Citi Trends Inc (CTRN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Citi Trends first quarter 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, May 20, 2009. I would like now to turn the conference over to Bruce Smith, Chief Financial Officer. Please go ahead, sir.

Thank you, Shaun. Good afternoon, everybody, and thank you for joining us today. Also on the call are David Alexander, President and Chief Executive Officer and Beth Feher, Executive Vice President and Chief Merchandising Officer. Our first quarter earnings release was sent out at 4:00 p.m. eastern time today and 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 call may contain forward-looking statements within the meaning of 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 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 cause actual results to differ materially from those described in any forward-looking statements. First, I will provide you with some details related to the first quarter results as well as guidance for the remainder of 2009. Then David will discuss further the first quarter results and our business outlook, after which we will address any questions you might have.

Total sales in the first quarter increased 18% to $143 million including a 7.4% increase in comparable store sales. About two-thirds of the comp sales increase was due to a higher average unit retail while the other one-third was a result of an increase in the number of customer transactions. Our merchandise category, sales in the first quarter in comparable stores were as follows. The home division was up 14% versus flat in 2008's first quarter. Children's sales were up 13% on top of last year's 5% increase. Accessories were up 8% after being down 4% last year. The men's department was up 7% versus down 3% last year, and women's was up 4% after being even in last year's first quarter. Sales of nationally recognized urban brands represented 49% of total sales in the quarter compared to 46% in 2008's first quarter.

Gross margin in the quarter increased to 40% from 38.6% in last year's first quarter with all four major components of gross margin showing improvement this year. Freight cost benefited primarily from lower fuel surcharges. Shrinkage has continued to improve due to our efforts to better control it through a greater focus on problem stores, enhanced surveillance systems and lower inventory levels. In addition, the initial merchandise markup was slightly higher this year and markdowns were lower due to our continued emphasis on conservative inventory management.

SG&A expenses as a percent of sales improved by two full percentage points, decreasing to 28% in the first quarter of 2009 from 30% in the first quarter last year. This improvement in the expense ratio was a result of the leveraging effect that occurs when comparable store sales increase at a rate as high as 7.4% while operating expenses are increasing only at a normal rate of inflation. SG&A expense dollars increased 11% over the first quarter of 2008 which was less than the 13% increase in store selling square footage from the end of last year's first quarter. Depreciation expense for the quarter increased about $700,000, much of which relates to last year's expansion of the Darlington distribution center. As a percentage of sales, depreciation was even with last year's first quarter rate of 3.1%.

As we mentioned in our 2009 guidance back in March, interest income should be much lower this year due to the declining overall interest rate environment and particularly with auction rate securities. In the first quarter, interest income declined by $700,000. There was also a noncash charge of $728,000 in the first quarter related to the valuation of auction rate securities. You may remember that we accepted an offer from UBS for us to sell these securities to them at par value in June 2010. As long as that transaction is completed, and we don't presently know of any reason why it wouldn't be, the unrealized loss recorded in the first quarter will reverse, either through a change in the valuation between now and June 2010 or at the latest, when the sale to UBS is executed at par value. The effective income tax rate increased to 34.2% from 32% last year due to having less tax-free interest income this year. Net income for the quarter increased 53% to $7.9 million from $5.2 million while net income per diluted share increased to $0.54 from $0.36.

In reviewing the balance sheet, inventories continued to be tightly managed, up only 2% from 2008's first quarter despite the 13% increase in store selling square footage. Comparable store inventories were down 8% compared to the end of last year's first quarter. The improvement in our inventory turns is also reflected in accounts payable as 57% of our inventory is currently financed through trade payables compared to 51% a year ago. Our cash position has continued to improve as cash and investments increased $30 million in the past 12 months. The $88 million of cash and investments on our balance is split almost evenly between cash and auction rate securities.

As we look forward to the rest of the year, we are currently estimating 2009 earnings per share of approximately $1.33 which is up from our previous estimate of $1.30. Consistent with our previous guidance, the new estimate includes for the full year a 3% comparable store sales increase assumption and 15% growth in selling square footage. The 3% comp assumption for 2009 implies an increase of about 1.5% over the remaining three quarters of the year including negative comparable store sales in the second quarter, which is our most difficult comparison because of last year's 6.5% increase. Through the first two and a half weeks of this year's second quarter, our comp store sales are running down 4% as we had expected.

The $1.33 guidance for the full year also assumes that the $0.03 per share unrealized loss on auction rate securities does not reverse or increase during the remainder of the year. In addition, the guidance reflects the adoption of a new accounting pronouncement which requires companies to change the way they compute earnings per share. This had a $0.01 negative impact on EPS in the first quarter, and we would expect it to have a $0.02 negative impact in the fourth quarter. The pronouncement also requires companies to retroactively adjust prior year EPS. For the full prior year, the impact was a reduction in earnings per share of $0.02. Now I will turn the call over to David.

Thank you, Bruce, and good afternoon everyone. We are very pleased with what our management team accomplished during the first quarter of 2009. The highlights include a comp sales increase of 7.4% despite significant economic headwinds. Record first quarter earnings, excellent inventory management and shrink control, strong expense control in both store operations and distribution, the successful implementation of our new warehouse management system and solid progress in our real estate objectives. Since Bruce has already shared our sales, earnings and inventory information, I won't add a lot to his comments other than to say that as a new member of the team, I've been impressed with the level of merchandise planning and inventory management skills that we already have in place. And with a couple new hires this quarter, we should only get better.

On the real estate front, we opened eight new stores and expanded four others in the first quarter. All of these new and expanded stores are performing well. In addition to the stores already opened, we have also approved an additional 35 new stores and six more reloads or expansions. This puts us at 43 opened or approved new stores versus our plan for the year of 45. By the end of this month, we hope to have approved and slotted in our opening schedule all new stores for FY '09. We will then turn our attention to the first quarter of 2010. One of our objectives for next year will be to shift the opening schedule forward with more openings in the first quarter. As Ed mentioned in our last call, we are also on track to open our first California stores this fall. In the second quarter, we will also close three locations. Two of these stores rank in our bottom five from a contribution standpoint, and lease term expirations made this a good time to close them. The third store was targeted to close some time ago when we opened a new store nearby. We had simply waited to evaluate sales trends for both stores before finalizing that decision. These closings will not affect our ability to reach our goal of a 15% increase in store selling square footage this year.

As Bruce pointed out, we had excellent expense control in the first quarter. Both store payroll and DC payroll were well managed. Additionally, our gross margin increased substantially, including a reduction in store inventory shrinkage from 1.7% of sales to 1.3%, a very strong achievement and improvement. As many of your aware, last fall we encountered difficulty in implementing a new warehouse management system. We ended up pulling it out. I'm pleased to report that on April 20 of this year, we successfully implemented this system in our Darlington DC. Thanks to our efforts of our distribution and information systems departments, the implementation has been virtually seamless and the Darlington DC is running ahead of plan in both productivity and throughput capacity. Bruce shared with you our month to date sales for May. Since Easter, sales trends have been slightly negative and month to date, our comps are down 4%.

While we don't give quarterly guidance, I will say that we do expect the second quarter to be our most challenging. Our second quarter sales in FY '08 benefited significantly from the stimulus checks. And not having this incentive combined with the current economic difficulties will make this a tough sales quarter. On the positive side, the current sales trends are consistent with our plan, and they are reflected in both our inventory levels and our revised guidance. Citi Trends' financial position remains strong with a nice cash position and no debt. While we are still in a period of great economic uncertainty, we believe that we are well-positioned to continue to succeed. We will now turn the call back to the operator and take your questions. Shaun?

(Operator Instructions) Thank you. Our first question comes from the line of Robert Samuels with Oppenheimer. Please proceed with your question.

Hi, great, thanks, good afternoon, guys. First, can you just talk about your gross margin expectations for the remainder of the year?

Yes, Robert. Historically, our gross margins have been in a range of around 38% to 38.5% except for that one year back in 2007 when we had to take quite a few markdowns to move inventory in a slowing sales environment. We did hit 40% in the first quarter which is higher than we've seen in the past. But going forward, we think the 38% to 38.5% range is still realistic and a reasonable expectation. You have to remember that in the first quarter, we did have the benefit of a 7.4% comp store sale increase, and that does tend to help gross margin.

Also, the first quarter is normally -- I guess it's the beginning of the spring season, so it normally has fewer markdowns than possibly other quarters where we had more clearance. When we look out over the rest of the year with comp store sales projections averaging 1.5% through the last nine months, we think something in the 38% to 38.5% range is reasonable.

Great. And then can you just comment on some of the fashion trends that you are currently seeing and then, just given the continued struggles of some of the full price retailers out there, what does the buying environment currently look like?

The -- from the trend piece, we continue to see denim perform well in both of our ladies' and our men's area. Also, woven shirts are definitely on trend right now. We are also seeing a great response from our increase in the accessories area coming from the jewelry business, the handbag business and the belt business. And, of course, we are selling the bright color palette that is so prevalent in the market this season. From a buying point of view with quantities out there, as you know, we do secure goods from a few avenues. Right now, the inline piece of goods procurement has been flat to down slightly. The opportunistic side, we don't see any tightening there, and the other piece of placement comes from special cuts, and we basically can fluctuate those, depending on what kind of in season and opportunistic buys we are finding at any given movement.

Great. And then finally, any geographic differences that you noticed during the quarter?

Not that we are seeing in the first quarter.

Great, thanks. Congratulations again.

Thank you.

Our next question comes from the line of Evren Kopelman with JPMorgan. Please proceed with your question.

Good afternoon, great quarter.

Thank you.

First question is on SG&A. It was significantly below our expectations and like you said, the growth 11% was less than the square footage growth. Can you talk about the drivers behind that?

Yes, as Dave had mentioned during the quarter, we did have quite a bit in the way of efficiencies in store operations payroll as well as distribution center payroll. As we look out over the rest of the year, I'm not -- I wouldn't predict that we would be in the situation where we have only 11% increase in SG&A. We would probably expect to be something more along the lines of a square footage growth, which is consistent with what we saw last year. If you remember last year, square footage increased 15% and so did total SG&A expenses. I think something along the same lines would be prudent for this year.

Okay. And then in terms of inventories, have you said where you expect to end the year in terms of the growth in total inventories?

No, we really haven't given any guidance on that.

Okay. And how many stores do you plan to open in the second quarter?

Second quarter, last year we opened four. This year it could be twice that many. But as always, those stores open right at the end of the second quarter, like the last Thursday of the quarter. So there's not a big impact on total sales from those openings in the quarter itself.

Okay. And then finally for David, as a newcomer, where do you see the biggest opportunities in the business?

The key things I see in the business are really just to continue to grow a lot of things we are doing well. I've been very impressed with the management team that Ed has built here and see a lot of opportunity to continue to grow with the team we have and several areas that I think over time, you will probably see us make some improvements. Human resources, we are looking at systems that will improve our hiring and on-boarding process. Real estate, we are looking at ways to better forecast new stores. Store operations in the next 12 to 24 months, we will probably make improvements in labor scheduling. I think we've said that in the next 18 to 24 months, we will look at adding another distribution center.

So again, I'm blessed to have joined a very successful company with a very sound management team that's poised to grow and having been with some fairly large retailers, we are kind of looking, and with Ed's help, looking at, what are the differences between very large retailers and Citi Trends? What are things that would really add value to incorporate here and what are things that really just relate to the scale of the other retailers and won't help us that much, and from that, we're identifying thing that we think will continue to drive our business.

Great, thank you very much.

(Operator Instructions) One moment please for our next question. Our next question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Thank you. Hi, David, welcome to Citi Trends.

Thank you, Patrick. Good to talk to you again.

Good to talk to you, too. Wondering if you might make some comments about the competitive environment. Specifically AJ Wright which recently opened some stores in Atlanta. Just wanted to see how your stores in that market were performing as they have gone into that market and just generally speaking, if you have any other comments about the competitive landscape, that would be great. Thank you.

Certainly. Well obviously, AJ Wright I view as a very good competitor, and we would obviously prefer there not be any competitors. So -- but the reality is we face good competition, strong competitors in a number of the markets that we operate in. We face AJ, TJ Maxx, Marshalls, all three of the TJX divisions. We also face lots of other good competitors and none of them have a material impact on our business as long as we execute properly. So we are used to facing good competition and generally, our success is dependent on how well we execute. The things that I've seen, there is really no material impact as long as we do our job correctly.

Okay, and then just general -- I guess welcome is probably the wrong word because I know you've been with Citi Trends since December but to your new position, I guess, is probably the better way of putting it. But any broad thoughts on the current economic stimulus, the 2009 economic stimulus plan and the lower withholdings and how that might affect your core customers' ability to spend and how -- is that sort of a -- do you expect that to be a gradual -- I know -- I think when you gave your forecast for the full year, you said that there was some of that in your forecast and now that the lower withholdings have gone into effect, I guess it was at the beginning of April, just wondering if you could share your views on that particular subject.

Obviously, I think that things that are being done now will not have the short term impact like the stimulus checks last year did. But we do believe there is some long-term positive impact from -- for our consumer from the stimulus initiatives that are being undertaken. I also believe that we will see some positive impact from the third minimum wage increase this summer. I would have a very hard time quantifying either of those that we view from a long-term standpoint, the things being done today to be positive for our consumer and again, we view the minimum wage to be positive for our consumer.

Okay. Thanks very much.

Thank you, Patrick.

Our next question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed with your question.

Yes, thank you. Just a couple questions for you, two operationally. One would be on the comps. You shared with us your comps for the May month to date and also your plans for negative comp in Q2. Any additional color in terms of the pattern you expect throughout the month of the second quarter and any promotional activities or other incentives you might be planning to try to combat that very difficult comparison in June? And then also in real estate, we are hearing more and more from the development community and retailers that there are opportunities to trade up or go into higher quality or higher volume real estate for many retailers. Are you seeing that same thing, or what are the dynamics in your own real estate?

Bruce, you want to take the first quarter?

Yes, I'll discuss the question about the timing of the comp store sales as we look forward. We typically don't try to get into monthly type reporting and definitely not weekly type reporting. The key thing I think there is that last year during the second quarter, the comps were up 5% in May, 15% in June and then were down 2% in the month of July. And so as we go through the second quarter, we have looked at that last year -- those results last year and tried to plan accordingly and to this point, what we've seen has pretty much been consistent with what we expected.

So I think at this point, all we are really saying is the second quarter is (inaudible) the third quarter of all the quarters is the easiest comparison because we were down 4% last year, and then the fourth quarter last year we were down 2%. So we've taken all that into consideration and the way we buy and the way we distribute, and that's where we are with that. I think the second part of the question, let's see, it dealt with, remind me again, Jeff.

Real estate.

Yes, something about, what was it?

Real estate in terms of the deals that you're seeing. Are you either seeing better rates on deals, or are you seeing better locations that you might not have been able to get in prior negotiations because of the lower vacancy rates during the last few years? So we are hearing both dynamics come out of the real estate community, better deals are available and better location are available. What are you seeing in your own negotiations?

I would agree with those comments, Jeff. We are seeing both of those. And I think we are really kind of seeing improvements in --rent improvements particularly in three ways. First of all, as you're aware, most of our leases, the initial term is five years. So we have at the end of five years, even though we tie out lease rates a lot longer than that, we have the opportunity to renegotiate those lease terms, and we are taking advantage of that in this economy. Second, we are in a good position in terms of relocations expansions, and we've had several opportunities present themselves this year in that area. As I mentioned, we will be relocating or expanding about ten stores this year. And then the third thing that we are seeing is historically very high rent markets we are seeing good opportunities in.

For example, we mentioned on the last call that we will go into California this year, and we are going into some markets that historically have been very high rent, and we are finding rents that are more east coast rents and rents that we can afford in those markets.

Okay, that's helpful -- very helpful. One other thing, maybe from Beth in terms of product categories. The denim, colored denim I believe had been very strong late last year and into spring this year. Hearing from some other retailers that that's dropped off significantly. Any perspective that you can give us on your own trends?

The denim piece remains strong in the blue families from light to dark finishes. The actual colored denim, Jeff, though, you're right, that piece of it has slowed down. It was much stronger when it first hit the scene, and it really came to a halt.

Okay. Thank you very much.

Thanks, Jeff.

Our next question comes from the line of [Brad Margoulis] with Byzyum. Please proceed with your question.

Hi, thank you. I wanted to ask you about the positive trends you're seeing in inventory store shrinkage. So just understand, you actually saw a reduction in shrinkage, or you took your reserve down from historically 1.7 to 1.3? And is this the first quarter you did this or saw this, or is this something that started last year?

Well, the two are really tied together. We saw actual improvement in our inventory results, and we have been seeing that for some time now, probably more than a year. And so what happens is when we see improvement in the actual results, we also take down our accrual for the stores that were not inventoried during that particular quarter.

Got it, got it. Okay, so you took it by basically 40 bips. Is that correct?

Well, it took itself down because the actual results were less than last year by 40 basis points.

Okay. Does your full year guidance of $1.33 assume -- using a 1.3% accrual rate for the rest of the year?

We are -- when we look at the rate, we are typically thinking somewhere 1.5%, plus or minus a few basis points is a reasonable number. 1.3% is pretty aggressive and is probably as strong a number as we've seen. So I think 1.5% is somewhere -- more closer to being a realistic number.

Okay, it's about every 20 bips is about $0.01 of earnings. Is that about right on a quarterly basis?

Yes.

Okay. Good job. Thank you.

(Operator Instructions) And our next question comes from the line of [Ryan Ramnick] from BLR Capital Partners. Please proceed with your question.

Hi, wonderful quarter. If I have this right, it's $0.54 plus the $0.03, it would be $0.57. That's like a record quarter, right?

Yes, it's a record quarter either way, actually.

Right, exactly. And I don't think you are getting the credit for that, and I just wanted to say what a fabulous job it looks like you guys are doing. I see a lot of companies out there, if they are lucky, showing 30% decreases from prior year's earnings. So I think that should be pointed out. My question really just relates to the ARS markdown of why you would decide to take it or why you had to take it since in June 2010, UBS, barring their failure, which I won't expect with the government bailing out everybody, won't happen?

Yes, as far as that goes, the reason we took the unrealized loss on the auction rate securities was we run a valuation analysis every quarter with the help of an outside group, and they look at a lot of different factors, a lot of different assumptions. The one factor this quarter that was the primary reason why we had the loss was that the interest rates on the auction rate securities have dropped quite a bit since year end. On average, the projection was to be around 2.8% at year end, and now that projection is 0.8%. So with that, fall off in the projected ARS interest rates, there was a deterioration in the value, the computed value.

So again, I don't want to beat a dead horse because it's kind of irrelevant, but will you get the $0.03 back obviously in 2010 if they redeem them at par and which they are supposed to do, correct?

That's right, that's what I said before. As long as that transaction goes through, and it's expected to go through, then the unrealized loss will come back to us at some point between now and then.

So I guess we should chalk this up to unrealistic FASB rules.

(laughter) No comment.

Okay, fair enough. Just one more question. Beth, I think you had talked about from your first question about the inventory, and I kind of missed it. I hate to ask you to repeat it.

The -- are you talking about the --

I think it was availability of inventory, and you broke it down, I think into three different pieces.

Yes. We actually secure goods in three ways as you mentioned. One of them is the inline goods that the manufacturers have. Those quantities have gone down slightly. The second is through close out opportunities, and we see that those levels have really maintained where they've been. The third is through special cuts in the market and basically, the special cuts we fluctuate on what units to procure based on what we are seeing from inline opportunities and the off price opportunities.

So you balance your inventory through all three pieces depending on what's going on.

Right, right.

Great. Well, you're doing a fabulous job. Keep up the good work. Thank you very much.

Thank you.

And we do have a follow-up question from the line of Evren Kopelman, JPMorgan. Please proceed with your question.

Thanks. Quick one, and I'm sorry if I missed this, but your -- you said your comps since Easter and month to date in May are weaker. Can you talk about what's driving the weakness? Is there any weather impact? If you could comment on that, that would be great.

Well first of all, I kind of say that -- when I say our business has been weaker really since Easter, I kind of have to begin by talking about why it was so strong until then. As we looked at the first quarter, we were up against 0% comps, we had a favorable Easter shift. We benefited from the delay in tax refunds that moved sales from January into the first quarter, we had great inventory management. Coming into the second quarter, I feel like our inventory management is still extremely good, but we are facing higher comps. And I think since we are facing higher comps and we don't have some of the real positives we had in the first quarter, we are really feeling the effects of the economy a little bit more.

I would also say again though, what we are seeing is very consistent with how we had planned, and we kind of look at it and believe that we are going to have nine or ten tough weeks and then we're going to move into a third quarter with much easier comparisons. So it's not that we are seeing things that are inconsistent with our plan but it's one thing to plan to be down, it's another thing to live through being down, and that's the reason I kind of called that out.

Mr. Alexander, there are no further questions at this time, sir. I will turn the call back to you. Please continue for closing remarks.

We appreciate everyone's participation. Thank you for the questions, and we hope you have a great evening. Bye.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.