Citi Trends Inc (CTRN) 2007 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'd like to turn the call over to the Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Thank you, Robby.

Good afternoon, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and Chief Executive Officer, and George Bellino, President and Chief Merchandising Officer. Our third quarter earnings release was sent out at 4:00 p.m. Eastern time today. If you've not received the release, it is available on our company website under the Investor Relation's section at www.cititrends.com.

You should be aware that the prepared remarks made during the call may 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, therefore, undue reliance should not be placed upon them. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially.

We refer you to the Company's most recent report on Form 10-K filed with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those described in any forward-looking statements. Ed Anderson and I will provide you with some details related to the third quarter results, after which Ed, George and I will address any questions you may have.

Let me now turn the call over to Ed.

Good afternoon, everyone and thank you for joining the call.

I will provide an update on our business, discuss issues affecting the third quarter results, and provide an update on future plans. Then Bruce Smith will review the third quarter in more detail and review our guidance for 2007.

First about third quarter sales, as we mentioned on the second quarter call, sales for the first three weeks of August were very good, up approximately 16% in comp stores. We attributed those increases to a transfer of sales into the third quarter, due to later school openings and the movement of the tax free days in Florida and Texas into the third quarter.

Unfortunately, sales slowed down quickly after the beginning of the quarter, and ran 5% to 6% comp store decreases until the last week of the quarter. The weather was unseasonably warmer through most of the second half of the quarter, but we saw a little cooler weather the last week of October and saw sales increase 4% that week. For the quarter, comp sales increased 1.9% on a comparable week basis. Sales for the same 13 weeks last year increased approximately 5% in comp stores.

After a solid first week of the fourth quarter, the last two weeks have been soft and comp store sales are now up 1.5% through the first three weeks of the fourth quarter. For the third quarter, sales of our merchandise category for comparable stores on a comparable week basis were as follows: Children's up 6% versus 15% last year; Women's, 2% versus a negative 1% last year; Men's, 1%, versus 6% last year; Home, 1% versus 13% last year; and Accessories were negative 2% versus a 12% last year.

After being flat with last year as a percent of our total business in the second quarter, sales of nationally recognized brands comprised 50% of our total sales in the quarter versus 48% last year. Sales of brands are driving the comp increase in Women's. I would like the fashion direction and the continued core performance of non-branded denim continue to be issues in the Women's business. We introduced our proprietary brand, Rough Riders, at the end of the second quarter. After a so-so start with our first deliveries, sales have picked up nicely with our second deliveries and the brand is delivering well in Men's, Women and Children's.

Now, about the operating results for the third quarter. Two factors account for the disappointing results in the third quarter. Sales were up only 1.9% in comp stores, we were expecting 5% to 6%.

Heavy clearance markdowns were essentially the entire reason for the three percentage point drop in gross margin and account for a significant portion of the profit decline from last year. We took aggressive markdowns to move Summer merchandise and in some cases to move slow selling Fall merchandise. The unseasonably warmer weather caused less customer traffic and required even more markdowns to move goods to prepare for holiday. We believe that we took all the markdowns that we needed to take in the third quarter.

One of our objectives for the quarter was to decrease inventories and we did that. At the end of the quarter, total inventories were up 26% over last year, compared to 40% at the end of the second quarter. Comp store inventories were up 8% at the end of the quarter. The clearance markdowns decreased the inventories, as did lower receipts of merchandise. We still own too much inventory and too much of our inventory is marked down, however, we believe we are reasonably well-suited for the all-important fourth quarter and expect to deliver positive comp sales, although modest. We expect to have reduced inventory levels to the extent necessary by the end of the fourth quarter and to be situated well for a good start to 2008.

Expenses were not a problem in the third quarter. We did experience deleverage as we had a 2.7% fiscal comp store sales decrease, but not as much as expected. Store payroll was controlled much better. We did have some payroll deleverage but we were about 20 basis points better than a 2.7% comp decrease would suggest. We did have outside consultants perform a diagnostics review of payroll management and also store productivity. There were no huge bubbles found, though we did get some excellent suggestions for improving payroll management and store productivity.

In addition, medical expenses and professional fees came back in line in the quarter as well. Store inventory shrinkage was 2% of sales in the quarter, right in line with our forecast. We counted 137 store inventory's in the quarter. The results suggest that we're on a plateau with store inventory shrink. The results have stopped getting worse but we have not yet started improving either.

Last quarter we mentioned utilizing camera systems with 24/7 monitoring to aid in shrinkage reduction. We have implemented these systems in six stores and results are preliminary but encouraging. Importantly, store manager turnover has improved during the year. After being over 40% for both 2005 and 2006, the rate through October is down to approximately 30%. We believe if this turnover rate continues to improve that this will yield better inventory shrinkage results in the future.

We opened six stores in the third quarter, bringing the 2007 new store count to 29. We will open 13 stores in the fourth quarter, five of them are already open and the other eight will open this week. With these 42 new stores and the 12 expansions, we again will exceed our stated goal of 20% additional selling square footage each year.

And now I'll turn the call back to Bruce Smith, our Chief Financial Officer.

First, I will review some additional details for the third quarter and then provide an update of our estimated earnings guidance for the remainder of 2007.

Total sales for the third quarter were up 14.2%, and are up 18.7% for the year-to-date. In discussing comparable store sales, the results on a comparable weeks basis are a better indicator of the true performance of our stores because they match up the same weeks in each year, while the fiscal comps are a better indicator of what should be expected in the financial statements because they match up the actual weeks that fell in the respective year's fiscal quarters.

Sales in comparable stores increased 1.9% on a comparable weeks basis, decreased 2.7% on a fiscal basis in the third quarter. This difference of almost five percentage points is a result of the third quarter last year including the always strong first week of August, whereas this year that week fell in the second quarter. Third quarter of 2007 picked up the first week of November which is a much smaller sales week than the first week of August.

The year-to-date comparable store sales for comparable weeks are up 1.9%, while on a fiscal basis they were up 0.7%. Gross margin for the quarter was 34.7% or 310 basis points below last year's 37.8% gross margin, with virtually all the decline resulting from an increase in merchandise markdowns as Ed discussed. SG&A expenses were 32.6% of sales in the third quarter of this year, versus 31.2% last year. The increase being due primarily to the expense deleverage typically accompanies the 2.7% decrease in comparable store sales. This was particularly evident in expense categories that are largely fixed. Such as occupancy expense, which was 80 basis points higher in this year's third quarter.

As Ed mentioned, payroll expense was under much better control this quarter, increasing only 40 basis points despite the deleveraging effect that the negative comp store sales decrease had on the expense percent. Depreciation expense for the quarter increased as a percent of sales from 2.4% to 3.3%, as a result of capital expenditures incurred for new, relocated and expanded stores and for new scanning technology used in the stores together with the deleverage on this fixed expense caused by the negative comp store sales.

Net income for the quarter dropped from $2.8 million last year to a loss of about a $0.5 million in this year's third quarter, while diluted earnings per share declined from $0.20 per share to a loss of $0.04 this year. Reviewing the balance sheet, our financial position continues to be in excellent shape with $52 million of cash and marketable securities and we have no debt. Total inventories at the end of the third quarter were up $19 million or 26% over last year's third quarter.

Store inventories comprise $15 million of the increase with about two-thirds of it in new stores and the remainder in comparable store inventories which were up 8%. Distribution center inventory was up $4 million, all of which related to additional closeout buys to be held until the next season. This pack-and-hold inventory was 80% higher than at the same time last year, as we continue to take advantage of opportunistic buys.

Looking at guidance for the full fiscal year, we are lowering our earnings per share guidance to a range of $0.91 to $0.96 per diluted share, based on year-to-date trends and consideration of last year's fourth quarter which included an extra week. This guidance which includes a $0.04 charge for expenses related to a secondary stock offering is based on a comparable store sales increase of approximately 1% to 2% for the year, on a comp week basis, which implies comps that are flat to slightly up in the fourth quarter. With last year's fourth quarter having 14 weeks, a loss of the extra week in 2007's fourth quarter translates to a quarterly comp store sales decrease of 6% to 7% on a fiscal financial reporting basis and a decrease for the full year of approximately 1% to 2% on a fiscal basis.

Robby, if you'd come back on, we're ready to answer questions.

Absolutely. The question-and-answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS) We'll pause just a moment to assemble a queue.

We'll go first with Elizabeth Montgomery with Cowen.

Hi, guys. Hopefully you can hear me okay.

Yes, hi, Elizabeth. How are you?

Okay, hey, a couple questions.

First, it's good to see progress on the operational initiatives, but I wondered if you guys had any sense of kind of what the thought process behind your customers slowing down was, and aside from the macroeconomic factors, do you have the ability to reach out to them in any way to drive additional traffic into the store, number one? Then, second question on the inventory, I know you said you still have too much inventory, too much of it at markdown. I'm wondering, how George feels about the 80% increase in the pack-and-hold inventory year-over-year, and if he feels like that's a good strategy to continue with longer term or if that might not be part of the problem behind maybe some of the lack of freshness in the stores? And I apologize for how I sound.

Beth, we understood you well and I think I have the same bad cold that you sound like you might have as well.

Yes, I do.

On customer slowdown in traffic that we saw during the third quarter, actually we're seeing as we begin the fourth quarter from our perspective, in fact, most of the sales change in the third quarter was due to less transactions and from our perspective lower transactions. We think the macro issues still--the subprime lending and gas prices probably still have not affected our customers to the extent of maybe some other people because of our customers' resilience toward apparel buying, but we clearly have a more negative outlook for our customer spending as we've gone through the third quarter, and now head into the fourth quarter.

Something is causing the slowdown out there, and we all read the same thing that you all do, the economy clearly is not in as good a shape top to bottom as it was before, and so we are a little anxious about the fourth quarter. That's why we trimmed our estimates, back to the fourth quarter, down to flat to slightly positive sales. If you just go back to a quarter before, we were looking at 5% to 6% comps for both the third and the fourth quarter, so we've definitely pulled back.

As far as promotions go, as you know, we are a pure every day low price operator. We really don't do special promotions, and even if this environment, we still think it's better to stay true to our philosophy and stay true to our customers by trying to drive the initial price as far as we can, so we haven't done yet and we won't be doing any special promotions as we go into the fourth quarter. Your second question had to do with inventories, and again, inventories are in better shape than they were before, 26% overall, 8% in comp stores but a piece of that inventory is an 80% increase in pack-and-hold.

And you wanted to have George weigh in on the pack-and-hold buys.

Pack-and-holds historically have been actually more profitable, better gross margin than our normal buys. It's predominantly branded merchandise that we are carrying. This is new merchandise, this is not any merchandise that's been out in the stores, this is merchandise we've bought from the vendors in our warehouse to hold for the next season. I'm pretty comfortable with the pack-and-hold number, we've been increasing it year-over-year, and it's been going very successful.

Okay, great, and then if I could just ask one follow-up, Ed, your holiday season is pretty back-end weighted, right?

Yes, our holiday season is extraordinarily back-end weighted. We won't really know how Citi Trends is doing until the last little two weeks before Christmas. Black Friday which we just came through is not nearly as important for us as it is for other retailers, again, because we don't do a lot of promotions during that time frame, but also because our customer spends late and because of their economic status. So yes, we're hugely late and this year with one extra day it will be even later than it was last year.

Okay, and in the time that you've been at Citi Trends, have you seen a holiday season that started out very slow, potentially negative and end of the year came through okay?

Yes, in fact, it's happened several times. So just because things are slow right now, doesn't mean that it's going to be slow, but because frankly our sales results were soft in the third quarter and have started off the fourth quarter soft at just a 1.5% comp, and being soft the last couple of weeks doesn't mean we can't have a good holiday. We've had some extraordinarily good holidays after soft starts. And we are against relatively flat numbers for the quarter, and weather that wasn't great last year. So we're hopeful that as we move into--closer to holiday, we have some good weather and we have these easy comps to go against. So it's not impossible for us to have a very nice holiday but it is off to a slow start so far.

Okay, thanks, guys.

Thank you.

Next we'll go to Roxanne Meyer CIBC.

Good afternoon.

First, I was hoping to get a little more clarity on--as it relates to (inaudible) on SG&A. Are you able to get any potential leverage on that flat or modest comp, and also if you could just maybe a little bit better explain the composition of your SG&A for the third quarter?

Historically, Roxanne, we have not been able to get leverage on a comp of flat to slightly up and we don't expect to do that this time. Generally, we're going to require somewhere in the 3% range of comp store sales increases before we get leverage on the expense line. So there's nothing built in, in fact, there's deleverage built into the guidance that we've given you. What was the other question?

Just on the--I guess your explanation for the third quarter on SG&A, is there any--can you I guess provide a little bit more detail on how the SG&A fared versus last year?

Yes, as I mentioned, the biggest component was occupancy expense which is logical because that is probably the most fixed of all of our expenses. The rent line as well as things such as utilities, repairs and maintenance, (inaudible), licenses, things like that, they're not going to change to any great extent, regardless of what sales do, whether they go up or go down. There is one component within the rent that is percentage rent but it--don't have that in many of our stores and it's not significant enough to outweigh the other components that are fixed. So about 80 basis points of increase was related to occupancy, another 40 was related to payroll expense, and then the rest were relatively minor items.

Okay, thanks, that's helpful. And then my next questions center around square footage. I guess, first just housekeeping, can you give us the ending square footage for third quarter and then second, at this point in time do you have any thoughts as to your square footage plans for next year, any intention of pull back there?

Yes, the square footage at the end of the quarter was 3.02 million selling square feet.

Okay.

On square footage growth for 2008, we haven't made final decisions yet on 2008 growth rates.

Okay, and then last, just wanted to I guess go back to inventory. It sounds like you said you're going to be comfortable with the inventory at the end of the fourth quarter. Can you just remind us, I'm sorry if I missed it, where you expect inventories to end up?

What I had had said earlier in I guess in the conference call script was that we expected to be situated well by the time we got to the end of the fourth quarter to get off--2008 off to a good start. George will talk to you a little bit about what our targets are for year end.

With our comp store basis end of January we plan to be low single digits and in the total we're going to be 20%, 25% inventory increase.

Okay, thanks. I think that's it and best of luck.

Thank you.

Thank you.

Next we'll go to Shaun Smolarz with Sidoti.

Hi, good afternoon.

Hi Shaun.

My first question relates to the guidance for the year. How confident are you in the new guidance after having cut guidance numerous times already over the past year and does the new guidance assume a continuation of the soft results so far in the quarter?

Shawn, regarding the guidance, we do our best each quarter to do our best job of projecting the next several quarters out depending on where we are in the year, and we have done that again for the fourth quarter this year, and so we're comfortable with the guidance. It obviously has lots of assumptions in it. The key assumption is sales. We're expecting sales to be modest up 1% or 2% in the quarter and we're expecting a little gross margin deleverage and a little expense deleverage, but yes, I told you earlier that we're up about 1.5% so far at the three weeks but the big weeks are ahead of us. If we have modest sales increases, we feel very confident in this guidance.

Okay, so just to summarize, so, so far in the quarter, comps are up 1% to 2% and the guidance assumes a comps up 1% to 2%, so basically if the current situation carries through--that the quarter, the current range should be all right?

Yes.

Okay. Got it.

Next question relates to three key issues, the inventory, store payroll and shrinkage. In terms of like the goals in terms of when to have all those issues completely resolved, when should we look for each of those issues to be done with?

Okay, those operating issues that we talked about at some length on the second quarter call, which we talked about being big issues in the second quarter results and we talked about the fixes of those issues. Inventory, we had said then that we thought that was a two quarter issue, and we made some good progress in the third quarter and we feel like that we'll work through it in the fourth quarter, and be back on track as we begin the first quarter of 2008.

Payroll we made some very good progress in the--in managing payroll better in the third quarter and we did not get all the way to where we expected to be but I think we'll make some more progress in the fourth quarter and essentially have that issue behind us as well. The third issue, inventory shrinkage, as we've said before, is a longer term fix and we had suggested that this could take until next year's second quarter to be fixed. I still think that time frame is appropriate.

I do report to you in the conference call script that with the results of the third quarter's inventories being not a plateau, the good news is is we believe that our inventory shrinkage results have stopped increasing, so have plateaued and with a couple of things going on with store manager turnover going down and other issues appearing to be successful, we think we have it going in the right direction but we had--that hasn't manifested itself yet but we believe it will, and we think, again this will be solved by next year's second quarter.

Okay, in response to a previous question a few minutes ago on store growth plans for next year, I mean, you said final I guess budgeting for that hasn't been completed, but I mean, is it possible that square footage growth of 20% might not happen next year, you might scale it back or is the question to increase it above the 20%?

No, I think the reason I got the question earlier on the phone call was that people have asked us before if these operating results weren't solved, would the Company consider pulling back its growth and the answer to that was yes, if we didn't solve these operating issues in a reasonable period of time we would contemplate pulling back our rate of growth, but again, no decisions have been made on 2008's growth rate yet.

Okay, and my final question for now is I noticed in the press release that you now operate in 19 states. What was the 19th state that you opened in?

That would be Illinois. Just opened our first store last week in Chicago.

All right, thanks a lot.

Thank you, Shaun.

Thank you.

We'll go next to Paula Kalandiak with Broad Point Capital.

Good afternoon. A couple of questions.

The first one is with regards to your pack-and-hold program. In the couple of quarters that I've been following you it seems like the amount of pack-and-hold's been up pretty significantly year-over-year. When are we going to start to see the benefit of that as it makes its way into the stores?

Well, what's happened is our pack-and-hold has been doing well for us, it's our regular merchandise that's been suffering. The fashion part of our business, the young branded part is what's been hurting us over these past several months.

How significant to your inventory is the pack-and-hold program, does it make up even 10% of what's in your inventory?

Yes. That's about what it makes up, 10%, maybe a little more, but around 10%.

Okay, and then my other question, I wasn't quite clear, something that you said in the prepared remarks about the inventory and I thought you indicated that you had taken the markdowns that you needed to take in the third quarter but then you also said that you had too much markdown inventory in your inventory. I was just too confused, I was wondering if you could go back to that.

Again, your first name is?

Paula.

Paula. Hi, Paula. This is Ed Anderson, and referring to the comments I made in the script, about markdowns, about the quality of inventory I guess was the reference, what I said was that we had taken all the markdowns that we needed to take.

In other words, what I was trying to tell people is that we were faced with the need to take a lot of clearance markdowns because of soft sales in the third quarter and we took all those markdowns. The suggestion was, we didn't leave markdowns on the table to be taken in the fourth quarter. We took all the markdowns that we should take in the third quarter.

But it's still in the inventory, the markdown merchandise?

Then what I went on to say was to basically to make a comment about the quality of our inventory. The quality--and what I said was, the markdown content by inventory is higher than we like for it to be. Because we took such heavy markdowns and we have more marked down goods carrying into the fourth quarter than we had last year, there's a higher element of markdown content in our inventory and so that was a comment about the quality is not quite as good as we would like for it to be. That was my point.

Okay, thank you and good luck.

Thank you.

Thank you.

Next we'll go to Patrick McKeever with MKM Partners.

Hi Ed, Bruce.

Hey, Patrick.

Question on your new stores. I'm sure it's too early to say much about the store that you just opened in Chicago, but how about some of the stores in some of your other new markets, including Detroit? How are those stores performing I guess relative to your expectations and then relative to your other stores?

Looks like the 2007 group of stores are going to be a pretty successful group of stores. We reported on I guess on our conference call back or maybe two back that the performance of the '07 group was lagging a little bit from the '06 group. It looks like with the information we have, and of course, the information we have is not complete because we do not have full year results for these stores, but it looks like the 2007 as a group are performing better than initially and are running kind of even with the 2006 group of stores, which is good news because that was another group of very good stores for us.

We have opened stores across the country, again, the four stores in Detroit, up in Chicago two weeks ago, more stores out in Texas and Florida. We're very happy with the Detroit performance. The stores out there are performing very, very well. Chicago seems to have a solid opening, it was not a spectacular but it was a very solid opening for our Chicago store.

We've come back and added more stores in Cleveland, more stores in Columbus which have been extraordinary good markets for us. And we've had other markets in smaller markets, for example, Spartanburg, South Carolina which we opened in the last two or three weeks, was a barn-burner of a grand opening, but we have had some good openings, again, the 2007 stores seem to be tracking in line with our previous year's openings.

Okay, and then question on the bigger--well, the competitive front overall, and there have been some moving pieces with the industry this year with Demo closing stores and just the general consolidation I guess that continues in the department store inventory.

So two part question, and the first part is just what are you seeing? I know you've got a big increase in your pack-and-hold inventory right now, but just maybe you could talk about the quality, maybe, of the merchandise opportunities, the buying opportunities that are out there? Are you seeing any new merchandise from new vendors that you haven't dealt with before, that kind of thing? And then secondly, just on the competitive environment, are you seeing any increased competition from some of the players that are in the business, like, I don't know, Ross stores, maybe, or even Value City or AJ Wright?

Okay. Thank you, Patrick. On the quality of our merchandise available to buy on off-price or closeout basis, George is going to answer that question, and then I'll talk about competition.

On the branded part, we are getting more branded merchandise than we were before. Closeout in some of the regular priced retailers such as Demo, we've been able to get more of it, which has been good for us, but there's also some of the brands that have sort of slacked off.

They're not as demand from our consumers as they were a year ago. (Inaudible) brand is one of them that's really dropped, which is a big part of our Men's business, a very staple. But there's new brands coming up, just as Kuji which is big right now with our consumers, and we're able to get that, made it easier for us to get I think some of the brands that like the Kuji that would have been more difficult in a better environment.

Patrick, on the competitive front, clearly our operators continue to open stores, AJ Wright I believe they're opening a few stores and DD is opening more stores. We've seen DD's actually compete with us now in three or four different places in Florida, and we consider them high quality competition, and there may be others, but those are the ones that come to mind.

As far as the general competitive front, just sort of wondering into how the holiday sees it up four weeks, we have been watching the ads from our competitors and watching what the department stores are doing and we're just kind of amazed. We keep believing that the amount of promotional activity that people are doing can't be increased into the next year, but I think a lot of the big box retailers and discounters and department stores are admitting to doing more discounting and promotions than ever, so we think this is going to be a very price intensive, highly competitive from that perspective, holiday season. So that makes us a little anxious of well, because I think it is going to be a kind of a tough environment out there, and I think a lot of people we normally go after the apparel spending dollar are going to be promoting harder than ever.

Just a quick one on the shrink initiative. Is that just a--you walk in the store and there's a flat screen monitor right above the entryway and it shows you being recorded as you walk in? Is that what it's all about and then someone is monitoring it--a third party is monitoring that information, or are you monitoring that information?

The 24/7 monitoring we're doing, that flat screen that you see walking into the stores, yes, it's--what you're seeing is the--are images that are being recorded. There are very large numbers of cameras in the store, in the back of the store and on the sidewalk that are actually being monitored 24/7, both on audio and a video basis. So these people are actually interactive with our stores and if you walk into one of these stores where this is going on, you'll see the call center actually calling the store and having a conversation with store managers during the day. This happens every hour or two all during the day, yes.

So now in terms of rolling it out, why not move more quickly with that, is it expensive and you just have to figure out if it's worth the cost?

Exactly. We have done six of them so far and we are expected to add about another 10 stores to that list. It does take a while to get these stores installed. These devices do require DSL lines in each store which has a fairly long lead time to it and the capital outlay is about $35,000 per store.

Okay. All right. Thanks very much.

Thank you.

Next we'll go to Quentin Maynard with Moorehead Capital.

Hey guys, how are you doing today?

Hey Quentin, how are you doing?

Great, most of my questions have been answered. Just a couple of quick things. Just kind of to get a little bit more clarity around gross margins here in the fourth quarter, are you expecting gross margin compression just because of the comp being a little bit slower or are you also seeing some compression due to fourth quarter markdown expectations?

Well, a lot of it will hinge on the fourth quarter sales, so with the comps projected to flat to slightly up, there could be some markdown pressure. Probably not a lot of shrinkage pressure. Last year the shrinkage rate was about 1.9 so it was pretty close to what we're running right now, but yes, the pressure in the fourth quarter to the extent that the sales don't get going, will be added to the markdowns.

Got you, and as far as your DC that you're working on right now, how is progress going on that?

The question has to do with the significant expansion that we're doing in Darlington, South Carolina, expanding our large distribution center up there. We're about doubling the size of it, that is going well. The construction is on pace to be completed by mid-March of '08. So we expect to be operational in that building by mid-March, '08.

Great. Thank you so much. As far as--I know you were talking about having an initiative to improve management turnover. Do you have a specific goal for where you would like to see it and what you think is reasonable to expect, and also kind of a time frame that you're hoping to get that in?

That's really a good question, Quentin. The gleam in my eye is 20%, I think that is probably too optimistic for the operation at Citi Trends but if we can get the number down to 25 over the next 12 months or so, I think that would be a very good--

Great, great. Well, I guess I just have two other questions for you. One regarding some of your new markets. I know Detroit has really gone off gang busters. I was wondering if you could give us a little bit of reflection on Miami and Indianapolis because I remember you saying earlier that those were good. Also, Baltimore because I know it had a little bit of a rougher start.

Well, I think I talked about some of our new markets earlier. We talked about the Midwest and we talked about Clevelands and Columbuses doing particularly well, and we've done reasonably well in sales in Indianapolis and Dayton as well, and we've done very well in Miami.

The one market where Citi Trends has really not delivered up to our expectations to this point has been the Baltimore, DC market. We have four stores in that market and all four of the stores do more than $1 million but I think none of the stores are doing the Company average, which is a $1.5 million.

Do you feel like--I remember a little while ago you saying you were seeing somewhat of a turn for those stores. Are you feeling like at this point you're going to be have them--kind of understand the dynamic in Baltimore?

We're clearly not going to give up on Baltimore. I have pretty much concluded that the issue with Baltimore for the most part has been that we probably in hindsight made some poor real estate decisions, that we just didn't get into the right kinds of markets for us at the right price.

But we're going to continue there because the opportunity for us is for a very large number of stores in the Baltimore area and we have seen some [pulps] in a couple of stores but some other stores have really not moved, so I guess we've seen some life in a couple of the, but a couple of them have not been as good. We're going to keep pecking away at Baltimore, we're just going to be a little careful about how much we add to Baltimore over time.

Thanks so much. The last thing, just on the capital structure, you guys with the stock price where it is, have you been thinking at all about buyback or dividends?

Well, Quentin, this issue of stock buybacks, we get this question on most of our conference calls and other questions from stockholders, delivering returns to stockholders is clearly on our minds, and this issue of stock buyback never goes completely out of our minds. We talk about it around here a lot, and we'll continue to talk about it, but we are conservative managers and we are a relatively small apparel retail business in the off-price and closeout business and I think we need to have a conservative balance sheet and that allows us to get the right kinds of inventory and terms from our vendors without question every day.

We do have about $50 million of free capital on our balance sheet and having $50 million to $60 million of cash on the balance sheet, really in my mind today isn't an outsized number for a company our size and the kind of business we operate in. As I've said before, though, as the company does continue to generate positive cash, at some point in our future we will be buying back stock, most likely not doing dividends but doing stock buybacks but not today.

Great, well, thanks so much. Great luck for the next quarter.

Next we'll go to Phil DeFelice with Wachovia.

Hello, guys. All my questions have been answered, actually. Best of luck for holiday.

Thank you, sir.

Thank you.

Next we'll go to Shawn Naughton with Piper Jaffray.

Good afternoon. I just have a couple quick questions for you.

You've been able to reduce your store manager turnover from 40% down to 30%, and I know you hired somebody recently in I think over from Ross stores. Is there anything on that front that you can share with us on where that improvement is coming from and what you guys are doing from a training perspective?

The laundry list of things to improve store manager turnover is a very, very long one. It is a number of relatively small things in most cases. We believe that turnover has to do with structure of the hiring process. It has to do with doing the right amount of training and then having the right kinds of retention programs and we think we've tried to attack all three of those fronts very hard this year by making the hiring process easier to do, to make it less cumbersome for the district managers and regional managers so that they do a better quality job of hiring and not spending so much time on the process.

On the training, we think we actually have pretty good training programs in place, but again, following up to ensure the training is done. Because we believe the people that feel adequately trained feel better about their jobs and perform better, and on the retention side, the Company has improved some benefits, some vacation benefits, some medical benefits, about a year ago. Those kinds of things are the kinds of things that we think help people feel better about the Company and better about their job and I think those things and other things help you retain people.

So we've been banging on these issues. We didn't start this last month. We saw these issues a year ago and started working on them religiously and we're now seeing the fruits of a lot of those labors, but it is a gradual process.

Sure, okay, and then on the system side, are there any additional investments that you guys are looking to make this quarter or out into next year with respect to managing payroll or doing stuff from a warehouse perspective or a distribution center perspective, are there any investments that you plan on making?

On the systems front, there's not going to be I guess revolutionary kinds of things done over the foreseeable planning horizon. The one thing that we will be doing after we get the Darlington distribution center up and running, is we are going to implement a new warehouse management system, but that's going to be a fairly basic warehouse management system that will be the first piece of a longer term, larger logistics plan for the Company, but again, that's coming on probably the second half of 2008. Nothing else of any consequence at this time.

Okay, great, and then final question, somebody had already mentioned this before about the competitive landscape, with Demo closing some stores, obviously and then obviously Underground Station. What are your thoughts about the future, kind of potential, the branded urban business and what does that potentially mean for your customer and where the potential opportunities for Citi Trends in terms of share gains within that marketplace as it evolves?

Well, as George talked to you earlier about some of the brands and how some of the brands continually evolve in and evolve back out again, and there clearly is a lifecycle to certain brands and that life cycle is three to five or six years, it seems like. But brands have been important to Citi Trends for some time now and as you saw in the third quarter, nationally recognized brands represented about 50% of our business.

Those brands were different than they were a year ago and they were different than they were two years ago or three years ago, and we'd expect that they would be different brands next year and the year after and the year after. It's our style and operating philosophy to try to find those brands that our customers want. We don't really care which brands they are. Obviously, we like doing business with certain people but we are going after the brands that our customers tell us that they want.

Again, it's our style to try to source the needs of our customers and quite frankly, if the branded business dropped down to 40% of our business, 45% of our business, that wouldn't necessarily bother us if we were selling the fashions that our customers wanted. From a gross margin perspective, the brands and our non-branded merchandise are essentially interchangeable. Basically what the urban African-American consumer wants and decides is currently fashionable is what Citi Trends will always be selling to them. We're sort of indifferent about how much or how little brands we sell.

Is there anything specific that's emerging today, you mentioned Kuji. Are there any other brands or things that are trends that are out there today in the marketplace?

Baby Phat has slowed up in the early part of the year, is now very strong again. Academics has come on, there's not any--other than Kuji I mentioned earlier, those are the brands that are driving the business right now. South Pole is a major brand that--from an opening price point brand that is very important to us.

Okay, great. Thanks so much for your time.

Thank you.

Thank you.

Next we'll go to [Nick Pay] with [Lobe's].

Can you give a sense of where CapEx is for the year in terms of spend for the DC versus just regular spend?

Yes, we have not spent a lot yet on the expansion of the DC. We've spent about $18 million in CapEx year-to-date and most of the $15 million or so that's left in front of us for the DC is still out there. We've only probably spent and accrued about $ 1 million into that.

Got it, and any sense of what CapEx is going to be for '07?

The year that we're in right now?

Yes.

It's going to be somewhere in the low 30s, $32 million to $33 million.

Got it. Thank you.

Thank you.

Next we'll go to Evren Kopelman with JP Morgan.

Thanks. Hi, guys.

Hey, Evren.

Trying to figure out how much of I guess weakness in comps is maybe fashion versus the customer not or customer being more cautious about their spending. I was trying to figure out, maybe looking at the categories, Children's seems to be still pretty healthy. Can you--looking at that, I don't know if you feel like you have the right fashions there, and maybe not in the other areas, just your thoughts in general on how much of it is fashion, how much of it is just the economy.

Tough question to answer. In our Children's businesses, it's the infant toddler business that is the stronger part of our business. The more fashion part, young girls, 4 to 14, and bigger girls, there's not really a fashion direction and that's been our struggle in junior's and in girl's. The infant toddlers, they're buying the branded, which is--they're spending on the children.

On themselves, there's not a real fashion direction or on the bigger girls. The denim business is still very soft for us. This was a big part of our business, has been for the last several years but the last now little over two years that we've had double-digit drops in denim. Junior area, the plus area, and in the girl's area is the challenging part there, and there's not a real good fashion direction out there right now. I think that's one of the reasons that we're struggling through this year.

What are you seeing for spring fashions then, any help?

Well, ended last year strong was the plaid shorts. We expect to that business again, but the tops, the top business, longer, belted type of tops. There was a print business that seems to be going strong yet. It doesn't make sense, it's plaid shorts and print tops, that's what we'll be selling out there.

Do you think your customer spends maybe now more--less of their budget on apparel and more of it on other things like electronics?

I think they've moved somewhat to that. Our customer base generally spends more on apparel than other customers though, in percentage of their total income. Electronics had become more important, it is a big costly expenditure for our customers.

And then two quick questions. First, can you maybe talk about a little bit what the Easter calendar is going to look like this year versus last year, we know that impacts your business a lot and then secondly, looking at--I don't know if you would answer this question, but we're trying to figure out maybe what percent of leases usually you have signed for the out-year at this point of this year, so maybe what percent of leases are signed for 2008?

Two very different questions, Evren.

The first one was on the Easter calendar, and Easter moves closer to the beginning of the year by one week.

Worse calendar we can have.

We view that as negative. In the retail business have always liked a later Easter, gives customers longer time to spend money on spring apparel, so this is a negative. Bringing the Easter in closer to the beginning of the year by a week. The good news here is is that the weather was so miserable last year for Easter, it was so cold, that most people didn't really see any good spring selling until after Easter which was the case with us, but it is a more negative calendar.

Regarding leases, your question was how many leases do we typically have signed for the next year at this point in time?

Right.

We typically don't sign leases 90 to 120 to 150 days out from a store opening and so as of right this minute in time, to answer your question, I have approved in the neighborhood of about 15 deals for the spring already. I think over half of them are signed. I don't know if that's what you were getting to or not.

That was it exactly. Thank you. Good luck.

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Next we'll take a follow-up from Shaun Smolarz from Sidoti.

Hi guys, just a quick follow-up question. Regarding the macro economy, it seems like the state of Florida is among the weakest states currently in retail. How is Florida affecting your results?

It's been some of our poorest results, and we've been looking at our results, particularly in the last three or four weeks because--or maybe even six weeks because of the weather. We've been waiting for the weather to turn cool and stay cool. Obviously in Florida, it's warm there most of the time, but we've had some of our poorest results over the last two months or so in the state of Florida. And we're not quite sure what that is, other than it's been hot down there.

And what percent of the comp base is Florida?

I think we have 24 stores in Florida, 24, 25 stores in Florida. So I would say, I don't know, 10% or so, Shaun, in that neighborhood.

Okay, and lastly, a few minutes ago you mentioned that in terms of merchandising, you really strive to offer the brands major customers desire. As you look at your current merchandise mix, are there any brands that customers want that you currently don't provide and if so, is that potential upside for '08 if you're able to secure those brands?

Right now, the most is Kuji, and (inaudible) getting quite of bit of Kuji, we could use more, but that's the only one that I see at this time.

Really, we get the brands our customers want.

Okay. Thanks a lot.

Thank you, Shaun.

Thank you.

At this time, we have no further questions. I would like to turn the program back over to Mr. Ed Anderson for any additional or closing comments.

Okay. Well we appreciate all of your questions on the call today and happy holidays to all of you all.

Thank you.

That does conclude today's conference. You may disconnect your lines at this time.