Citi Trends Inc (CTRN) 2008 Q3 法說會逐字稿

Good day and welcome to the Citi Trends conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn it over to the Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Thank you, Operator. 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 Chief Merchandising Officer.

Our third quarter earnings release was sent out at 4:00 p.m. Eastern Time today. If you have not received a 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 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.

I will provide you with some details related to the third quarter results, and Ed will discuss our guidance for the fourth quarter, after which Ed, Beth and I will address any questions that you might have.

Total sales in the third quarter increased 5.4% to $104.9 million, and comparable store sales decreased 4.2% after increasing 2% in last year's third quarter. Comparable store sales by month were as follows. Down 4.1% in August, down 5.4% in September, and down 3.2% in October. For the quarter, a 2% average -- a 2% increase in average unit retail was offset by a 6% decrease in customer transactions.

By merchandise category, sales in the third quarter for comparable stores were as follows. Children's sales were up 10%, versus up 1% in last year's third quarter. The home division was down 3% in this year's third quarter, versus up 4% last year. Men's was down 7% after being up 3% in 2007's third quarter. Women's was down 9% versus up 2% last year, and accessories were down 16% compared to a 5% increase in 2007. Sales of nationally recognized urban brands increased 3.6% in the third quarter, just under the total company increase of 5.4%. These brands accounted for 49% of our sales in the quarter, versus 50% in last year's third quarter.

A number of our stores were impacted by Hurricanes Gustav, Hannah and Ike during the quarter. However, in the end the hurricanes had a negligible impact on our sales and earnings. We did lose over 300 store sales days due to closings from the hurricanes, but after the stores re-opened the sales rebounded to higher than pre-hurricane rates, and by quarter end had offset the earlier sales losses in the quarter. We did have some damage from the storms, and these expenses were included in the third quarter results but were not significant.

Gross margin for the quarter increased to 36.9% from 34.7% last year, due to lower merchandise markdowns and inventory shrinkage. Markdowns were lower by 200 basis points in this year's third quarter even while facing negative comp store sales, due to our efforts to improve the management of inventory levels. Shrinkage dropped from 2% in last year's third quarter to 1.5% this year as a result of the steps taken in the past year to better control inventory shrinkage, including a reduction in the span of control of district managers in order to increase the level of supervision, better focus on problem stores by store operations and loss prevention, 24/7 camera surveillance systems in over 30 stores, and lower inventory levels.

SG&A expenses were 34.8% of sales in the third quarter, up from 32.6% last year. The year-over-year increase in expense ratio was due to the deleveraging affect that occurs when comparable sales decrease, while operating expenses are increasing at a normal rate of inflation. After 18% increases in SG&A expenses in both the first and second quarters versus the comparable quarters in 2007, the percentage increase was held to 12% in the third quarter.

In particular we were pleased with the store operations ability to manage our biggest expense, store payroll, as we came out of a strong second quarter and started to see the sales decrease. Although we were not able to reduce store payroll at the same rate as the comp sales decline, particularly with another minimum wage increase this year, we were able to minimize the effect much better than we did. For example, in the first half of last year when comp store sales began to slow. In addition, efforts were made throughout the company to minimize or eliminate expenses on every line item on the P&L.

Depreciation expense for the quarter increased $900,000 and rose from 3.3% of sales in the third quarter of last year to 3.9% this year. As the result of capital expenditures incurred for new, relocated and expanded stores, and the expansion of the Darlington distribution center, the net loss for the quarter was $687,000 this year compared to a loss of $513,000 in 2007's third quarter, while the loss per share was $0.05 versus $0.04 last year. Year-to-date net income has increased from $5.8 million last year to $7.3 million this year, while earnings per share has increased 24% from $0.41 to $0.51.

In reviewing the balance sheet, total inventories were down 4% from the end of 2007's third quarter despite an increase in store selling square footage of 15%. Inventories in comparable stores were down 15%, as we continue to conservatively manage our inventory levels in light of the difficult economic environment. You may remember that at the end of last year's third quarter, our comparable store inventories were up 8% over the previous year. The lower inventory levels this year have had a very positive impact on our business, with the most obvious being reduced markdowns resulting in improved gross margin. Lower inventory levels also had positive impacts on shrinkage results as well as store payroll levels.

Now, turning to an update on the auction rate securities that are on our balance sheet, in Q3 we had one issuer redeem $5.4 million of securities at par value and one of our investment banks redeemed another $4 million at par value. We have now signed the offer from UBS to have them purchase all of the remaining $42 million of auction rate securities in June 2010 at par value, to the extent that they have not been redeemed by then. In the meantime, we will continue to earn tax free interest income on the ARS. We have not needed liquidity in these securities to run the business.

We had discussed earlier this year that we increased our credit facility to $35 million, to be safe in light of the lack of ARS liquidity. However, as it turned out, we have not had to borrow anything under the credit facility and won't have to this year. We have been able to fund our operations and store growth through cash flow.

As reported last quarter, we intended to implement our new warehouse management system in the third quarter. We did go live with the system in September. However, we were not able to achieve the merchandise through put levels we expected, so we backed out most of the new system and went back to our old system. We did leave in place the new hardware and material handling equipment, as well as the inventory management and shipping software. We will re-implement the system in April 2009, after the spring shipping peak. There were no significant merchandise flow disruptions or expenses incurred. We do like the new system and are sold on its benefits, but now will not achieve all the benefits until 2009.

In the third quarter we opened 7 new stores, expanded 3 existing stores and closed one. Since quarter end, we have opened 14 more new stores. We have now opened 37 new stores and expanded 9 existing stores this year. The new and expanded stores have performed well to this point. We expect to open two more stores in the fourth quarter, bringing the year total to 39 new stores, 9 expanded stores and 1 closed store for the full year. Therefore, we will exceed our stated goal of 15% additional square footage for the full year.

Now I will turn the call over to Ed.

Thank you, Bruce, and good afternoon, everyone.

We clearly are now in a period of unprecedented economic difficulty and uncertainty. However, I believe that Citi Trends is well situated to withstand these economic headwinds and to continue to prosper in this environment. Why do I believe this? First, we are strong financially. We have no debt and $54 million of cash and investments on the books at the end of the third quarter. It has been comforting to be able to stay focused on our business despite all the noise going on in the financial markets. We have done a good job at managing our biggest asset, inventories. We are lean, and this is a very good place to be, with sales as uncertain as they are.

We have made a number of improvements in operations. First, we have gotten a handle on inventory shrinkage and have delivered much improved results. Secondly, we have made large improvements in payroll management. We have focused on expense control all year. In the third quarter we delivered a smaller than expected loss in a tough sales quarter because we managed expenses very well. So what are our plans to deal with this tough environment? We will continue to run lean inventories, to continue the focus on strengthening our operations, and to [tie] even further our expenses.

What about growth? We are committed to continue our growth at a 15% square footage pace. We believe in this environment that real estate prices will come down, and we are positioned to take advantage. We will push very hard to get cheaper rents and we will not chase any expensive deals.

How about a stock buyback plan? I thought I would go ahead and answer this question, because it will certainly come up in the question-and-answer portion of the call. We realize that at today's prices, a stock buyback plan might appear to be attractive. Because of the amount of uncertainty in the economic environment, we believe now is the time to preserve capital. Having said that, we obviously will continue to watch and gather information on this issue.

Now, I will address guidance for the fourth quarter and the year. The big assumption of course is sales for the fourth quarter. Our comparable sales trend is a comp decrease of about 4% from last year. That's what we have achieved for the last 90 days or so. On a two year comparison, our trend is a comp decrease of about 2%. We do have sales for the first three weeks of November. However, Thanksgiving moved from week 3 to week 4 this year, really crowding the numbers. Our best guess for November is a range in comp sales of negative 4 to plus 2. Last year's November was a plus 5, December a negative 5 and January flat.

So we have decided to forecast a comp of negative 3 to negative 6 for the fourth quarter. This will yield earnings in a range of $0.44 to $0.54 per share for the quarter, and $0.95 to $1.05 for the year. We will finish the year with an increase in selling square footage in excess of 15%, and expect an effective tax rate of approximately 33%.

If the operator would come back on, we are now ready to answer your questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Evren Kopelman with JPMorgan. Please go ahead.

Good afternoon, guys. I was looking at your SG&A expense management, and it looks like you guys did a really good job, and you touched on that a little bit. Can you talk about opportunities for next year? There are more opportunities with payroll management or corporate overhead? Basically, what kind of SG&A growth rate can we expect for '09?

When we look at '09, and we are in the middle of budgeting process right now, there are some things that we are counting on next year, certain initiatives that we actually put into place mid-year this year will have a benefit for the first half of next year. Store payroll, I think, as we mentioned has been very well managed. We have also carefully grown the overhead base, just selectively adding positions where they were really critical and not - making sure we don't go overboard in terms of building infrastructure. We obviously have to do some of that as we continue to grow, but we are doing it selectively and really just placing emphasis on certain areas. We did mention the distribution center, and we expect our distribution center to gain some efficiency next year as we implement the - or re-implement the system in the spring.

When you look at our expense base, the big areas are obviously store payroll, the distribution payroll and store rents. Ed mentioned that our store rents is an area that we are really driving a hard bargain on. We are not going to chase rents or store locations that are not within our parameters, and we will continue to be very selective in which stores we do pick. We think that there are some opportunities out there for us to pick up some good real estate over the next year or two.

How about depreciation expense for next year?

Depreciation expense will be about $17 million to $18 million next year.

Great. And lastly, if you guys can you touch on maybe new store productivity, if in the new environment you are seeing new store volume - I am not sure if you touched on that earlier in your prepared remarks, but if it is in line with what you have been seeing for the past 12 to 18 months or if it is weaker? That would be great, thanks.

The question was on new store productivity for the '08 new stores versus what we have seen in previous years. The '08 stores are performing good as a group and are within a percent or two of last year's results. So we are continuing to see good productivity from our new stores.

Thank you. Our next question comes from the line of Robert Samuels with Oppenheimer. Please go ahead.

Good afternoon, guys. How much more gross margin opportunity do you see as we head into '09?

As we head into '09, historically what we have said is a reasonable rate for us is right around 38%. If you go back 6 or 7 years, you will see we were consistently were right around that number until 2007, when we had a 200 basis point decline in gross margin because of all the markdowns we had to take to clear inventory. I think we have shown this year we can get back to that level of 38%, maybe not all this year, but certainly expect that in 2009 that we will be at least back to 38%.

I don't know that you should count on anything significantly higher than that, because really our strategy has been to be an everyday low price retailer, and to keep a reasonably gross margin but try to increase profits through leveraging expenses by getting comp store sale increases. So we will continue that pattern of being sharp on pricing, and try to drive sales and will he ever expenses.

Are you seeing any new trends or new brands, or the easier availability of brands in the marketplace right now?

Rob, I'm going to ask Beth Feher to talk about merchandising trends and the availability of brands or off-price buys.

The trends that we are seeing happening as we go forward, denim certainly continues to be a strong force in ladies, men's and kids. We are seeing the overall look starting to clean up, both in the brands and in the non-branded area, and we are liking a lot of the shorter lengths as we go forward. We are calling it anything above the knee, from shorts to bermudas, replacing a lot of the capri business.

From a brand point of view, we are seeing some new brands emerging that we are testing, and we are seeing a little bit of flexibility happening between our top brands and some of our secondary brands taking some of their sales.

Great. Finally, can you provide just a little bit more color around some of the individual market performances?

You want to know how various brands are doing, Rob?

No, various areas of the country.

Oh, how various areas of the country are doing, okay. Our business has been fairly consistent across the country, pretty much for the entire year. As we got into the cooler time of year, as we came to this fall, we did see the northern area of the company come a little bit better.

Actually, since the hurricanes - we talked about the hurricane impact, and how we had a negative impact and had a positive impact, and the hurricane-affected stores I guess in late September and October, those Texas and Louisiana stores have continued to outpace the rest of the chain. Probably the weakest area in our company for the last probably three or four weeks has been Florida.

Thanks.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Jeff Klinefelter with Piper Jaffray. Please go ahead.

Yes, Ed, a question for you on the real estate growth strategy and maintaining 15%. Given that - I would imagine new stores along with your total chain have been coming down in productivity as comps have decelerated the last couple of years. Do you feel like from a new store return perspective you are going to be getting commensurate sort of offsets in real estate costs? Is that the way you would be thinking about those 2009 and 2010 opportunities, to make sure that your four-wall return is at or even ahead of prior trends?

Jeff, thanks for the question and good afternoon. Regarding productivity, the decrease in productivity that you are probably referring to has to do with productivity as we went through the second half of 2007, which affected the comp stores but also affected the new stores in existence at that time. We have not seen a consequential downturn in new store productivity overall. So we are still getting that 95% to 100% return on the first year on these stores and expect that to continue.

Now about growth in 2009 and 2010, we do intend, for now at least - by the way, the caveat here is how the fourth quarter turns and does the economy get materially worse, and having a material effect on our business. Assuming things don't get any worse, and we actually start to see some light in next year's spring, we clearly intend to stay with the 15% growth idea. Having said that, though, we are going to be prudent. We are going to drive an even harder bargain in 2009 than we did in 2008, because we think commercial real estate is -- is in a condition that suggests that rents should be cheaper, and we are finally starting to see it.

You all have asked me in the past, what about availability, what about rents, and I told you before that we have seen prior to this quarter better availability. Now, we are finally seeing rents come down, and I think that is what is going to help us achieve the returns that we have done historically, Jeff. But we are going to drive hard bargains, be very careful, very prudent, in going about our growth for next year. But I think again, a company that has a good model like we do, even in this environment, can take advantage of cheaper real estate to continue, and that's what we intend to do.

Thank you, that's helpful. Just a follow-up on that, in terms of geography and maybe in general, what you are seeing behavior-wise out of the developers for more of the strip center real estate, are you seeing bankruptcies or very abrupt closures that are being presented to you as opportunities? Because I know you have very short lead times to open your stores, so I would imagine people are presenting it when they have sort of financial crisis situations with their tenants. And then geographically, are there areas of the country you are going to look to potentially accelerate, and others that you might de-emphasize?

First, extraordinarily stressful situations for landlords or people that own large numbers of shopping centers, we have not yet seen that happen consequentially, and nor have people come to us with that kind of an idea. We clearly though are seeing much greater flexibility among landlords. I don't know if that's the market or the company that our company has grown and is one of the few retailers that is still growing in sizable numbers. But we are seeing landlords come to us and present many more deals to us than have historically. So that is one of the reasons that we think now is a good time for us to continue to grow with the model that we have.

As far as our growth into 2009 and later, we will continue to grow our stores, with the vast majority of our stores being in the territories that we operate in today, with less in outlying areas. As you know, we have gone to the extremities up to Detroit and Chicago and out west to Kansas City, and we are actually contemplating a move to California in the second half of 2009. Again, that move will be determined upon the kinds of rents we can get in the California market, and again the general economic environment when we make that move. So that is not a definite, but that is something that we are actually planning.

The majority of our growth is going to be in the southern part of our company where we operate currently, and again fill in stores in the Detroits and Chicagos and Kansas City and, again, importantly in Texas, and very importantly in south Florida. Again, at least 80% of what we do will be in core markets where we have had very good success in the past.

One last thing on your systems, from a merchandising system and inventory managing perspective, do you feel you have the adequate systems and software suites in place now to help you manage the complexities, growing complexities of going into these other climates around the country?

I think the short answer is, generally speaking, yes. We think we have the platform that can support our growth for sure, and with some modifications to our existing systems and refinements, I think we will have the information systems that we need to take us to the next level. Obviously, working with colder climates and being a lot better at handling these colder climates we think is still a very big opportunity for our company.

Having said that, Beth has been here six or seven months, and we just hired a Vice President of Planning of Allocation about three or four months ago, and they have have already come forth with a wish list for things. These are primarily things that aren't that expensive, and are primarily the modification area as opposed to a wholesale change out of our systems. So I think we are generally well-situated. We will modify, we will add, as we go forward to support our business, but nothing consequential at this point.

Thank you. Good luck.

Thank you. Our next question comes from the line of Patrick McKeever with MKM Partners. Please go ahead.

Thanks. Hi, Ed. Just a question on the paycheck cycle, you mentioned the paycheck cycle, I think, in the third quarter sales release as becoming more pronounced. Just wondering if you might elaborate on that, and talk about how things have changed with the cycle over the past few months or couple, three quarters?

Are you talking about the first-of-the-month phenomenon, Patrick?

Yes, right.

Right. Just to be clear, I think as I understand your question, you weren't talking about the government rebate checks back in June or July. You are talking about the first-of-the-month phenomenon, where a lot of government checks are issued to people on various forms of government, and how does that affect our business?

Right.

It has always been a key to our business, and our business has always moved up significantly in those weeks that have the first of the month in them. It seems to us that in the last three or four months, that has become even more pronounced. I don't have a great measurement for you, but it looks like that - and again, I think this is indicative of the fairly tough economic climate we are in, is that the first-of-the-month business is still a phenomenon. But as people spend that money and we get into the second and third and fourth weeks of the month, those weeks have tended to be somewhat more difficult. So we are seeing an exacerbation, if you will, of that phenomenon.

Okay. And is this something -- over the years, is this something that has been more consistent over time and just recently has become more of an issue?

No, no. I think we have talked about it because other people have talked about it and people keep asking us what is going on in our business different, and I want to say that this is a matter of degree, this is not a new phenomenon. This is the way our business has been run pretty much forever.

I know it has always been sensitive to the first of the month. Okay. And then the -- I just feel like I'm seeing more and more urban apparel at some of your competitors, including Marshalls and Ross stores to some extent, and certainly it remains a big focus at AJWright. So I was wondering if you could talk about that and say whether you feel like they have -- they are putting - more so Marshalls than Ross, whether or not you feel they are putting a bigger emphasis on urban apparel? And then I was also wondering if you're seeing more competition on the buying side for some of the better brands - better urban brands?

I think I will try to address both of those. One of them is you are seeing what appear to be more urban brands in some of the other off-prices like Marshalls and TJ's, I guess, at Ross, and then a new competition for the actual buying of the brands. We see the same thing that you are seeing. We urban brands in a lot of off-pricers, and we see a lot of our off-price competitors, Marshalls and TJ's in particular, as well as Ross, when they have stores that are in more urban markets they clearly are able to put more of their brands in those markets. We see that, and that's what we would expect them to do. But I don't think that's -- I don't think that's a material change from where they had been before. I'm talking now about these major off-pricers, being Ross and TJX, with the Marshalls idea and AJWright included.

As far as competition for buying the brands, we talk at Citi Trends how over time we have become more important to the urban brands, and we had moved the pecking order to where we are number 1 or 2 for off-price and close-out buys for virtually all of the urban brands. That is still true. In fact, now virtually all of the urban brands actually make goods for Citi Trends, but they also do the same thing for the other off-pricers, too. We don't have that idea. But we - nothing has changed as far as, I think, Citi Trends' importance to these folks, because urban brands is all that we do.

There is additional competition in the marketplace. The Cato chain has a chain called It's Fashion Metro, which is growing fairly rapidly, so there is another buyer out there for urban brands, but the flip of that is that people are going out of business as well. So I don't think our position has changed materially from where it would have been say a year ago.

Okay. Thank you, Ed.

Thank you. Mr. Anderson, at this time I will turn the call back to you for closing comments.

We appreciate you all joining the call today. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you, again, for your participation. At this time, you may disconnect. Have a nice day.