Citi Trends Inc (CTRN) 2008 Q1 法說會逐字稿

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

Thanks, Michael. Good afternoon, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and Chief Executive Officer, and Beth Feher, our new Chief Merchandising Officer. Our first quarter earnings release was sent out at 4:00 PM eastern time today. If you have not received the release it is available on our company website 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, 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'll will refer you to the company's most recent report on form 10K filed with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those described in any forward-looking statements. Ed and I will provide you with some details related to the first quarter results, and guidance for 2008, after which Ed, Beth 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, I want to make a few comments about our new Chief Merchant, Beth Feher. Beth joined Citi Trends on April 2nd, about six weeks ago. She replaces George Bellino, who had previously announced his retirement. I should add here how much I appreciate George Bellino's contributions to our success. Back to Beth, we are happy to have her on our team. She has been here only a short time, she is already making a positive impact. She has been an apparel merchant her entire career and brings a track record of outstanding success to our company. We are confident she will lead our merchandising team to great success.

Now about first quarter sales. Total sales in 13 weeks ended May 3rd, 2008, increased 13.5% to $121 million, compared with $106.6 million in last year's first quarter. Comparable store sales increased .3% in the first quarter. Comparable store sales by month for the first quarter were as follows, up 10% in February, down 10% in March, and up 4.5% in April. Our slightly positive sales in the first quarter were a little less than we had expected, after a very strong start to the quarter in February, sales were poor in March. Colder weather in March and the earlier Easter holiday both contributed to the disappointing March sales. Our business did improve in April and we ended the quarter on a fairly positive note.

Earnings per share results for the quarter came in at $0.36 per share, compared with last year's $0.40. Given the soft sales environment, especially around the very important Easter holiday, we are pleased, overall, with the results for the first quarter. We have made very good progress in inventory management. We delivered positive comparable store sales in April with a high single digit decline in inventory. We feel good about the quantity and the quality of our inventory. We should be able to deliver positive comp sales with a decline in comp inventories in quarters two and three of 2008.

Total company inventory at the end of the first quarter was 2.5% less than last year and approximately 13% less in comparable stores. Inventories came in slightly less than planned but at levels with which we are comfortable. Inventory shrinkage in the first quarter was 1.7% of sales, flat with last year's first quarter. We believe that inventory shrinkage reached a plateau in the fourth quarter. Store manager turnover has continued to improve, and the results of the 24/7 camera monitoring have been good. Preliminary results of inventories taken in the second quarter suggest improvement over last year.

Expansion of our Darlington distribution center is complete. We are now adding some additional equipment, including sorters and material handling equipment and a new put to light system for picking, which will improve productivity. Also we are in the final testing stages of our new warehouse management system to improve productivity and inventory management. We expect to go live with the WMS in the early fall. The cost of the expansion, as well as the equipment and the WMS will total about $15 million, somewhat less than we originally estimated. In the first quarter of 2008 we opened 12 new stores and expanded four existing stores. Markets for the spring have included: Flint, Michigan, Fort Wayne, and South Bend, Indiana, and Lawton, Oklahoma. We have also added new stores in existing markets in Baton Rouge, Louisiana, Tampa, Florida and San Antonio, Texas. While the results of these stores are preliminary, these stores seem to have opened very well. Now Bruce will go into more detail on the financial results of the first quarter and earnings guidance for the year.

A comparable store sales increase of .3% in the first quarter was largely driven by the children's side of the business. By category, children's sales were up 5% versus up 6% in last year's first quarter. The women's division was even with last year versus being down 3% in 2007's first quarter. Home was also flat this year compared with plus 6% last year. Men's was down 3% versus flat last year, and accessories were down 4% versus up 2% in 2007. Sales of nationally recognized urban brands performed in line with our other merchandise and accounted for 46% of our sales, the same as last year's first quarter.

Gross margin for the quarter was 38.6% compared to last year's 39.1%. 50 basis points decline was the result of higher merchandise mark downs caused by the continued sluggish sales environment. We once again we saw moderation in inventory shrinkage. At 1.7% of sales shrinkage was even with last year's first quart and 20 basis below last year's full year rate. SG&A expenses were 30% of sales in the first quarter of 2008, versus 28.7% last year. Most of the increase in expenses is a percent of sales was due to the deleverage caused by the modest increase in comp store sales of .3% that was well below the normal rate of inflation and expenses. Payroll expense was up 60 basis points as a percent of sales while occupancy were 40 basis points higher. Depreciation expense for the quarter increased $900,000 and rose from 2.6% of sales in the first quarter last year to 3.1% this year, as a result of capital expenditures incurred for new relocated and expanded stores.

The effective income tax rate used in the first quarter was 32% compared to 35% in last year's first quarter, which provided a benefit to the quarter of almost $0.02 per share. Last year, the 35% estimated rate used in the first quarter proved to be too high as the full year rate ended up being 31%. This year we believe that the full year rate will approximate 32%. However the biggest unknown at this point is whether we will be able to liquidate our investment positions in auction rate securities which do provide tax free interest income. Without that tax benefit our effective rate would push closer to 35% if we did not reinvest in tax free instruments. Net income for the quarter was $5.2 million this year compared to $5.7 million in 2007's first quarter.

Now in looking at the balance sheet, total inventories were actually down 2.5% from the end of 2007's first quarter, despite an increase in store selling square footage of 16.5%. Inventories and comparable stores were down 13% as we continue to bring our inventory levels more in line with where they think -- we think they need to be. You may remember at the end of the last year's third quarter our comparable store inventories were up 13% over the same time in 2006. The other significant item of note on the balance sheet is the reclassification of our auction rate securities to noncurrent. This market, which we discuss in detail, on the year end earnings call is still not liquid. And until we see either that liquidity is returning to the auction process, a secondary market emerges or the issuers begin to call the notes, we feel like it is appropriate to classify them as noncurrent.

In addition to the reclassification, we performed a fair value analysis of the securities due to the lack of liquidity. This analysis indicated that we should book a temporary impairment charge of $2.3 million or $1.4 million after tax. This charge does not run through the P&L, but is instead a reduction of stockholders's equity. Even without current liquidity in the auction rate securities market, we believe we have adequate liquidity to fund our operations. In addition to cash on hand, we have a $35 million credit facility which we have not yet had to utilize.

As for 2008 guidance, we expect earnings in the range of $1.10 to $1.15 per diluted share. This guidance assumes an anticipated comparable store sales increase of 2% to 3%. An increase in selling square footage of 15%, and an effective tax rate of 32%. If the operator would come back on, we are ready to answer your questions.

Thank you. Ladies and gentlemen, at this time we will begin our question and answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of Jeff Klinefelter with Piper Jaffray. Please go ahead.

Yes. Just a couple questions for you. First of all, Ed, on top of mind for everyone right now is rebate checks and their potential impact on business. And while difficult for anyone to tell in their sales results, so far, could you discuss if you are picking up on any trends yet that would point to the rebate checks having an effect? Anything you are doing to capitalize from a marketing to drive store traffic in from a local marketing perspective at all to capture those as well?

Okay. Thanks for the questions, Jeff. Regarding this issue of the tax incentives, which I believe began being sent out to the people about two to two and a half weeks ago, we have begun to hear from our store managers, district managers and regionals that people are beginning to get the tax checks. Not in huge amounts, but in some amounts. But we have yet to be able to see any real change in our business that we could suggest was a result of the tax checks, to this point. I will point out to you that our sales were 4.5% through the month of April, and for the first couple of weeks into May we are running about 4% up, and we have yet to see any real impact from the checks. Even though we expected to be some positive impact, it's really hard to have any determination over what that impact might be. As far as doing any special marketing to drive customers into our stores, as you know we spend very little on advertising and really allow our merchandising to do the marketing for us. So we have not really done any special marketing for this event.

Okay. Couple other other questions. One on expenses and payroll costs at your stores. Are you seeing any sort of pressure there? Are you expecting any pressure, anything to accelerate as you go through the balance of the year?

No, nothing of any great substance. During the first quarter in addition to just the lack of leverage from flat comp store sales, when we looked back at the components for the quarter, of the 60 basis points, 10 basis points of it was direct store payroll, another 20 basis points was in what we call the store operations group, which includes district managers, regional managers and a few people at corporate, and the 20 basis points there was more related to the fact that we did reduce the span of control that our district managers have, reduced the number of stores they supervise, and so that caused a little bit of deleverage that we had. Then the rest of it was the other 30 basis points or so which related primarily to benefits, including a higher bonus accrual in the first quarter of this year than last year, because last year's was unusually low, significantly missed our budget at that point in time.

Okay. Back to your question, Jeff, we really don't see the numbers running away from us in stores as we proceed. And a 10 basis points the leverage in stores on .3% sales is running pretty good, we think.

Yes. No, I would agree. Maybe lastly, speaking to some more of the merchandise or brand trends opportunities, would you speak to that a little bit, Ed, in terms of are you running behind in inventory? I imagine there is a brand that is trending pretty well. Do you have pockets of inventory deficiency that you are chasing after at this point, given the strength that you did see in Q1? I don't know if Beth wants to to jump in here on the first call and comment at all from an outside perspective on opportunities she sees from the company going forward?

I'll speak generally, Jeff. And then Beth has been, even though she's been with the company just six weeks, she has been in market twice with us with our buyers up if New York. So she does have some sense of what is going on in the marketplace, particularly as it relates to close out buys, and in particular branded close out buys. Generally speaking, we have been able to get the merchandise we want at the time we want it. Beth you want to talk about any particular brands or opportunities you see?

We are not -- we are finding just about all the goods that we need out there. We don't see a shortness of merchandise at this point. Our brands are pretty much tracking at the level that they were at last year. We don't see that going up or down right now. We'd like the level that it's at. We are monitoring it by zone, but right now we think we are in a pretty good brand position or pretty good inventory level with the branded product in our stores.

And Beth, just one other thing from your perspective, with your past experience at any retailers. Any quick thoughts on opportunities -- key opportunities you see in merchandise categories or markets?

No. I think it's a little early to mention that. I don't see any major changes. So far what I have seen I like. I'm sure we'll have some incremental changes down the road. But right now, reviewing the buying staff, the product assortments, I think it is a strong formula, but I'm sure as in most retailing arenas we'll have some change down the road.

Great. All right. Thank you.

Our next question is from the line of Lyn Walther with Wachovia. Please go ahead.

Hi. Thanks. Just following on that last question. Ed you mentioned that Beth was already making a positive impact. Can you maybe talk about what she has impacted so far and then maybe looking out when we could really see more of her influence?

Well, hi, Lyn. And thanks for the question. What I really meant by a positive impact is she's come in here in a short time, done a lot of work and spent a lot of time getting to know the team and getting very involved with the team and getting very involved in inventory management, which as you know has been a challenge for us in the past. And I'm confident she is going to take over these reigns very soon and do a very good job with inventory management in particular, that is really what I was talking about. She and I have spent a lot of time together. We travel stores together getting -- and looked at Citi Trends and some opportunities down the road. But as she said earlier it is a little early to talk about changes at this point, at least consequential ones.

Okay. And can you maybe talk about the unbranded part of the business? I know you have been struggling a little bit more with. Did you see any opportunities there or has anything really changed this past quarter?

Well, I reiterate that our branded business has been difficult for us for some time, particularly as we have been trying to find a fashion direction. But I'll ask Beth to just comment to you briefly about some things that are working in unbranded at this point and what kinds of fashions may be taking hold for us as we head into fall.

We are seeing from the fashion side of it, plaids are selling extremely well. The Polo classification is also doing well in all zones of business from kids to ladies to men. And we are also seeing trends toward any kind of foil printing or any kind of metallic happening in either gold or silver. We are also noticing that there is a trend toward woven shirts that we think probably is starting now and will continue into the fall and early into spring. Within denim, there is actually a lot of excitement going on. That new, high-wasted denim is perfect for our consumer. We are also selling skinny legs within denim and we are selling new trouser bodies. The whole color theme though this year that is out in the bright colors or the citrus colors are the yellows, the fuscias and greens are so right on for our customer and we are seeing good results whenever we are carrying the commodity items in those bright colors. Outside of that you know there is a few things from a more edgy point of view that are starting to sell like leggings and some of the military looks. So we feel pretty positive overall about the fashion side of the business, the unbranded piece.

Okay. Thanks. That's helpful. And then just one for Bruce. SG&A dollar growth, should we assume it will be at a similar level as Q1 throughout the rest of 2008?

Let's see, Lyn. The only thing I will point out is the depreciation on the Darlington distribution center will start in the second quarter, and on an analyzed basis that's going to be in the neighborhood of $1.2 million or $1.3 million. That is one incremental piece. Other than that we don't -- we typically don't give a lot in the way of forecast as to the individual points to the P&L.

Okay. Thanks a lot, guys. Good luck.

Thank you. Our next question is from the line of Patrick McKeever with MKM Partners. Please go ahead. Patrick McKeever your line is open. Are you with us?

I am. Thank you very much. Hi, everyone. Just on the second quarter same store sales comparison, the one we should be thinking about is the fiscal number right, the 9.4%, as opposed to the calendar comp that was 3.4% last year?

No, you should be looking at the calendar comp.

Okay. So Ed, when you say that comps should be positive, even with much lower inventories per store through the second and third quarters, you are thinking of that 3.4% that you did last year, and given the current trend, which is kind of in the 4% to 5%, 4% area?

Let me be more specific about that, Patrick. I was saying two different things. One, I was saying I think the companies should be able to deliver positive inventories -- positive sales with negative inventories. We are over inventory last year and we ought to be able to deliver positive comp sales with mid to single digit negative inventories at least. Obviously, Patrick, as you know, there are no guarantees about sales, but we are looking for low single digit sales in the second quarter and prospectively. And two weeks doesn't make a quarter for sure but we are up 4% or so with two weeks into May.

Yes, and that is kind of what I'm thinking. I'm trying to get a better handle. I know the business can be volatile month to month, because of the weather and other factors, especially calendar holiday shifts, like Easter. But the -- if you think back to the second quarter of 2007, at that point and time you had stopped giving out monthly comps. Maybe you could give us some is flavor on where the different months of the second quarter 2007 were. So maybe even just which months were the harder -- are the harder months from a comparison standpoint this year, and which are the easier months, that sort of thing.

Sure, I'll do that Patrick. I'll give you some fairly round numbers, but I'll get you fairly close. On a by month basis comps for last year's second quarter with the total quarter being up around 3% or so, the best month of the quarter was last year's May about 7%, and June was about 6%, but July was negative 5%. You may remember that we had a lot of later school openings last year that pushed out into August, and so we had some very disappointing sales at the very end of July and we had some very nice sales at the very beginning of August. That is roughly it.

Okay. So you think the business is starting to, from a -- certainly from a top line standpoint from a sales standpoint, underlying demand standpoint starting to firm up here even though there is all this doom and gloom on the economy and gas prices and sub prime, all that stuff?

Yes. But I'm not wildly optimistic, Patrick. Firming up is one thing. Firming up slight positives is one thing, but we've not become wildly optimistic. Clearly as we have gone through a month of April, and after the first couple of weeks of May with 2%, 3% or 4% up. That is nicely positive but -- and solid, but it's not off the charts as positive. I guess we are waiting and seeing.

Okay. And then circling back to the first question that was asked on the stimulus program. You saw such a nice lift when some of the federal relief dollars to sales flowed into the Gulf Coast states, and talked then about how your customer -- your core customer tends to spend incremental, those kind of incremental funds and apparel is a high priority and so forth. And just wondering just maybe on that same logic why there wouldn't be a bigger benefit to sales, let's say in the months of June and July when the bulk of those stimulus dollars are distributed.

Well, as we said before we are starting to hear noise about the checks coming out, but again we have been been able to see any direct correlation at this point. I think you are right as far as the timing probably goes. But remember in the post Katrina hurricane time down in those 50 stores at Citi Trends which were effected, there were two things going on or three things going, there was a lot of money being pushed in the area, both private donations, huge amounts of money being donated to the folks down there, as well as a lot of government money being spent down there. And so there's a lot of money going into those folks hands, but they also had a need. People had to replace households of clothing and so they had money with a clear need. Here, there's going to be $110 billion, I guess, passed out to folks over the next eight or 10 weeks. But there is not the same kind of demand driver, so I'm not sure what the money ends up being spent on.

Sure. Sure. Makes sense. Okay. Thanks, Ed.

Thank you.

I think our next question is from the line of Evren Kopelman with JPMorgan. Please go ahead.

Thank you. Hi, guys. How are you? My question's on -- first question is back to school shift last year. Do you know if there is any changes this year or it should be more comparable the schedule to last year, so we shouldn't expect any shift?

Evren, we don't have all the data in yet. We are actually revery vague our stores and all for that data right this minute. What we have heard, anecdotally, is that there are going to be later openings again this year, but not nearly to the magnitude of last year. I think we are going to see some pressure in July, again, but not nearly to the magnitude of last year.

Okay. That helps. And then on the merchandise margin, looking at the second quarter last year, it was tough, because of both the back to school but also the calendar shift. But I think I remember, if I remember correctly, you said markdowns were higher last year. And they were also higher at the year before. I guess with inventories in great shape, today, would you expect lower markdowns this year in the second quarter?

Evren, last year the markdowns were comparable as a percent of sales to 2006. What really happened that pressured margins in the second quarter was the shrinkage was higher. It was higher by about 80 basis points and in the second of the previous year, and that was virtually all the fluctuation and gross margin year-over-year. As it relates to shrinkage we hope to pick something up in the second quarter, but --

Right.

-- I don't really think it has to do with markdowns.

Okay. And finally, on the D&A, what is your expectation for the year?

$16 million.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Quintin Maynard with Moorehead Capital. Please go ahead with your question.

Hey, guys. Congratulations. Just a quick question for Beth. (inaudible) at the merchandise, are you seeing any of the inflation that we hear about coming from the producer side?

Not that we are hearing. And we have been -- I have been in the market two weeks out of the last six. So at this point, no, we have not.

All right. Well, that was my only question. Thank you so much.

Okay. Thank you, Quintin.

Thank you. There are no further questions at this time. Mr. Anderson, please continue with any closing comments.

Okay. Thank you all for joining the conference phone call. We'll see you next time.

Thank you. And ladies and gentlemen, this does conclude the Citi Trends conference call. You may now disconnect.