms of the product mix, that could impact the margins or the growth opportunities for those stores?

We have done nothing to change any product mix in any of these stores. The stores are opened with and have pretty much continued to carry the same merchandise mix as our other stores do.

And then, I believe that when we were talking during the roadshow, you guys had kind of warned that maybe you would see a little bit of SG&A pressure from the new distribution center coming online. And now it doesn't look like that could be happening. Is that a function of spending less money than you had at first anticipated to get it up and running?

I think it's a function of two things. I think you are right; I think it's a function that we are spending less on the building and related equipment that we had expected to, and the fact that we are getting the building up earlier than we had planned. We have already incurred some of the startup costs in a timeframe when our sales have been pretty good, so we already have some of the startup costs behind us. And we're expecting to get a consequential amount of the investment startup costs in the fourth quarter of '05, where previously we were expecting those startup costs to be in maybe the second or third quarter of '06. So the answer is yes, yes, yes on less because of the building costs and related costs and also because we got those costs into an earlier timeframe.

Thanks a lot and congratulations.

Jeff Klinefelter, Piper Jaffray.

Congratulations, as well, on a great year so far. A couple of questions for you. Ed, you mentioned that you clearly believe you're getting a lot of new customers, given your traffic counts through, particularly, this very strong third quarter. I wondered if you could maybe just shed a little bit more light on how you are analyzing that, capturing the data, maybe thinking about how you're getting that customer in. Is it word-of-mouth? And how you sort of ensure that you continue to service that customer and, importantly, find out maybe what other product categories you can deliver to them, and if it's a different type of customer than you've normally had in your store?

And then, the second one would be in sort of a general customer on managing the inventory that you have through the cycle we're in. It seems like a lot of the brands you are talking about are sold also in some of the department stores and other specialty stores. And there seems to be a real transition taking place, again, for a number of those urban brands. And how do we think about that now going into next year, when there is probably a different set of brands available and maybe in different quantities as the space in traditional department stores is reallocated?

I'll attempt to tackle both those questions, very different questions. The first was on the customers. We don't have a great deal of information about our customers. The information that we obtain, we obtain through the point-of-sale transactions at checkout. We capture the transaction, the individual items in the transaction, so we know what customers buy of each item, what the average item is, what the average basket is and how many transactions we have. We don't try to correlate that to specific individuals. So we tick off transactions, and it could be the same customer 10 times or 10 different individuals.

So all this data comes to us from point-of-sale. We think it's reasonably accurate. We've tracked it over time. And so we are pretty confident that the increase in transactions really relates to increases in customer traffic. And again, we do track the retail per item sold, as well as the number of transactions each customer buys. And we thought what we would see is a marked increase in the size of the transactions. And while we saw a little bit of a tick-up in that, I think the surprise here is that we had a lot more transactions going on. And as far as knowing who these customers are, we have nothing scientific on that.

In terms of how you're reaching those customers, is there anything that you have been doing? I know there's fairly limited brand outreach in marketing, but anything at all that you are doing or that you have been able to figure out that's been particularly effective?

We have done nothing different. We still continue to advertise very little, as you know. We really have three advertising campaigns per year; we advertise at Easter, back to school and Christmas. And that's primarily image advertising for the Company, over fairly brief timeslots. And we advertise our grand openings fairly significantly, and we have done nothing different in the hurricane areas or anything else through this process. So whatever has been getting our customers to our stores, the word-of-mouth and the amount of advertising we have been doing has continued to do that.

Now, on the other part, (indiscernible) I guess from information that you're seeing is that you're seeing the potential for cycling out of some of the current brands into potentially new brands as we move into '06, or I gather you're saying you're seeing some volatility in some of these brands, and you're wondering how we are managing through this process and what we expect to happen.

Yes, that's correct, essentially that a number of these -- we've gone through a few different cycles with some of the traditional sort of urban brands, whether it be department stores or specialty. And I think, as we go through that transition, I think the idea is that there is excess product out there and available for you as you come to the market. I'm just curious now, as we kind of cycle through some of that inventory into next year, how you kind of think about planning for that.

I'm going to give you sort of the general philosophy on the way we run our business and why I think it works, this cycle and other cycles, and then ask George to talk you specifically about what he is seeing in the marketplace, as far as softness among urban suppliers, and what he might anticipate seeing as we go into next year's first quarter. And that's probably about as far as we can see.

Our merchandising philosophy -- and it's really primarily George's, but it's our company philosophy that we stay close in. The weighted average of open to buy is 90 days. While we do by closeouts, and occasionally by closeouts that are large enough to carry into the next season, that represents less than 5% of our business. And while we do off-price buys, we often do those in season and other buys in season. So we stay pretty close in, and I think that's good. It keeps our inventories freshen and healthy, in a situation where, like we have been, where our business has been extraordinarily higher than we planned. It means our merchandising team is pedaling pretty fast to keep up with the merchandise. And they have done an excellent job of actually keeping up and keeping the merchandise flowing and keeping the inventories in the proper sales-to-inventory relationship.

Now, as far as specifics about softness in the marketplace among urban brands, George, why don't you address this with Jeff?

There's always changes in the brands and who's hot and who's not. This year, the urban brands have been strong for the last three or four years; some of them have softened up, and that has given us opportunity to buy more goods from some of these people. As we go forward, we are constantly in touch with the new brands that are coming out there. We may have a difficulty for the first season or two, maybe longer, to get them to sell us. But after a while, with our credit and our persistence, we are able to get most of the new brands onboard to sell us, especially as their inventory grows and they have their ups and downs, as well.

Our approach is to constantly be out there looking for the next thing happening. And so far, we have been able to continue to get the brands that are hot -- may not be in their first season, but we do eventually get them to sell us.

One of the things that we are hesitant to do is to call out specifics on brands, as you know. But you've heard us say before that those key brands for us -- Baby Phat, Phat Farm, Rocawear, Apple Bottoms and Dickies -- those brands have been hot for us all year long. And we have really not seen any tailing off among those very top brands. So at this point, we have not seen what you are telling us that you're seeing in other places.

Dorothy Lakner, CIBC World Markets.

It was kind of a follow-up question to Jeff, just on the men's side of the business, specifically. If you could talk about what you're doing that's different there, because some of the competitors, I guess, in the urban space have not really -- have done very, very well with women's but not so well with the men's business, so I just wonder where you're different.

And then just a question, housekeeping question -- if you could give us square footage at the end of the quarter?

Our men's business had been soft, as you know, through the beginning of '04. Our men's business started picking up as we entered the second half of '04. And our men's business has been strong through '05. In fact, this quarter, it was somewhat higher than women's. I believe, on a year-to-date basis, men's and women's is pretty close to being equal. Isn't that right, Tom and George? Pretty close to equal?

We get asked this question a lot, and I think it may be that our customer is looking for different brands than some of the other stores sell and perhaps different fashion. That's probably as specific as I can care to be. George, do you have anything to add to that about our men's business versus other people's men's business?

A lot of the brands -- some of the retailers give up on into early. If you bring the prices down, many times you can sell those brands. That has happened with us. We have had disasters a couple times with going into a brand for the first season or two, and then been able to work with them where they can still come out alive or help them to move inventory, and we can bring the prices down and give our customers a better value, and that brand develops into being a very successful brand for us.

Remember, what we say about brands and fashion is we believe the look is more important than the brand. And we know that's counterintuitive to what a lot of people think about urban fashions, but we really believe that it's got to be the right look first and the brand second. Even the brands that are consequential to our business, we think if it wasn't the right fashion look, the brand wouldn't make any difference.

Square footage is just over 2 million square feet at the end of the quarter, for about a 21% increase.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears we have no further questions at this time.

Thank you all for were joining the call today, and we look forward to the next one.

This does conclude today's conference call. We thank you for your participation and have a great day.