Citi Trends Inc (CTRN) 2007 Q4 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 turn the call over to the Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Thank you, Michael. 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 fourth quarter earnings release was sent out at 4:00 p.m. Eastern time today. If you have not received the release, it is available on our Company web site under the Investor Relations 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. 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 risk, 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 fourth quarter results and guidance for 2008 after which Ed, George and I will address any questions you may have. Now I will turn the call over to Ed.

Thank you, Bruce, and good afternoon, everyone. First, about fourth quarter sales. The Company's 2007 fiscal calendar year contained the traditional 52 weeks, whereas fiscal 2006 contained 53 weeks with the extra week falling in the fourth quarter. Accordingly, comparisons of total sales for the fourth quarter and full year of fiscal 2007 to the same period in 2006 are affected by an extra week of sales in 2006.

However, for comparable store sales the Company is reporting on a comparable weeks basis, for example the 13 weeks ended February 2, 2008 compared to the 13 weeks ended February 3, 2007. Total sales in the 13 weeks period ended February 2, 2008 increased 6.2% to $134.6 million compared with $126.8 million in the 14-week period ended February 3, 2007. Comparable store sales decreased 1.1% comparing to 13 weeks ended February 2, 2008 to the 13 weeks ended February 3, 2007.

For the year, total sales in the 52-week period ending February 2, 2008 increased 14.6% to $437.5 million compared to $381.9 million in the 53-week period ended February 3, 2007. The extra week last year contributed approximately $10 million of sales to fiscal 2006. The full year comparable store sales increased 1% comparing the 52-week period ended February 2, 2008 to the 52-week period ended February 3, 2007.

Comparable store sales on a comparable weeks basis by month for the fourth quarter were as follows: Up slightly in November, down almost 5% in December, and up slightly in January.

Now for comparable store sales by merchandise category for the fourth quarter. Sales decreased 1.1% across all categories. By category, children's up 2% versus up 11% in last year's fourth quarter. Women's down 1.5% versus down 5.3% last year. Men's down 3% versus down 4.1%; home down 4% versus up 8.3% and accessories were down 6.6% versus up 7.3%.

Sales of nationally recognized urban brands continued to perform better than non-branded merchandise and accounted for 51.5% of our total sales in the fourth quarter compared to 49.6% of the total last year. Total Company inventory at the end of the fourth quarter was 12.4% larger than last year and approximately 3% higher in comparable stores. Our objective in the fourth quarter was to reduce store inventories down to a low single-digit comp increase.

In spite of a tough selling environment in the fourth quarter we did reduce our inventory levels very close to where we targeted. We reduced the inventories by more closely managing the (inaudible) to buy and taking aggressive markdowns.

The earnings per share results for the quarter came in at $0.59 per share and they are disappointing compared to last year's $0.73. Last year's quarter had an extra week, but this year's results include about $0.06 per share of probable one-time tax savings which Bruce will explain in more detail later.

Soft sales coupled with considerably higher markdowns were the primary reasons for the decreased profits in the fourth quarter. We took higher markdowns due to softer sales as well as to ensure we opened 2008 with appropriate inventory levels and quality of inventory.

While these higher markdowns had at least a 3-percentage point negative impact on fourth quarter gross margin we believe that 2008 gross margin will not be negatively impacted by 2007 inventory issues. Inventory shrink in the fourth quarter was 1.8% of sales, flat with last year's fourth quarter. We believe that inventory shrinkage has reached a plateau since the sharp increase in the second quarter.

Store manager turnover has decreased which we believe is a very positive sign and the early results of the 24/7 store camera monitoring systems have yielded very positive results as well. We opened 13 new stores in the fourth quarter bringing to 42 total new stores in 2007. The 2007 new stores have performed well and we are very pleased with the results in the Detroit and Chicago markets.

Additionally, we expanded 12 existing stores during the year. The year end selling square footage increased 20.6% over 2006. Now Bruce will go into more detail on the financial results of 2007, after which I will discuss our plans for 2008.

As disclosed in the press release, total sales in the fourth quarter were up 6.2% and were up 14.6% for the year. Excluding the extra week in 2006, total sales for the full year would have been up 17.5%. Gross margin for the quarter was 35.2% compared to last year's 38.4% margin with all of the decline resulting from an increase in merchandise markdowns.

For the full year, gross margin was 36.3% versus 38.3% last year with the markdown pressure in the third and fourth quarters representing the entire decrease in the margin. Inventory shrinkage was 20 basis points higher for the full year but was offset by a slightly higher initial merchandise mark-up, and slightly lower freight costs.

SG&A expenses were 24.4% of sales in the fourth quarter of 2007 compared to 24.7% in last year's fourth quarter. Expenses were well controlled, particularly with the expense deleverage that typically accompanies a 1.1% decrease in comparable store sales. Lower insurance cost, professional fees and incentive compensation more than offset increases in occupancy and payroll expenses as a percentage of sales.

For the full year, expenses increased from 28.2% of sales in 2006 to 29.1% in 2007. Depreciation expense for the quarter increased as a percent of sales from 1.9% to 2.6% 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.

The Company's effective income tax rate was lower this year due to a combination of higher tax-free interest income on our investments and higher work opportunity income tax credits as the Company has grown. At the same, the pre-tax income for 2007 decreased in relation to the prior year. The effective tax rate for the fourth quarter was 28% versus 32.4% last year. For the full year the effective rate was 31% versus 33.2% in 2006.

Net income for the quarter was $8.4 million this year compared to $10.4 million last year while diluted earnings per share was $0.59 versus $0.73 in 2006's fourth quarter. The year net income was $14.2 million compared to $21.4 million last year, while diluted earnings per share was $1 versus $1.51 in 2006. As we discussed last year, the extra week in 2006 was worth approximately $0.10 per share.

In reviewing the balance sheet, total inventories at year end were up over last year by $9 million, were only 12% despite an increase of more than 20% in store square footage during 2007. As discussed in previous quarters, our inventory was 26% higher year-over-year at the end of the third quarter and was as much as 45% higher year-over-year earlier in 2007. Accordingly, we are pleased with where our inventory levels ended this year.

Inventory in new stores comprised $7 million of the increase while the opportunistic buys we refer to as pack-and-hold were up $5 million. This is the merchandise we typically buy at close-out prices near the end of a season to be held in our warehouse until the beginning of the next season.

Inventory in comp stores was up $1 million, but when combined with distribution center merchandise ready for shipment to stores, it is actually down $3 million compared to the end of 2006. The Company continues to have a strong balance sheet and adequate liquidity to fund its business. In fact, today the Company has approximately $81 million in cash and marketable securities, $20million of that is in overnight funds and operating accounts. Approximately $5 million is in store bank accounts and the remaining $56 million is invested in auction rate securities.

At this point, we do not have a valuation problem with these securities and we have continued to classify them as current assets. Given the recent attention these securities have received in financial markets I would like to provide more details on our holdings.

Our investments are in municipal auction rate securities or issued by statement governments to fund student loans. They're all AAA rated and most are guaranteed either by the United States Department of Education or by insurance companies.

The underlying securities have a long-term maturity, however, they have generally provided short-term liquidity through an auction process that reset the interest rate every 35 days and allowed investors such as Citi Trends to either roll over their investments for another 35 days or sell them at par. After our year end, the demand for these types of securities at the auctions declined to the point where like other companies it was not possible for us to sell the securities.

As a result, we rolled over our investments typically earnings higher interest rates than were being earned previously. As a result of interest rates increasing due to provisions in the notes, our interest rate on the entire portfolio is more than 2% higher than previously. Our yield is now well over 6% and since these securities are federally tax exempt, the taxable equivalent rate is over 10%.

It is not yet clear how this market will react going forward. Some people believe that a secondary market will develop to purchase these securities or that the issuers themselves will obtain alternative financing and call the notes, particularly those that had increases in the interest rates that they are paying to investors such as us.

But at this point there's no certainty due to the developments being so recent. As you may have seen, we classified these securities as current assets on the balance sheet accompanying the press release. However, we have not yet decided whether our investments will be included in current or non-current assets when we do file our 10-K in April.

The rule is if we don't expect to be able to turn the investments into cash within one year of the balance sheet date, they will be reported as non-current assets. As for valuation, again, we do not have any evidence that would lead us to believe that the value of the securities is impaired which would require a write-down.

Student loans which are the underlying collateral have not experienced credit issues as have certain other segments of the credit market such as subprime mortgages. Also the backing by the Department of Education and insurance companies helps support the credit rating.

From a liquidity standpoint, today we have $20 million of available cash in addition to the $5 million in store bank accounts and the $56 million of auction rate securities. Even with this level of available cash, we did want to be conservative and ensure that we experience no liquidity issues. We have obtained a $35 million credit facility with Banc of America.

The interest rate, to the extent we have to borrow, will be LIBOR plus 1.5% and importantly this credit facility is unsecured. Ed will now discuss our plans and guidance for 2008.

Thank you, Bruce. So far in 2008, sales have been good. After the first seven weeks of the first quarter through this past weekend our sales are up 10% in comparable stores. However, these results include Easter this year and Easter was two weeks later last year.

I expect we will give back most of the sales increase in the next two weeks and likely in the first nine weeks of the quarter approximately flat with last year. Our sales have really moved with the weather so far again this year. When it was warmer than last year earlier, our sales were good. But the weather in March has been cooler than last year and our sales have been soft accordingly.

The good news is is that we have had some good spring selling as well as nice movement of clearance. Additionally, total inventory after Easter sales is essentially flat with last year and comparable stores inventory is about 10% less than last year. So we have made progress in pulling back the levels of inventory.

The expansion of our Darlington distribution center is just about complete. We will be operational in the expansion by May 1. This expansion takes us through at least 2010 before we will need additional warehouse space.

In the first quarter of 2008 we have opened 11 new stores and expanded three existing stores. We will open one more new store and expand one more store in the first quarter. New markets for the spring have included Flint, Michigan and Lawton, Oklahoma. We have also added new stores in existing markets in Baton Rouge, Louisiana, Tampa, Florida and San Antonio, Texas. So far sales for this group have been very, very good.

While we have made solid progress on the issues of store manager turnover and inventory shrinkage we think it is prudent to pull back on expansion this year. I expect to open approximately 40 new stores in 2008 and expand approximately eight existing stores. This additional selling square footage will net approximately 15% increase over last year.

Additionally, while we have hit our new store targets in the past we've had trouble opening stores as timely as we would have liked. Accordingly, in January we brought in Steve Horowitz as our new Vice President of Real Estate. Steve brings a great deal of experience from off-price strip shopping center retailers to Citi Trends.

As we previously reported, George Bellino, our President and Chief Merchant, is retiring this spring or summer. We believe we are close to completing the search for his replacement and will hopefully have an announcement fairly soon.

For earnings guidance for 2008, we expect earnings in the range of $1.10 to $1.15 per diluted share. This guidance assumes an anticipated comparable stores sales increase of 2% to 3%. If the operator would come back on, we are now ready to answer your questions.

All right, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jeff Klinefelter with Piper Jaffray. Please go ahead.

Yes, thank you. Ed, a couple of questions for you. First of all, could you talk a little about your new store performance, the '05, '06, and '07 classes, just giving us a sense for how they have performed in terms of the maturity curve and if there are any differences or nuances as you have moved into the Northwest as an example of a new market?

Okay. I will give you that answer at a high level, Jeff, and Bruce may fill in some of the blanks. The '05 group of stores was a terrific followed by a group of stores that was just about good in '06 and the 2007 stores obviously we don't have full year results for yet, but have performed very well and are exceeding our pro forma numbers. As far as geographically speaking, we are happy to report in the Midwest, the Cleveland area, moving into Detroit and Chicago this past year, we've had outstanding sales results.

A couple of things I will add to that, Jeff. The sales in the stores we opened in 2005 and 2006 reached $1.6 million on average during their first 12 months and consistently achieved cash-on-cash returns in excess of 100%.

Okay. How about the comp performance as those new store classes have matured in the following year, in the '05 for example, is there anything outside of the normal average chain comp that you are seeing?

No, there's not. They have pretty much come in line with the rest of the stores. That's not inconsistent with what we've seen with other stores after their first full fiscal year.

Okay. So, Ed, you are not seeing any underperforming markets in new markets that you have entered at this point relative to your pro forma plan or your average the last two years?

That's exactly right. Our new store performance in new markets, and I guess specifically the new markets you are talking about are the Midwest markets of Columbus, Ohio, Cleveland, Ohio, Indianapolis, Detroit and Chicago. All of those markets have performed as well or better than the averages of other markets.

We still have one underperforming market, which we told you all in previous phone calls that we still haven't really solved yet. That's the Baltimore market. With that exception, when that was first opened about three years ago we've had outstanding success in all the other new markets.

Okay. So, essentially your reason for bringing down your growth rate this year, slightly new stores would be simply getting better internal sort of practices or controls in place, it is not a performance issue, it's not an availability of real estate, is that correct?

That is absolutely correct. The reason we pulled back on growth and we suggested we were contemplating this last fall even though we hadn't reached a decision has to do with the issues we had with store manager turnover and the issues we had with store inventory shrinkages. Those numbers were too high last year.

We wanted to work on them and pull those numbers back to us. We have had some good success, but we thought it was prudent to give this a little while longer so we decided to pull back. It has to do with giving our store operations team a bit of a pause so we can solidify our operations. It has nothing to do with the success in new markets or the availability of real estate.

Okay. Another question would be on your guidance. In terms of the comping 2% to 3% for the year you just discussed the fact you might be back to sort of a flat run rate here in the next two weeks after adjusting for the Easter shift and for Q1.

I know you don't like to get too much into quarterly detail, but can you give us some sense for how you see these comps unfolding for the year in terms of comparing against the quarters last year and then any other details on sort of margin and SG&A given that we saw deceleration in those throughout the year last year?

Yes, Jeff, on the comp question, we really don't try to break that out by quarter. We have a range of 2% to 3% for the full year, and really don't want to try to break it down any further than that. Related to your question about gross margin and expense ratios, we do think we have a good opportunity to improve the gross margin in 2008, particularly the back half of the year and all of the markdown pressure in 2007 may not get completely back to where we ran in 2005 and 2006.

Both of those years we had 38. (inaudible), may not make it all the way back there, but should make a lot of progress in getting a large portion of it back in 2008.

As we have said before on the expense issue, is we can get to 3% comps than we have a decent chance of breaking even on the expense ratio. In other words, having no leverage or deleverage for south of that, even at 2% we could have some deleverage in the expense ratio, particularly with the depreciation line in 2008 because of the new distribution center coming on line in Darlington.

Okay. One last question if I might and maybe the last time we get to ask George this question, a little bit more detail on some category trends, what you are seeing in terms of firming of trends in the key, particularly, men's and women's apparel areas, availability of product, et cetera?

Availability is still there. Brands, the last time we talked the Baby Phat and Rocawear brands had slowed down a little bit. They had a resurgence for Holiday and are doing very well for spring. Southpole, [Neechi], Apple Bottoms also doing well. New brands coming on board, Coogi, we talked about before.

Ed Hardy, [Bereon], a resurgence in the kid's area of U.S. Polo which has not been that successful in the last couple of years but has come back, still a struggle with us in all areas from a big part of the men's branded area and has been decreasing. We think it should plateau at an area of being somewhat stable versus second quarter of this year.

Junior area in the unbranded, it's fashion, colors, bright colors, yellow is the hottest color for spring followed by green. Thus, knits have been very strong early. Updated basics like polos with [rouge] sides or extended plaquets. Another thing is big screen Tees some related to [flapper] songs like independence is real hot right now.

Another one, "God made me he was just showing off." That's one of the hottest T-shirts we have right now. Jeans business still a little tough, we're selling branded jeans very well, but unbranded fashion jeans are not selling that well.

Okay.

Jewelry is the hottest category. The men's, we are selling in men's, solid polos, something that we have not sold well in my career here. They're very hot this year. Usually we sell striped polos, but this year the solids are selling with plaid shorts,. Plaid shorts are hot, but not as hot as last year, both in ladies and in men's, pretty you strong in the kid's area.

George, could you amplify on his question related to the men's and women's business in particular. I reported earlier in my comments that both men's and women's had negatives in the fourth quarter on top of negatives the previous year's fourth quarter. Could you talk a little to Jeff about the health of the men's and women's business?

It has been challenged with fashion in those areas. The things that have been selling especially in the ladies, junior area and the plus area is the branded, the unbranded part of the business we've had a little struggle with personnel with some of our buyers. But it is not real, real hot fashion wise.

Men's area, it is, it is just the thing that dragged us down in the fourth quarter in all of the areas that was coats and sweaters. We had just a terrible year with the weather being warm, some of the Northeast did well with coats and sweaters. We did not do well in those categories. The branded coats and ladies, the rest of our businesses were really pretty tough in the ladies and men's in those categories. That's what hurt us. I think we are going to see fashion business in both men's and ladies get stronger through this year.

Okay. Thank you.

All right. Thank you. Our next question is coming from the line of Evren Kopelman with JPMorgan. Please go ahead.

Thank you, hi, guys.

Hey, Evren, how are you?

Good. A couple of questions. The first one is on the fourth quarter. You, when you gave guidance on February 6 when you reported sales, I think you said $0.42 to $0.46 and even excluding the tax rate, you delivered upside to that. Can you talk about what drove that upside?

Yes, Evren. There were several things.

The two biggest things were the tax rate being much lower than expected. The other item that really stood out was the incentive compensation accrual with the earnings being down as much as they were, the incentive compensation accrual was, once we ran all of the bonuses for stores, district managers, corporate, distribution center, et cetera, the accrual need was much less than we had expected. So, those were the big items and then there were a few others that were a penny here or a penny there.

Okay. Great. The second question is on inventory. So, first, can you talk about inventory plans where you expect them for year end and also how you are buying inventory, is it for your 2% to 3% comp plan or are you buying possibly for lower comp and try to turn that faster?

Okay, Evren. If I understood, I think there were two or three questions there. One of them was inventory. Were you asking about the end of '08 inventory plan?

Yes.

Evren, we are looking at probably about $5 million more in inventory at the end of '08 compared to the end of '07.

Okay.

It is going be flattish to down in comp stores through most of the year. That's the target.

Okay. Flattish to down.

On a relatively small sales increase to increased inventory turnover during the year and to manage to flattish to the slightly negative comp inventories through the year.

Great. The final question also on inventories is on the content of it, can you talk about a percent of markdown inventory now versus last year at this time, and secondly, you talked about the pack-and-hold, kind of where is it as a percent of inventories and some of these great buys you had recently, what season is that for? I am trying to figure out when we might be able to see some of the gross margin improvements because you have said the pack-and-holds have better margins before?

I think I heard about three questions, again, Evren. I will see if we can answer those three in the right order. The first one had to do with content. The question was essentially what's the current content of our inventory, the percentage of markdowns to the total.

The percentage as of last week, we just finished the markdown percentage of total is around 13% or 14% of the dollars, compared to around 12% last year. So it is fairly close. We believe the inventories are this year versus last year, actually healthier because the original merchandise markdown is we believe is marked down even further than it was last year.

Let's see on pack-and-hold you asked about the -- we said at year end the pack-and-holds were up about $5 million. If you scroll forward to today, about where are we, Bruce?

We're at about $15 million at cost --

Compared to last year?

10.

So it's about the same place as it was at year end. Your other question, Evren, was these pack-and-holds that Bruce was referring to that we have bought recently and they're somewhat higher than last year, what season are they being bought for?

Right.

That's mainly back to school and fall. It will start going out in June, out to stores and the last will probably go out as late as October, most of it will go out August, September.

It has had a better margin every year consistently, better than our regular goods. That's why we continue to build it. Also what opportunity is out there. This year there was a lot of opportunity with business being bad and we took advantage of that.

Great. Just to clarify, so of the $82 million year end, how much was the dollar amount of the pack-and-hold?

$15 million.

$15 million. Great. Thank you.

All right. Thank you. Our next question is coming from the line of Shaun Smolarz with Sidoti & Co. Please go ahead.

Hi, good afternoon, everyone.

Hey, Shaun.

My first question is what are your thoughts on the retail environment right now and the potential impact of the fiscal stimulus package on your customer, and what gives you confidence that comps will be positive this year?

I think I missed part of your question, Shaun, but I think you asked me for our general feedback on the state of the economy as it affects our customer?

Right, and any impact on with the fiscal stimulus package with those checks coming through beginning in May?

Okay. And then sort of juxtapose that with our expected 2% to 3% comp.

Right.

Okay. Well, our view of the economy today is that the economy for our customer is worse than it was a year ago. I think that situation has deteriorated because a couple of things that have happened that were a little different than before.

We have talked about our Company never really been able to see a direct correlation in high gas prices nor the subprime lending issue, but a couple of other things have occurred. The very sharp spike in food prices, I think, is a big negative to our customer. While we talk about our customers' spending on clothing being outsized lower income customers also spend as much as 25% of their disposable income on food.

The very large inflation in food prices we think does have a negative effect on our customers. And to some extent we believe the spike in unemployment will also be a negative to our customer. But I think the economy is somewhat worse for our customer today than it was last year for sure.

As we go through the year into the spring of the year into the late spring and early summer when the government's economic stimulus package in the form of these rebates start coming out, I guess, in May, we believe that that stimulus package should help Citi Trends and help Citi Trends' customers because this package is intended to go to lower income customers and the dollar amounts are targeted toward lower income customers and many of our customers will be the recipients of these tax rebates. And hopefully a lot of this money will get spent at Citi Trends.

It has been some time since the last package like this was done. I believe it was in 2001, and so the data for, our Company was a lot different than it is today, geographically in size and other things. But back then, that stimulus did occur in the early summer, and the Company did see a rebound in sales, perhaps from the stimulus package and maybe some other reasons as well.

We think there was a net positive back then and we expect this stimulus package will have a positive benefit of some amount on our Company as we go into the late spring and early summer. I think when you put all of this together, when you look at the fact that the Company came off of a year where comp sales were up just 1%, and it was pretty much that way pretty much all the way through 2007, and look at 2008 even though the economy is difficult. I think somewhere in low single-digit comps is about right for us.

Okay. And my next question is for Bruce. Historically, SG&A has risen a little more than 20% year-over-year on a dollar basis. So I was a little surprised to see that SG&A was only up 8% in this past fourth quarter. Can you give us more color on how you were able to contain expenses in the fourth quarter like that?

Yes, Shaun, I mentioned earlier the incentive compensation, that was an accrual we brought down quite a bit in the fourth quarter based on the actual results. So that was one issue.

In addition, during the fourth quarter we had some good results on insurance cost as well as professional fees. Remember, last year we had the significant increase in audit and related costs, the cost of Sarbanes-Oxley, we were in the first year of that. We had quite a bit of that fall in the fourth quarter last year, 2006 I'm talking about.

Those were the three big areas. If you look at our payroll and our occupancy expenses, they were actually up as a percent of sales if you exclude incentive compensation piece from payroll. That's typical when we have a negative comp store sale number like we did during the fourth quarter.

Okay. And just on the cash balance at the end of the fourth quarter on, is that is the $62 million, the $6.2 million in cash and cash equivalents and then the $56 million in short-term investments?

That's right, $62 million.

Okay. And then, last question just relates to the Chief Merchandising Officer role. I guess this question is for George. Can you elaborate on the timing of your decision to retire in light of the very challenging overall retail environment, urban apparel market and the need to be more efficient internally?

I think the timing, if you follow football like Brett Favre, just tired. I have been doing this for a long time and we have to go to the next level. The Company has great potential to grow. I don't have the energy, the passion right now to take it that, to continue with it. I think we have a good merchandising team, a very good merchandising team and we have a strong candidate for my replacement and that will make it easy for me to exit.

Lastly, for Ed, during the process of looking for a new chief merchant, could you maybe go into some generalities in terms of what you were looking for in the new person?

Okay. The, obviously, I should preface this by saying finding a skilled apparel merchant like George Bellino is a difficult to near impossible assignment. But what we are trying to do here, we try to make it easy for the head hunter.

Basically, we said what we want is someone with first of all the person has to be an apparel person. We want an apparel merchant that has a lot of skill in apparel retail and department stores or specialty stores or off-price stores, with a preference toward off-price and specialty store background.

And we want someone that in addition to having a lot of apparel experience, the general management skills that you would expect, someone with good leadership skills, good communication skills, someone who is going to be able to lead a team and hold a team accountable. It is really that simple.

All right. I appreciate your insight today. Thank very much.

Sure.

Thank you. Our next question is comes from the line Roxanne Meyer with Oppenheimer. Please go ahead.

Great, good afternoon.

Hi, Roxanne.

I just wanted to -- hi -- I just wanted to first follow-up on the fashion, and, George, you had mentioned that as we move throughout the year we can expect to see some better fashion.

I am just wondering if you can elaborate, if you are able to, on sort of what's coming, what's new, what we can expect to be the big drivers, and also how you see the unbranded part of the business impacting the business as we move throughout the rest of the year?

Is that an area that we could see improvement in or do you see the unbranded business continuing to be pressured?

I think there is definitely improvement in the unbranded part. Part of it is we have changed buyers in that area, especially the plus size area, and they're just getting their feet under them now. They both came in last summer. Buyers where we split an area. Also the top buyer in the junior area is going into her second year now is starting to get a handle on that part of the business.

Our move, which was about a year and a half ago, we moved a buyer out to the West Coast. That's just beginning to start to pay off. It was in the latter half, the fist part of last year, not so much in the latter half. We have expanded his responsibilities to cover the plus size fashion business, too. Most of, a lot of the fashion is coming out of the West Coast in the unbranded.

It is a market that's on top of trends and can turn trends out quickly, four to six weeks versus having to wait or going overseas, it's a domestic market. What is happening there, it is the knit business has gotten better and the woven business is starting to show some signs of life.

If we can get the jean business back on track it would really happen. We see some light there in high waisted jeans. Hopefully, we can do some skirt business which last year was nonexistent. We are starting to see some life there. I think there's great opportunity for that part of the business. It is work, but it is going to, I think it will have upside.

Okay. Great. Are you able to share what percentage of the unbranded business is denim?

I don't know that offhand. I couldn't tell you.

Okay.

It is, it is way less than half.

Yes, I would say 20% if I had to take a guess.

The tops and bottoms is fairly even. Of the bottoms piece, it is probably, again half, right. So it's somewhere to 20% to 25% probably is about the number at the most.

Okay. And then in terms of your guidance, I mean thinking about how your SG&A was managed in the fourth quarter and the benefits from lower insurance cost, professional fees and executive comp, how should we think about that as, in your '08 guidance? Should we expect that those will continue to be managed as tightly, or should we begin to see increases in those items?

I think what you have to remember about the insurance and the professional fees is that in comparing 2007 to 2006, the reason we got a benefit was because the amounts in 2006 in both of those areas were unusually high and so, I think, 2007 is probably a better gauge of what the number is going forward.

So, we are not really suggesting that there was something that unusual in '07. The unusual occurrence was back in '06. The incentive compensation is a different issue because in years like this, where earnings drop the way they did, the bonus accrual goes down substantially and then if we get earnings going the right direction next year it could go up substantially also.

Okay, and then in terms of the tax rate assumption for '08 is it going to be similar for the full year of '07 or closer to the fourth quarter?

In our guidance, we have included a 35% tax rate. That number is very difficult to predict for a lot of reasons. The two big items that we have are the tax-free interest income and the income tax credits at that give us big benefits. We have a hard time really predicting what is going to happen with the tax-free interest component of that. So at this point, we are using 35% in our internal projections.

Okay.

That's right.

Great. The just last, what is your average new store size?

This past year new stores averaged, I think, 11.5, 11,500 square feet, I think, is right in 2007. The stores that have opened this spring have averaged 11,400 square feet.

Okay. Great. Thanks and best of luck.

Sure, thank you.

Thank you. Lyn Walther with Wachovia, please go ahead with your question.

Hi, guys, thanks. One more on the incentive comp line. Is it possible for Q4 can you give us the basis point impact from the accrual reversal?

No, I don't want to drill it down to that level.

Okay. And then following up on another question, you mentioned Ed Hardy as one of the brands that you have. That's a pretty expensive price point, can you give us a little more color on that? Is that stores, are you planning to add some other higher price point brands. I guess you are not seeing any price resistance, just a little more detail on that?

We don't have it in all categories yet, but where we have it, it's selling very well. Branded is not what you think for our customers, but they're buying it. We will expand it as we can expand it. We have it in handbags now and we have it in the junior area. We don't have it in the all of the men's area yet. But it is what they're demanding, and we have to get it.

Okay. Great. And I know you introduced your private brand, Rough Riders, back in the fall. How is that performing, plans to add any other brands?

Well, we are not right now planning to add any other brands. It is performing in certain areas very well and certain areas not so well. It depends on our execution and how we make it.

The, it is doing very well in the men's, boys area, not so well in the kids area, and not as well in the female side of the business, be it more of a men's brand. Doing well with it in shoes, both in the ladies and the men's shoes it's doing well. It didn't do well in our accessory area, but it is all about, it was our first time out with it. It depends on the execution of it.

Actually, it did well in the plus size sportswear. We're not licensing any more brands. We are developing some more of our own labels we've come up with. We've come up with Red Ape, actually one of our buyers developed it with a vendor and we purchased it from him and they're going to expand that brand for other areas.

What is your percentage of private label today?

Somewhere in the 15% area.

Okay. Great. Just on the surveillance cameras that you have, I know it seems to have been working well for you. How many stores do you have it in now and what are your plans for '08?

Okay. We have, we've increased the number of the 24/7 monitoring systems up to 16 stores and we're adding another 14 stores now.

So we will have, I guess, by the time we get through another month or so we will have about 30 Citi Trends stores on the 24/7 monitoring and we are going to stop at that point and evaluate these results before we continue. The results have been very, very good. But we think they're perhaps, there could be a diminishing return on this investment. We want to make sure we are spending the money wisely. We will have 30 of our highest shrinkage stores on this system in another month or so.

Okay. Great. Good luck, guys.

Thank you, Lyn.

Our next question is coming from the line of Rob Wilson with Tiburon Research. Please go ahead.

Thank you. I am looking at your balance sheet. Your balance sheet doesn't exactly match the balance sheet in the 10-K last year. I am referring to last year's numbers. Can you help me understand why cash changed and accounts payable changed?

Yes. There was a reclassification of prior year amounts to conform to the way we are presenting the amounts this year. Basically, what it revolves around is in the past we had always taken our outstanding checks and reduced or reclassed those, if you will, back into cash and increased our accounts payable because they had not cleared the bank yet.

The way we are accounting for that now is we're going ahead and treating those outstanding checks as being out of the cash and, therefore, having reduced the payables. Since we started doing that in 2007, we had to reclassify our prior year amounts so that we have an apples-to-apples comparison.

Okay. That's very helpful. One other question, you guys seem to always indicate you are happy with new store performance and the profitability thereof. But I am looking at a business model that is seeing its operating margins materially decline. Can you help me reconcile those two things? Thanks.

The business model, I guess, you are talking about the business model being in the Company aggregate for 2007.

I mean I am looking at your operating margin has declined from 7.9% in '05 to 4.3% in '07, yet you are happy with new store performance. So what am I missing? Why the material decline in operating margin if you are happy with new store performance?

I guess the, the short answer to that question is when we talk about store operating performance we are talking about sales generated and generally the cash flow is driven by these stores as we have opened them. It has continued to be very good.

The Company's operating results in 2007 were really across the board as we, it is really a sort of a one issue problem with gross margins. We had inventory issues that were pretty much across the board in 2007. We had inventories that were too high and we had to take pretty aggressive markdowns in quarters 3 and 4 to work our way through those inventories.

That was a Company-wide issue. This was not a poor performance from any set of new stores or any new store markets. This was really a Company-wide issue, and we think that issue is very largely behind us.

Okay. Well, thank you.

Thank you. Our next question is coming from the line of [Brian Rounsic] with BLR Capital Partners. Please go ahead with your question.

Hi, I apologize if I'm going to ask you to repeat a few things. My line was dropped. You guys had talked, I think, about current trends after giving your sales results from Q4, with January being up slightly. Can you repeat that?

Well, I think I said in the prepared comments earlier, I gave you sales results for the fourth quarter being negative 1.1%, and I said sales in November were up slightly, December was negative 5%, and January was up slightly. Up slightly means positive, but less than 1%. As we came into the first quarter of this year, I reported that our sales had been very good for the first seven weeks of the quarter.

That would have been through this past weekend. Our sales were actually up about 10% in comp stores, but also added quickly that this year's results include Easter which is a very important selling season for us and we haven't gotten to last year's Easter yet. While we are up nicely right now, I expect us to have pretty sharp negatives in the next week or two which will put us, I think, close to flat through February and March.

Got you. You talked, I think, about inventories being down about 10 per square foot from your inventory being up about 3% per square foot at the end of the fourth quarter. Is that the current inventory today?

Yes, what we have, yes, just to restate that, what we said was that inventories at the end of the fourth quarter and the beginning of the first quarter were up about 3% in comparable stores. And the inventory number that I reported was the inventory this past weekend, in other words, pulling inventories to the same place I pulled sales through the first seven weeks. After Easter this year, our inventories are down about 10% in comparable stores which they should be. We are now past Easter and we target it to be about this point.

Okay. Great. You had also talked, I think, about reigning in the store square footage growth as a result of more trying to get the store base under control and I think some of that related to shrink. But I thought you said shrink was like 1.8% this year?

I told you one, yes. You are essentially correct. The reason we are pulling store growth back is to, is to further solidify our store operations and reducing store manager turnover, continuing to do that as well as continuing to make sure the shrinkage number is fully under control and coming down.

But the shrink was flat year-over-year, though, right?

Pardon me?

Shrink was pretty much the same as it was the same as last year?

In the fourth quarter of '07 the shrinkage was the same as last year.

At 1.8%?

Right.

Okay, Got you. For the year do you know what it was?

It was up 20 basis points. I think the numbers were 1.7 to 1.9.

I assume you are happy with that shrink rate, yes?

Not really. It could always be less, but there's obviously a cost associated with that. Sure. We are glad to see that the rate of increase has, we think, has stopped. That's why I talked about the plateau. But our target shrink number is lower than what we have been incurring for the last several quarters. We continue to want to drive it down further.

What is your target out of curiosity?

You asked what we would be happy with, probably a number less than 1.5% of sales.

Got you. And you're stating shrink on a cost basis?

Yes.

Okay. The you had said urban brands represented 51%-ish or so?

Right.

Is that correct?

Fourth quarter.

For the fourth quarter that's correct.

Versus 49% last year?

Right.

And is that including men's, women's, kids, home, et cetera?

Yes, that's every urban brand across all merchandising categories, correct.

Is it trended that way all year? Up slightly?

One quarter during the year where urban brands versus last year were flat. But all the other quarters the urban branded business as a percentage of our total business has continued to increase.

Is that the result if I think I heard you correctly that the private brands were the unbranded merchandise in the store, which I think would include your private label merchandise along with other non-branded has been slower and, thus, you are moving the inventory into areas that are obviously turning faster?

You are exactly right. What is happening is while there wasn't a real fashion trend driving the non-branded business, not just the Citi Trends but for other specialty retailers as well, we believe our customers have been using brands as a proxy for fashion. So we have, since we are not selling as much non-branded we pushed the branded business and we will continue to do that.

If you look at your margins from unbranded versus branded I'm assuming the branded merchandise maintain margin, I'm talking now, are slightly, are less than the unbranded merchandise?

It is less than the non-branded merchandise, but not consequentially.

They're very, very close.

They are.

That's why we are indifferent to the not branded versus non-branded. For us, they are very, very close.

Is that because you are combining in that merchandise margin the advantageous brands that you, or the advantageous buys that you make and do your pack-and-holds? Is that the result of bringing the margins comparable?

It, that has something to do with it because one thing we with, because a high percentage of the pack-and-hold buys we do make are in branded merchandise.

I would assume almost 100% probably.

It's not 100%, but it's a high percentage because we do some very opportunistic buys of (inaudible) price point merchandise as well.

Especially in the men's side of the business.

And a lot of our coats business, unbranded coats are bought on a pack-and-hold basis.

You had also talked about coats and sweaters being weak, George, was that in men's and juniors?

Yes, the junior branded coats were strong. That was one of our, that and boys were strong. All of the other coat areas, infant, toddlers ladies unbranded, and men's branded and unbranded. They were very weak.

Okay. Got you. And one more. I'm sorry. Accessories, you had said for the fourth quarter, where does accessories come in at?

It was negative 7% in the fourth quarter.

Versus last year's?

It was up somewhere in the single digits.

Okay.

It was a nice increase last year, a pretty big decrease this year. Something at 7?

Yes.

Negative 7 against positive 7?

Correct.

Listen, I really appreciate your time and thanks for answering all of the questions.

Thank you.

Thank you. Our next question is coming from Patrick McKeever with MKM Partners. Please go ahead.

Okay. Thanks.

Hi,Pat.

Hi, Ed. Hi, Bruce. Going back to the question about the upside relative to your February 6 guidance, Bruce, you said it was the tax rate being lower than expected and incentive compensation that reversing the accrual and then insurance cost and professional fees coming down versus last year when they were high.

Adjusting for those items, would you have been more or less in line with your plan, that $0.42 to $0.48, or guidance, I should say. Would you have been near the top end of that range or would you still beat it?

We would have been at the top end of the range at least, maybe slightly beat it.

Okay. And then, on traffic and ticket, usually you talk about those things. Just wondering how those two items were in the fourth quarter, and then more recently is the strength thus far in first quarter 2008, is that a function of average ticket being higher or store traffic being higher or maybe if you could just give us a little color on those two items?

Yes, in the fourth quarter and in most of the year of 2007, the traffic was the weakest area. Actually, the average number of items purchased was up, but it was offset by less traffic and slightly lower average item price. I'm not real sure about the first quarter to be honest with you.

In terms of the blend?

We don't have those stats yet.

Okay. And then in the, I know this is maybe too hard to ascertain, but in the fourth quarter, how much of, of your sales were driven by markdowns? Can you provide any color on that? Do you know what I mean?

Now that you are so much cleaner from an inventory standpoint, I guess my question is that a, are your customers in the fourth quarter must have benefited from some pretty hefty markdowns and maybe that helped to drive the average number of items purchased up and all? Is that a risk now that, that the, the promotion or the markdowns were so aggressive in the fourth quarter that your customer might be conditioned to expect that going into this year?

It is really an interesting question. We don't have the statistics in front of us to suggest how much of our business in the fourth quarter was, were sales of clearance merchandise versus sales of regular price compared to the prior year. My guess is that it was probably somewhat higher because we had more clearance merchandise in the fourth quarter and we were very aggressive.

Remember, Patrick, we don't do promotional markdowns. We just mark it down permanently. So it goes to a clearance rack. We don't do 25% and 50% off promotions. So we're not doing that, but we clearly had more clearance merchandise and our point of view is that it is better to have fresh, new merchandise for sale than to have a lot of clearance merchandise.

So we think while we have some customers that are clearly clearance buyers, that the Company's health over time and sales over time will actually be higher with a higher proportion of regular priced merchandise. So we are, we are, we believe that is going to be favorable for us as we go through the first quarter and through 2008. But your point about this idea of they, conscious customers, having an appetite for clearance is a good one.

Okay. And then last one, do you, CATO is opening up this larger, urban oriented, urban apparel oriented store, it's fashion metro store and they don't have too many right now. I think it is six, but they are planning on opening 30 in 2008. Do you have any of those in your markets? Have you seen them yet?

Yes, we have. We have seen them, we have seen three or four of them in our markets, yes.

Any comment, is it when they open up does that hurt your business in those markets? Or is that an issue competitively speaking?

Well, we have, our point of view is that competition is not good. And so any time a competitor opens up that is, that is going after your customer or attempting to sell similar merchandise, generally has a negative impact on your business. We have not seen a measurable impact in the markets where we've had, the competitor you referred to open up. And as a practice, we just don't like to talk too much about competitors' initiatives.

Sure, understood. Okay. Thanks, Ed. Thanks, Bruce.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question is coming from the line of Quinton Maynard. Please go ahead.

Hey, guys, how are you doing today?

Hey, Quinton, good, thanks.

Good. I think most of my questions have been answered. I just have a few follow-ups. You had talked about hoping to control shrink through improving management turnover in the stores. Indicated that was on track. Do you have a number for where management turn is now?

Yes, well, Quinton, I didn't say it was on track. I said it had improved nicely.

Okay.

I will just give you the numbers. The numbers for 2005 and 2006 store manager turnover was over 40% in each of those years. We did put down for 2007, I think it is between 30% and 31%. So we have made some nice progress. But it needs to be under 30%. And we continue to push that.

Great. One other quick one, I don't know if you know this off the top of your head, but can you break out what percentage of your sales are credit card sales?

Yes. About 25% of our sales are credit card sales. So, the other 75%, obviously, are cash and check. But about 25% are plastic.

Okay. That would include a debit, though?

We believe that at least half of those 25% plastic transactions are debits.

Got you. And then as far as lay away is that a meaningful percentage at all for you?

Yes, it is. It is between 8% and 10% of our business.

Great. Last question, in looking at a net income margin for you guys and thinking about the growth of the business, the growth of the square footage, the fantastic results you had in 2006, I think you were over 5% on a net level. Can you help me understand kind of what the target is, was '06 an aberration and we should just never expect that again, or is that where you feel like you can get and also a time line on what you think the right amount of time to make progress towards whatever the goal is, should be?

Yes, I will be honest with you, Quinton. We don't look at the net income percent near as much as the operating income percent.

That's fine. We can talk about that line either way.

Yes, because the interest income and the income tax rate are out of the control of the operations group here, but the operating income rate did get as high as 7.9% back in 2006, and that was a year we did have the extra week and everything was running on all cylinders, but we would hope over some period of time we would get back to that. I mentioned earlier that we certainly think we have the potential to make significant strides in getting back to our gross margin historical levels up in the 38% range. Even if we don't get all of it this year, we would certainly hope to within two years and then the key on the expense rate which is the other major component of the operating profit percent is to get comp store sales going in the right direction and getting them in excess of that 3% range because that's where we start to get leverage once we get over that.

I got you. But you know, as far as kind of thinking about is this something you think we could getting above 6 or heading toward that 7 level through '08 or are we looking at '09? Any feel for that?

Well, I mean we gave you our guidance for '08, and I think that is pretty much a level we want to get to at this point.

All right. Thank you very much, guys. Appreciate it.

All right. Thank you, our next question is coming from the line of Mark Cooper with Wells Capital Management. Please go ahead.

Great. Thank you. Did you give the cash flow from operations and CapEx number for the year?

The CapEx number for the year was $30 million.

$30 million, okay.

And the cash provided by operating activities was $16 million.

$16 million for the year. Thank you.

All right. We have a follow-up from Shaun Smolarz. Please go ahead.

Hi, guys just a quick follow-up. I wanted to know if given, it seems like you had a relatively strong Easter season. I wanted to know if that gives you any more confidence in state of your consumer and if that was overall Easter better than you anticipated?

Well, I am glad you asked that question because Easter week is a very important week for us and it is kind of a barometer of how things work in the spring. The week we just finished that was in that number I gave you earlier, cumulatively 10% up which included that Easter week. That week this year, I think it was about a $12.5 million week on a comparable store basis compared to last year.

If I take this Easter week and compare it to last year's Easter week I think our sales were down about 0.7% week-for-week. In other words, Easter week this year, two weeks earlier than last year's Easter week, but this year's Easter week was down about 0.7.

We were really disappointed with that week. We had thought we had a big opportunity this year's Easter because last year's Easter wasn't great. Last year's Easter week we were very disappointed in. We had a very cold Easter week last year and we were disappointed. We did temper our expectations for this year's Easter because it is two weeks earlier. But, so we didn't think this year's Easter was that great really.

Okay. Appreciate that insight.

Okay.

Thank you. There appear to be no further questions. Mr. Anderson, please continue with any closing comments.

Okay. We appreciate all of your questions and thank you for joining the phone call.

All right. Thank you, ladies and gentlemen. This does conclude the Citi Trends conference call. You may now disconnect. Have a very pleasant rest of your day.