Citi Trends Inc (CTRN) 2008 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 the call over to Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Thank you, Mary. Good afternoon, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and Chief Executive Officer David Alexander, President and Chief Operating Officer and Beth Feher, our Chief Merchandising Officer.

Our fourth quarter earnings release and a separate released describing our executive management transition were sent out at 4:00 p.m. eastern time today. If you have not received the releases they are available on the 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 and management may make additional forward-looking statements in response to our questions. These statements do not guarantee future performance, therefore undue reliance should not be placed on them. 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 results to differ materially from those described in any forward-looking statements.

First, I will provide you details related to the fourth quarter and full year results as well as 2009 guidance. Then Ed will discuss our business outlook and the executive management transition mentioned in the press release after which we will address any questions you might have.

Total sales in the fourth quarter increased almost 9%, to $147 million and comparable store sales decreased 1.9%. Sales for the full year increased 11.6%, to $488 million and comparable store sales were flat. Comp store sales in the quarter were actually up 1% through December, before falling 12% in January, as a result of the delayed timing of income tax refunds this year. In addition to the IRS deferring by one week when tax filers could e-file their returns this year, we believe that a sizable number of our of customers declined the more expensive refund anticipation loans this year in favor of waiting on the IRS to send the refunds to them. These circumstances have the effect of pushing sales into February in 2009.

Customer transactions up slightly in both November and December before dropping in January. For the quarter a decline in the number of customer transactions comprised about two-thirds of the comp sales decrease, with a lower average ticket making up the rest. For the year, flat comp sales included a 1% increase in the average ticket, offset by 1% fewer transactions.

Looking at merchandise categories sales in the fourth quarter for comp stores were as follows. The home division was up 8% in this year's fourth quarter versus down 4% in last year's fourth quarter. Children's sales were up 2%, on top of last year's 2% increase. Men's was down 3% after being down 3% last year. Womens down 4%, and down 2% last year. Accessories were down 14%, after being down 7%, and last year's fourth quarter. Sales of nationally recognized urban brands represented almost 52% of total sales in the quarter identical to last years fourth quarter. And for the full year sales of national brands were 47% of total sales in both 2008 and 2007.

Gross margin for the quarter increased to 38.1%, from 35.2% in last year's fourth quarter due to lower merchandise markdowns and lower inventory shrinkage. Markdowns were lowered by 220 basis points in this year's fourth quarter even with negative comp store sales due to our efforts to improve the management of inventory levels. Shrinkage decreased by 40 basis points in the fourth quarter as a result of the steps taken to 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 almost 40 stores and lower inventory levels. For the full year gross margin returned to its pre-2007 historical levels just over 38%, up from last year's 36.3%. As in the fourth quarter, the full year gross margin improvement was due primarily to substantially fewer markdowns needed as a result of better inventory management. In addition, inventory shrinkage was 40 basis points lower for the full year in 2008 compared to 2007.

SG&A expenses were 25.5% of sales in the fourth quarter, up from 24.4% in the fourth quarter last year. This increase in the expense ratio was due to the deleveraging effect that occurs when comparable store sales decrease while operating expenses are increasing at a normal rate of inflation. After total SG&A expenses, increased 18%, in both the first and second quarters, versus the same quarters in 2007, the percentage increase was held to 13% in the second half of the year. This 13% in increase in SG&A in the second half is important to note because it is less than the 15% store square footage growth that we had in 2008. We were pleased with store operations management, of our biggest expense, store payroll, in the face of decreases in comparable store sales. 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 deleverage associated with a negative comp sales. In addition, efforts were made throughout the Company to minimize or eliminate expenses in every line item.

Depreciation expense for the quarter increased is $900,000, and rose from 2.6% of sales in the fourth quarter last year, to 3% this year, as a result of capital expenditures incurred from new relocated and expanded stores and the expansion of the Darlington distribution center. Net income for the quarter was $10.1 million this year, compared to $8.4 million in 2007's fourth quarter, a 20% increase. Net income for diluted share increased to $0.70 in this year's fourth quarter from $0.59 last year. For the full year, net income increased 22% to $17.4 million, from $14.2 million last year while earnings per diluted share increased to $1.22 from $1.

In reviewing the balance sheet, total inventories were up 5% from the end of 2007 which is a positive considering that store selling square footage increased 15% year-over-year. Comparable store inventories were up 3% at year end. When comparing 2008 and 2007 year-end inventories, it is important to note that by the end of 2007, we had made significant strides to get our overall inventory levels to where we wanted them. In fact that the end of 2007 our total inventory was up only 12% from the end of 2006 even though store square footage was up 20%. Therefore unlike earlier in 2008 when we were comparing current year inventory balances the prior year levels higher than we would have liked, by the end of 2008 we were comparing the prior year inventory that was not unreasonably high. Bottom line we are continuing to conservatively manage our inventory levels in light of difficult economic environment. We do believe we can replenish inventory quickly as sales continue to increase.

Our cash position continued to improve in 2008 as cash and investments increased to $77 million from $62 million. At the end of 2008 the $77 million consisted of $33 million of cash and $44 million of auction rate securities. Tighter control of inventory and its contribution to cash is evident in more that just that one line item as accounts payable increased at a much higher rate than inventory due to improvement in inventory turns. At year end, accounts payable had increased to 61% of inventory compared to only 53% last year.

Last quarter we explained that the auction rate security situation has improved that our investment bank, UBS, has extended a offer to us to purchase these securities in June 2010. In the meantime, we will continue to earn tax free interest income on the securities, although as you can see from the interest income line in the fourth quarter income statement, the rates on the securities have dropped due to the overall interest rate environment. We have not needed liquidity in these securities to run the business. As we discussed earlier this year, we increased our credit facility to $35 million to be safe, in light of the lack of liquidity in the option rate securities. However as it turned out we have not had to borrow anything under the credit facility, and have been able to funds from operations and store growth through cash flow. As a result, we have now reduced the size of our credit facility to $20 million.

Looking forward to 2009, we are currently estimating earnings per share of approximately $1.30, which does include a 3% comp store sales increase assumption and 15% growth in selling square footage. As we said in past we typically require 3% comp increase before we start to lever expenses because expense inflation is normally around 3%. We would expect that to be the case again in 2009 particularly with another minimum wage increase.

One question that might be asked about guidance, is the 3% comp increase assumption in light of a flat comp in 2008, and considering the current economic environment. There is no question that it is somewhat difficult to project sales in this environment, however we were pleased with the comp increases that we began to see in November and December, and while comps were down 12% in January, we more than recovered the effect of the shift in tax refunds, in February sales. While we know that the second quarter comparison will be difficult because of the positive effect for the government stimulus checks last year, we also realize there is a stimulus plan that has been implemented this year focused on unemployment benefits, job creation and taxes. Therefore we believe the stimulus plan has the potential to help our customers. This affect may be apparent in the third quarter comparison because in last year's third quarter gas and food prices were causing a strain on our customers.

Looking a at the 2009 earnings guidance, with a comp sales increase of 3%, and the addition of 15% square footage, we are expecting a 20% increase in operating profits. However our interest income is expected to decrease to less than a million dollars in 2009, due to the interest rate environment not just with auction rate securities but with all types of available investments. In addition to the obvious effect that this has on the interest income line, the income tax line is also affected because most of our interest income through the years has been tax free, which is always helped us maintain a lower affective tax rate. Without interest income continuing at a similar percentage of our overall earnings, our income tax rate is expected to increase to approximately 35%. Now I will turn the call over to Ed.

Thank you, Bruce, good afternoon everyone. We are pleased to end 2008 with strong results in the four quarter and start 2009 with strong sales performance. As Bruce stated, after a disappointing January, sales were very strong in February. We comp sales increased over 14% in the month, on top of a 10% comp in last year's February. We do attribute a large part of the sales increase in February to effectively transfer business from January to February. Tax refunds started slower this year hurting January and helping February.

The increase in comparable sales dollars in February, was about $4 million more than the dollar decreases in January. Sales have been good in March, too. We have now passed last year's Easter which was March 23rd last year, we have 2009 Easter ahead of us on April 12th. Comp store sales in March are down just 3%. Comp store sales for the quarter-to-date are up about 7%. With Easter sales ahead of this year, we expect positive sales for the rest of the quarter. Last year's Q1 sales were about flat.

We have opened four new stores and expanded two others in the quarter. All the new stores and expanded stores are performing well. We will open a total of eight new stores in the first quarter and expand or relocate a total of four stores. We are committed to selling square footage growth of 15%, for the year, which will mean approximately 45 new stores for the year. We have approved 30 new store deals for 2009 at this time. And importantly we're opening our first stores in the state of California this fall. We will open four to five stores there this year. We see outstanding potential for Citi Trends on the west coast.

As Bruce pointed out we've had control of the year store payroll was controlled well, additionally we reduced our losses to inventory shrinkage from 1.9% of sales to 1.5% for the year, a very strong achievement and improvement. The Company's financial position remains strong with a nice cash position and no debt. We are still period of great economic and political uncertainty. However, our Company is operating well, and new store model is still performing, it is from this position of strength we continue our aggressive growth.

Now I will speak about my upcoming retirement. I will retire as the Company's CEO on April 4th. David Alexander, our President and Chief Operating Officer, will assume the CEO position on April 5th. I will continue as employee of the Company, serving as Executive Chairman of the Board to facilitate a smooth transition of the CEO roll. I will act as advisor and counselor to David and will continue to serve as Chairman of the Company's real estate committee. I will provide broad oversight of the Company's operations for the board of directors and David will report directly to me.

I feel very good about the timing of my retirement. The Company had a good year in 2008 and off to a strong start to the 2009. We have assembled strong executive management team to lead the Company into the future including a highly qualified new CEO. David is a very skilled and talented retail executive. He has years of executive-level experience that have prepared him for this job. Our Board of Directors has taken succession planning very seriously and has spent a great deal of time and effort particularly on executive management succession. My stepping down and moving in to the executive chair role together with promoting David to the CEO job, our successful results of the board's succession planning process.

I have enjoyed leading the Company for the last seven years. Our team has accomplished a great deal in that time. The Company is strong financially and is operating very well and is positioned for great success in the future. I thank all the Citi Trends employees for the hard work and support. On April 5th, David will take over as Chief Executive Officer, he will run the Company's operations and he and Bruce will handle investor relations. This will be my last conference call. With that, we will now turn the call back to the operator and take your questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Evren Kopelman, with JPMorgan. Please go ahead.

Thank you, good afternoon, guys.

Good afternoon, Evren.

The first question is probably on a lot of people's mind, sounds like your comp trends are far better than maybe what the rest of the apparel retail industry is seeing. In your opinion, what do you think is driving your outperformance that you're not comping negatively?

As you probably seen, from all the retailers results, a lot of our prices of discount operations appear to be performing at best-- better than many other segments in retail. We did point out that we were having positive sales in December and November, December, and then had a negative January, we think that the vast majority had to do with timing of tax refunds for our customers. So we have had a strong February, as we move through March, off to a good start in March as well. We think a lot of this has been, the momentum coming from the tax refunds. But that's now about over. We do think that the fact that we have improved our inventory quality, and there are some fashion trends going on that Beth can address but we think we had really good solid inventory positions, and some momentum from the tax refunds.

Just following up on that if Beth could comment on some of the fashion trends and what she expects for the rest of the year. Also you mentioned the quality of inventory, you talk a little bit about the buying environment seems to have been very good for off pricers, and what do you expect for the rest of the year as more manufacturers and retailers get their inventories in better positions?

We will talk about the trend piece of the question first. As we saw in fourth quarter, in our ladies, men's and kids area, the denim business continues to be very successful. The other trend that's happening is this whole neon bright color pallette in the ladies area, the kids area the accessory area, which is really fairing well with our consumer. The inventory and that piece of it, we are we are still seeing a lot of opportunistic buys available in the market. That's probably pretty even with what we've seen in the past. We are seeing a slight deterioration of line goods from manufacturers, but all in all, we are doing a bit of adjusting of inventories to compensate for that, possibly buying a few more things further out than we used to and optimistic about the a lot of the current trends out there, right now, holding for our consumer for the year.

Lastly, on the rent, are you seeing given the environment again, better deals that could be meaningful to your numbers?

I will answer your rent question in a second. You had three pieces you asked about fashion availability and quality of inventory. And that's a good new item and I want to answer that question. Our inventory as I alluded have been managed as Bruce said, and I will say, managed well through the whole year. We did end the year at 5% total inventory increase and 3% comp increase. As we scroll forward at the end of week seven of 2009, our total inventories are actually about flat with last year, comp were negative 3. We think this is the right place for us to be at this time. Again, I felt the situation to be. As far as the quality of inventory, both the age of the inventory and the marked down content are better than last year, again the health of inventory is very good. I think that in addition to these fashion ideas that Beth had mentioned are what is driving our sales currently.

Regarding rents, our rents are from new stores are very slightly less than last year. Very slightly, 6% or 7% neighborhood. I said before, looking at real estate opportunities for our Company for into the '09, we seen availability, for sure, we have not seen the kinds of rent reductions that I thought we would see at this point. We are attempting to drive very hard bargains, our objective is to deliver lower rents on average than we did last year and we're doing that-- for the thirty deals so far I think the average rent is down about 7%. That does include four stores of those thirty are California deals that we approved already. I will point out looks like relative to other places in the country, California rents have come down from where they were more than perhaps other places have been. That's the status of rent expense on new deals to this point.

Thanks, it's sad to see you go, Ed.

Thank you, Evren. Good luck to you.

Thank you. Next question is from [Shawn Notten] with Piper Jaffray

Congratulations on a good quarter, guys. First when you look across the categories in the store, can you talk about specific driving the results within each one of those categories and which ones do you believe have the greatest growth opportunity over the next two to three years?

Thanks for the question Shawn. It's best to talk about what is going on in the current business, which categories are performing well, like this minute, then we will come back and talk about our future.

Right now we are actually experiencing nice growth trends across almost all zones of the business. But definitely leading the pack are our ladies areas, especially the plus size business. In the men's area, we are seeing increases and within mens the big men's area seems to be giving us a lot of increase right now. The kids area, which is pretty consistent to the kinds of results we saw last year, continues to perform. And we are seeing great strides in the accessory and intimate area. That's come from some repositioning we did there in assortments and certainly with the new staff we hired in that area. Probably the only area right now that's giving us a little bit of difficulty is our dress area, where we have actually pulled dresses out of some of the northern markets.

Shawn, probably the brightest spot of last year was the kids business. Boys and girls. But as we came through year end and got into the January, February, and now March our accessories business, and our intimate apparel business has really taken hold and is now leading the pack. Against last year's Easter week for example we just finished we had sales increases the accessories categories, this is a clear focus for us in 2009, to drive more jewelry business, more intimate apparel business, more handbag business, and those businesses are working very well for us. And we expect that to continue as we go through the spring and into the second half. As far as looking forward two or three years, we were generally pretty happy with the contributions, our businesses are very balanced as you know. With the exception of accessories which we will build over time, we are generally pretty happy with the mix.

In terms of the comps sounds like things are off to a really strong start in Q1 here. Are there any geographic differences that you are noticing-- is Texas doing better than Florida or Georgia doing better than Florida or any nuances you can see there by state or geographic differences?

Amazingly enough, and this is very good news for us, is our business is doing good in the north, up in Detroit and Chicago, and our business is doing good in south Florida and down in Texas. We had very exciting new store openings as we came through the late part last year into the spring of this year, our business continues to be fairly balanced across merchandising categories and fairly balanced across the country.

Great. Best of luck the you guys,.

Thank you.

Our next question comes from the line of Rob Wilson with Tiburon Research.

Yes Ed, thank you for taking my call. You mentioned rents have come down. You suggested 6% or 7%. You suggested it's not as much as you would have thought at this juncture. Why not just wait for your six months before you start signing these lease deals and see if the rents come down?

The short answer to that Rob is that we have a strong appetite for growth. Our new store model as I eluded in my comments is still working, we'll still deliver those 100% of return on investments even with somewhat higher rents. We had delayed to some extent-- you heard me talk about eight stores being opened in the first half of --the first quarter of the year. So our year is going to be back loaded and part of that back loading if not most of it had to do with just what you said. Waiting. And even though we've done thirty deals up to this point, we have 15 to 17 deals left to do for the year, and we would expect to see that manifested in those deals and the of course the deals for 2010. But we have back loaded it to some extent. It is also possible, Rob, that I'm wrong about this that the rents will never come down. But it seems to me the real estate market needs to come down more than it has to this point.

Okay, fair enough. One last question. You mentioned I think in your guidance you suggested that December was going to be negative five the last conference call. And sounds like it did better, do you have a breakdown of November and December comp store sales.

Bruce, tell us November and December and January comps.

Yes, November and December were up 1%. January was down 12%.

Both November and December were both 1%?

Yes.

Combination or individually?

Individually and combination.

Perfect, thank you.

Thank you. Our next question comes from the line of Quinton Maynard with Morehead Capital Advisors . Please go

Congratulations on the quarter. And Ed we are sorry to see you go, a quick question you mentioned a few of the deals being California deals.

Yes.

Can you talk a little bit about your thoughts on California as far as getting product out there, being able to manage the store's distribution there, how you see that being an operational challenge or something that is easy for you guys to handle?

Thank you, Quinton. California as I said, we think California and the west coast offers a lot of opportunity for us. We seriously believe that the population, the mix of the population, the income levels suggest that there ought the be a lot of stores on the west coast. One of the good things that has happened is because of the -- for us at least, not from real estate folks out there but for us the real estate market has come down as I indicated earlier, markedly than it has in other places. So we are able to get some California deals that are comparable to our east coast deals. This would not have been possible three or four years ago. So we are able to go out there with not taking on substantial rent risk which is a good thing for us.

We know that operationally there can be challenges, we have people on our team both in HR and Real Estate and other areas that have actually operated in California before so we've done a pretty significant amount of work preparing ourselves for the operating environment in California. And we're confident that we are going to move out there to manage the function, one of our senior store operations individuals to manage California for us, so it's a person that we know, who by the way, has worked in California before not with Citi Trends but with another retailer -- who has experience in California and with Citi Trends and so we're going to tee this up-- taking a very senior person out there to kick off this California operation for us.

As far as the logistics of getting merchandise out there clearly shipping merchandise to California from the east coast is going be more expensive to begin with. As we look long-term, one of the things we did mention is we have completed the work on (inaudible) distribution center and very generally where it will be. The need is the beginning of 2011, so we'll be acquiring space or buying a building in 2010 and getting it outfitted and operational for the very beginning of 2011. That building is going to be somewhere in the west Texas, New Mexico, general area, so once the distribution center is in place, we would be able to get it to our California stores and west coast stores and Texas stores effectively than we are today. So in the short-term, yes, we will have some more expensive freight costs, over the longer term, we're preparing for those costs to come back down to us.

Thank you so much. Best of luck.

Thank you Quinton.

(Operator Instructions). Our next question comes from the line of Patrick McKeever with MKM Partners. Please go ahead.

Hi everyone.

Good afternoon Patrick.

Just thinking at about the earnings growth forecast for 2009, sounds like the old Citi Trends, the growth formula anyway 15% footage, I know it was higher than that a few years ago, double digit footage, low single-digit comps, modest SG&A leverage, gets you to around 20% operating income growth. My question is just with the economy being as tough as it is, and unemployment for African Americans north of 13% I think, in February, and the volatile sales trends you had, I know they netted out over the past few months to being strong but have been volatile by month. Questions, why not take a more conservative approach to guidance? What gives you confidence that I mean, is part of that the stimulus? What's in there? Why not take a more conservative approach to guidance I guess is the question?

Patrick, the real number in the guidance, I think you are right by the way, the model that you see for 2009 is the old Citi Trends model. The good news is we are seeing from an operational perspective, merchandising perspective, management perspective, things clicking for us at this point. That's why we think the question in our numbers for 2009 are within the sales number, is that 3% comp number achievable. Highly confident we can deliver (inaudible) and change the gross margin, we think we can manage our expenses, I think we now have that situation handled, we talked to you about having the stores in the pipeline to deliver the growth we talked about. So I think now it's about can this Company deliver a 3% comp for the full year? There are challenges in 2009 for sure. The economy is uncertain. Our business has solidified as we came through the fourth quarter and as we have come through the beginning of the first quarter, so it gives us more confidence that a 3% comp for the entire year is achievable.

The second quarter clearly is a huge challenge with a very large $140 billion tax stimulus being dropped upon (inaudible) last year's June, and our Company was recipient of that I think we had in the neighborhood of 14 comps in that month. After that, the comps get easier again. So yes with have some trepidation about saying 3% is the number for the year, but we come through a reasonably solid fourth quarter and a pretty strong beginning to the first quarter, which suggests that's the case, if clearly things stop, we will have to modify. We are giving it, we think it's better to tell you what we think and what we think is realistic given what we had in our hands. If that changes we'll tell you. But this is our best estimate at this point.

Sounds great. I'm glad to hear it. And question on new store economics, Ed you said new stores are back to that 100%, return on investment, I think cash on cash return on investment in just one year, is that what you were referring to?

That's exactly what I was referring to, yes. The stores -- in 2008 to performed well, that's what I was talking about our model is still delivering, we don't have 12 months of results for all the stores we opened in '08 yet, but we have indication of what the performance was on an annual basis. We are going to deliver what we had done over the last six or seven years. So we feel very good about that. We are optimistic about 2009's performance.

Sounds great. Thanks, Ed, and good luck.

Thank you, Patrick.

Thank you. Our next question comes from Ryan [Runic ] with BLR Capital Partners. Please go ahead.

Hey guys, great quarter. Wanted to ask a couple of housekeeping type questions, did you say national brands for the quarter were about 52% of sales and for the year 47%?

That's correct.

Was inventory per square foot at the end of the third quarter up 3?

At the end of the fourth quarter?

Yes.

It was up 3. Yes.

I just noticed that the spread between your total inventory, and the comp inventory was less than I guess it's been.

That's because distribution center inventory, the amount of inventory we owned and flow through inventory and back stocked inventory and a little bit of price buys was down at that point in time. As we scroll forward I gave you the inventory number of last week. I told you --

Down 3, right?

Down three. So the comps moved actual moved downward from where they were in the fourth quarter driven largely by strong sales from the beginning of February through this point.

Based on sales trends looks like you are managing the inventory superbly so I think that's a good thing.

Good sales tough managing inventory of course.

Absolutely. You mentioned I guess of the 45 expected stores to be open for the year, how many are going to be in California?

We expect five in California.

About five. That's going to necessitate the future growth within California and throughout the west coast, would necessitate the extra distribution center in the Texas area?

Next distribution center is necessary because of our total growth, but we would probably put it in the general Texas area if we weren't even doing California.

Great. I guess Bruce, I will pick up some other stuff offline. Great job. Sorry to see you go, but we know you will be there in the background. Thank you.

Our next question comes from Mark Cooper with Wells Capital Management . Please go

Good afternoon. Did you mention what the cash flow from operations and the CapEx was for the fourth quarter?

Let's see. No I didn't. For the full year CapEx, ended up at $23 million.

23 million.

About 2 or 3 million of that fell in the fourth quarter.

$23 million.

Cash flow from operations full year was roughly $40 million.

$40 million for the full year?

Yes.

Thank you.

Thank you. There are no further questions, Mr. Anderson, I will turn the call over to you for closing comments.

Thank you Mary, and thank you all for joining the phone call we appreciate your interest and we appreciate your questions. It's been a great deal of fun, wish all of you the best of luck. Thanks.

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