Citi Trends Inc (CTRN) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends second 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, August 19, 2009.

I would now like to turn the conference over to Mr. Bruce Smith, Chief Financial Officer of Citi Trends. Please go ahead, sir.

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 second-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 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 second-quarter results as well as guidance for the remainder of 2009, then David will discuss further the second-quarter results and our business outlook, after which we will address any questions you might have.

Total sales in the second quarter decreased 3.5% to $112 million, including the 12.4% decrease in comparable store sales. Customer traffic was 10% lower with the remainder of the comp store decrease resulting from a decline in the average customer purchase. By month, comparable store sales were down 10% in May, 14% in June and 12% in July. By merchandise category, sales in the second quarter in comparable stores were as follows. Accessories were down 4% versus flat in 2008's second quarter. Home sales were 11% lower after being up 11% last year. The children's department decreased 11% versus up 18% in the second quarter of 2008. Women's was down 13% compared to up 2% last year, and men's declined 15% after being up 4% in last year's second quarter.

Sales of nationally recognized urban brands represented 41% of total sales in the quarter compared to 42% in 2008's second quarter. Year-to-date through the second quarter, total sales were up 7.6% and comparable store sales were down 2.2%. Gross margin in the quarter declined to 38.2% from 38.8% in last year's second quarter. Merchandise markdowns typically pressure gross margin in quarters in which we have negative comparable store sales due to the need to clear merchandise during the season, and the second quarter was no exception as markdowns were 130 basis points higher this year.

However, the increase in markdowns was partially offset by a 60-basis-point reduction in inventory shrinkage and a combined 10-basis-point improvement in the initial merchandise markup in freight cost, resulting in a gross margin that held up pretty well overall in relation to the sales decline. As discussed previously, inventory shrinkage results have been improving for several quarters now, due to initiatives that were implemented to better control shrinkage.

For the year to date, gross margin is up 0.5 percentage point to 39.2% from 38.7% in last year's first half with that entire increase resulting from lower shrinkage. Merchandise markdowns are 40 basis points higher. However, the markdown effect has been offset by lower freight cost and a slightly higher initial merchandise markup.

SG&A expenses were tightly controlled in the quarter, increasing only 5.7% despite a 13% increase in store selling square footage. As a percent of sales, SG&A expenses increased to 34.9% in the second quarter of 2009 from 31.9% last year due to the deleveraging affect the decrease in comp store sales has on the expense percentage. Both store payroll and distribution center payroll were well-managed.

Since the implementation of our new warehouse management and [put to light] systems, we continue to track ahead of plan on DC productivity. In addition, all other expense lines throughout the P&L were well-controlled. For the six months year-to-date, SG&A expenses as a percent of sales have increased only 20 basis points even with a comp store sales decline in the first half of the year.

Interest income has continued to decrease due to the declining overall interest rate environment. In the second quarter interest income was down by $450,000 and is $1.2 million lower for the first six months of the year. Note that operating income before interest increased 10% in the first half of the year on a total sales increase of less than 8%. Much of the unrealized loss on auction rate securities that was recorded in the first quarter was reversed in the second quarter as ARS valuations increased due to an improvement in the credit spreads and the liquidity in the ARS market.

The second quarter had an unrealized gain of $671,000, and year-to-date the unrealized loss is only $57,000. The effective income tax rate was 34.2% in the first half and is higher than last year's full-year rate due to having less tax-free interest income this year. For the quarter we had a net loss of $69,000 or $0.00 per diluted share versus net income of $2.8 million or $0.20 per share last year. For the year-to-date net income is almost identical to last year's first half, $7.9 million or $0.54 per share this year versus $8 million or $0.56 per share last year.

In reviewing the balance sheet, inventories continue to be tightly managed, up only 4% from 2008's second quarter, despite the 13% increase in store selling square footage. Comparable store inventories were down 10% compared to the end of last year's second quarter. Our cash and investments position has continued to improve, increasing $20 million in the past 12 months to $79 million, demonstrating the strong cash generation and high contribution margin of our store model.

In looking forward to the rest of the year, we are currently estimating 2009 earnings per share in a range of $1.28 to $1.33. This estimate includes a comparable store sales increase assumption for the full year of approximately 1%. In the first half of the year we had a comp store sales decline of about 2% following a 3% comp increase in last year's first half. Comparisons are easier in the second half of 2009, and we are estimating an increase in comp store sales of approximately 4% following last year's second-half decline of 3%.

In addition, the guidance reflects 15% growth in selling square footage for the full year and an effective tax rate between 34% and 35%.

Now I will turn the call over to David.

Thank you, Bruce, and good afternoon, everyone. As we stated back in our first quarter call, we expected the second quarter to be our most challenging of the fiscal year for several reasons. First, we faced our strongest same-store sales comparison of any quarter this year. We estimate that last year's stimulus checks drove a 6% to 8% sales increase from a flat to slightly negative trend to a positive 6.5% comp.

Second, our customer endured very difficult economic conditions this quarter. This was particularly true for our teenaged customers, who use their summer jobs to purchase their summer fashions. According to the Wall Street Journal, July unemployment for African-American teenagers was nearly 36%.

Third, eight of our most important states representing 44% of our stores decided to shift their sales tax holidays from July last year to August this year. This impacted second-quarter sales by roughly 1%.

Finally, our ladies' sales were impacted this summer by a significant consumer shift to summer dresses. As you are aware, our strength is casual fashion sportswear. And, unlike our off-price competitors, we haven't developed a large dress business. This summer dresses became the sportswear of choice, and while we saw substantial gains in this business these gains in what has been a relatively small category for us were not sufficient to offset decreases in our more significant summer categories such as shorts, tops and Capris. Given these trends in casual dresses, we are increasing our focus on the dress business.

All in all, it was a very tough sales quarter. Looking at the longer-term, however, we saw a lot that we were pleased with. First, we continued our track record of solid real estate growth. Inventory management continued to improve with more disciplined planning and allocation. After grade shrink control in the first quarter, the results improved even further in the second quarter. We saw strong expense control in both store operations and distribution and continued progress in terms of distribution productivity. Store manager turnover continued to improve and we rolled out the first phase of the new virtual edge system for applicant screening and on-boarding.

On the real estate front in the second quarter we opened eight new stores and also expanded one. Included in this opening group were our first two California stores in Rialto and Moreno Valley. All of these new and expanded stores are performing well.

For the first half of the year we've now opened 16 new stores and expanded five others. This month we will open an additional 12 stores and complete three more expansions. Included in this group will be our first store in Northern California. All remaining store openings for 2009 have been approved and slotted in our opening schedule, and we are confident that we will hit our plan of 45 new stores and 15% square footage growth. In addition, we also completed work on a new store forecasting tool and have made it a key part of our evaluation of location submittals.

As Bruce pointed out, we achieved excellent expense control in the second quarter. Both store payroll and DC payroll were well-managed. Additionally, our strong shrink control allowed us to achieve relatively good gross margin, considering the size of the comp store sales decrease.

We entered the third quarter with comp store inventories at a healthy level and very current. Comp store sales for the first two weeks of the quarter are at positive 3.5%. While there is a lot of noise in this number, both positive and negative, with shifting tax-free days and delayed school start dates, we are pleased to have returned to positive comps, and we like some of the trends that we're seeing, as they relate to key fall categories.

Despite a tough sales quarter, Citi Trends' financial position remains strong with a nice cash position and no debt. We continue to be committed to growth. And, while we are still in a period of great economic uncertainty, we believe that we are well positioned to continue to succeed.

I will now turn the call back to the operator and take your questions. Operator?

(Operator instructions) Jeff Klinefelter, Piper Jaffray.

Thank you, just a couple of questions. Interesting comments on the teen unemployment rates, and I was just curious if you could share a little bit more about what you're expecting from those teen customers as we go through the back half of the year. Clearly, summer jobs are important during school breaks. I'm just wondering if you think a lack of summer jobs would actually carry forward into the second half. Is that a factor in your comp forecast for that period? And any sense for what percent of your transactions or traffic, or any way you can define it, is actual teen purchasing for themselves versus the parents?

Thank you, Jeff. I have a hard time quantifying it. I'm in stores just about every week and obviously see a lot of teenagers shopping. The things that I would tell you is, we had expressed in our first quarter conference call a concern about the effect of summer sales on teens not having summer jobs. And as the summer played out, that turned out to be a very big issue in terms of unemployment for teenagers.

We have a lot less of a concern about that in the other three quarters of the year. And as I mentioned, we're pleased with some of the trends we're seeing as we go into the third quarter, particularly related to categories that will be important for us in the third quarter.

So I can't give you a lot of specific details. I can tell you that we recognized that as a concern before the quarter ever began and do recognize it in the summer. Teens, when they are working in the summer, tend to spend money on apparel. And that is very key to our customer.

In terms of those trends that you're encouraged by going into the back half, can you share a little bit more about what you're seeing and how you anticipate that being supported by product availability?

Sure. Let me have -- I'll have Beth address both the things we are seeing good trends in and also talk about product availability for the fall.

We are actually excited about the positive fashion trends we are seeing in categories that are very important to us. The most significant is probably denim, which is critical to our success this fall. We are feeling strong about denim in ladies, men's and kids. And, based on our season to date trend and the amount of newness within the category, like destructed, krinkle, skinny leg and color, we are feeling really good about denim.

We also feel very optimistic about the junior and plus brand area because there are several core and mid-tier brands there that are really back on track. We also like the momentum that we are seeing in the jewelry area, the handbag area and ladies accessories, which we feel will continue into the fall season.

As far as the quality or the availability of inventory out there, we are pleased that we are finding what we feel are the correct levels of both in line, off-price and closeouts. We really aren't seeing any consequential changes as far as availability is concerned.

And particularly in light of the CIT issues that have surfaced here recently, I'm thinking also about the viability of some of the smaller vendors. Any impact at all their to your product flow?

We certainly haven't seen any, and Bruce has kind of been our point guy following CIT. Do you want to talk about what you're seeing?

Yes, Jeff. There is no question, they there are a significant player in the retail industry, including our portion of it. But we really haven't had any disruptions at this point. There's been a lot of chatter, but no disruptions in the flow of merchandise. And I guess it seems like they've made some improvement in their own position recently. As you can imagine, it's impossible for us to forecast what ultimately is going to happen to them. But we would like to think that our vendors would be able to work with other factors in a worst-case scenario. But quite honestly, we don't have a real way to predict that.

(Operator instructions). Patrick McKeever, MKM Partners.

Just a question on the guidance for the back half of the year, and I'm just wondering if you might be able to, I don't know, maybe provide us with a little more comfort that that's achievable, given the performance in the second quarter. On the EPS side, if I'm doing my math correctly, it implies about 18% EPS growth in the back half of the year; and then you said comps in the -- I think you said, 3% or 4% area for the back half of the year.

So are you looking -- can we get there just with the comparisons, or do you need something to change in terms of the basic underlying tone of the business?

Let me let Bruce start regarding the top line, and then I'll make a couple of other comments.

The key is clearly the top line. We've shown the ability to maintain the gross margin and also closely monitor the expenses. The key is the top line. And really, the things that we're looking at there, I guess, are historical in nature, but also forward-looking. When you go back over the past few years, whether it's 2007 fiscal year or 2008, we've been at pretty much a run rate of flat to slightly up in comps. Then in the first half of this year we did a negative 2%, but it was up against a 3% positive number last year. So once again, the trend over that two-year period is slightly up with an easier comparison in the second half of the year where we are going up against negative 3%. We are thinking that a positive 4%, which would put us at 1% for the full year, is a reasonable expectation.

And beyond that -- the rest of your question regarding EPS -- apart from the negative sales trend we saw this summer, virtually every other metric was positive. And we have, in the last couple of weeks, begun to see sales much more consistent with what we had assumed our sales trend would be post the second quarter.

In the second quarter we expected and we had said in our first quarter call that we expected negative comps, and there were a couple reasons we expected. One was the teen unemployment, two was just the general state of the economy, and three was the fact that we were up against strong comparisons.

We had a couple of surprises in the second quarter that we didn't anticipate. One was the shift in the tax holidays. That cost us about 1%. And the other, we were somewhat surprised by how strong consumer sentiment shifted to dresses this summer and how much that affected sales in more typical summer apparel. And as I mentioned, we are putting a focus on that business. That has not been a significant business for us. If that trend continues, we want to be able to handle it.

But as we move into the fall, I think we're moving back into things we are very strong in. We've had very good underlying trends in long denim throughout the year, and we've seen very good trends the last few weeks, and that's very foundational to our fall results. And in a few other key categories for us we've begun to see some good movement in, and that has given us the confidence for our forecast for the fall.

Okay, thanks, I think I've got one more here. Maybe a clarification, but I think you did answer it. So that shift in the tax-free holidays hurt you by, you said, just 1 percentage point?

There were really two things moving. The thing we could fairly easily quantify was the tax holiday shift. That was about 1%. The other thing that's harder to quantify is (technical difficulty), and there was movement in that as well. And when we look at individual markets and shifts in back to school date, you can see a very obvious impact. And some of that is still affecting us. We are seeing markets that have gone back to school with very good sales. We're seeing markets like, for example, Florida, where most schools are still several days away from going back. Last week we lost sales, and this week those sales have come roaring back. But the things that we can quantify, we know we lost about 1% in July. With school start shifts, we may have lost a little more than that, but the thing we feel confident in is the 1%.

[Brian Runick], [BLR] Capital Partners.

Just a couple clarifications. Bruce, in your prepared remarks you had mentioned something about up 7.6% and down 2.2%, and I couldn't quite catch what that referred to.

Yes, that was our first half of the year number. The total sales were up 7.6%, and comps were down 2.2%.

So that's the six-month comp in total sales number?

That's correct.

Okay, got you. AUR -- I think I just heard number of transactions were down 10% for the quarter?

That's right. Customer transactions were down 10%.

And the AUR?

The average customer transaction was down about 2.5%. The AUR was actually slightly up, so it was the number of items in the basket that caused the 2.5% decline.

Okay, and did you say -- I'm sorry, I didn't catch it -- UPT's, you said, were down slightly, or the average transaction amount?

Yes, units per transaction were down.

Yes, that's right.

So the number (multiple speakers).

Okay. Inventory at the end of the quarter per square foot -- did I hear you are down 10%?

That's right. Comp inventories were down 10%.

But totals up 4; right?

Right.

Okay, the spread looks a little wider. Is there a timing issue there, or -- because in the first quarter you --

That's really just related to new stores, non-comp stores, stores that opened in 2008 and 2009.

I got you, and I think you opened those eight new stores in the second quarter, late in the quarter?

Right, that's right.

Those are July openings, yes.

And are you guys on pace for the third quarter around 21 to 23 stores?

[I don't] think about the exact calendar because they are October-November openings for the rest of the year. We're actually on pace to hit our number for the year. We will open 12. I think seven have already opened this month. We've got another five more to open in August, and so there would be 12 in August. We've got several have opened October, the rest in November. The answer to the question is, we'll hit 45. Exactly how many will land in the third versus fourth quarter, I'm not certain.

No problem, okay.

I'm sorry; I just don't have the schedule with me.

Sorry to press you on that; it's not a major question. And, the last issue I had was, David, you had mentioned some metrics that were positive. Can you just review some of those that you were referring to specifically?

Sure. The things that I think are fairly significant -- one, shrink was very strong this quarter, 0.9%, and actually stronger than what I would advise is sustainable. I think we have really improved our shrink. I think a sustainable run rate is probably 1.3% to 1.5% and we've done a number of things to get there. I view that as very positive.

SG&A increased only 5.7% against a 13% square footage increase. And really, when I look at the P&L, line item after line item, we are very well managed and well-controlled. Store manager turnover decreased to a level that I'm pretty pleased with, in the mid-20s on store manager turnover, which is a very good number.

So I view all those as very positive things. I'm pleased with things that are happening in our technology area. We have just completed a new site profiling store predictive model which we used a third-party consultant for. We've just rolled out our new -- the first phase of our new on-boarding and staffing tool.

So, if I look across the Company both in terms of measurable things and in terms of initiatives, I think we had a very positive quarter. DC productivity continued to improve. We're still ahead of schedule in terms of that ramp-up in terms of our new systems. Inventory management I would also comment on. I think we ended the quarter very clean and with the right inventory level.

So as I look at things apart from the top line, I see a lot of positives. Obviously, the top line was very tough this summer.

[Sam Chase], Stephens Investment Management Group.

First off, if what I just heard you go through, which is what I wanting to talk about, which is, it sounds like income statement from an inventory perspective, from a G&A perspective, from a shrink perspective was all very positive in the quarter and has been, I think, for a while now. Is there anything that leads you to believe with positive comps, I guess, and forecasts that those should get -- that those should not get worse as time goes on; correct?

Yes, I would say -- let me just take them one at a time. I'll dig into shrink more because that's obviously a significant one. Shrink -- we have seen good reductions. I think we were 1.1 last quarter. Is that, right, Bruce?

I think so.

And 0.9% this quarter. We believe now that we can probably sustain a run rate in the 1.3% to 1.5%. And the things we've done there is we've taken 43 of our highest shrink stores, we've put in a 24/7 monitoring system with 15 cameras, and we've seen a nice reduction in shrink in those stores. We have recategorized our stores based on shrink risk. We've realigned and redirected our loss prevention department. We're allocating more time and more attention to prevention in those high-risk shrink stores. We've seen an improvement there.

We have lower management turnover. That almost always equates to lower shrink. We have lower store inventory levels. That's leading to lower shrink. So the shrink improvements, we think, are something that are positive and are sustainable.

In terms of SG&A, when we look at the distribution centers, in April we put in a new WMS system. We put in a new put to light system. We had tried that once before and had some challenges. This time, it went very smoothly. And we've seen productivity improvements and capacity improvements from that. So we're excited about that.

We are in the early stages of making improvements in terms of store labor management, trying to better allocate labor based on key factors in terms of store opening hours and risk classification and sales and so on. And we, I think, manage store payroll very well this quarter.

And then all the other expense categories -- I think there have been some positives in those as well. So kind of a long answer to your question. The short answer is, there is no reason that those would move south if we begin to see good sales again.

Now I would also tell you, though, we knew second quarter was going to be tough, and we were very aggressive in managing expenses in the second quarter. So anything that -- anyplace we could squeeze, we did, because we knew it was going to be a tough quarter.

Great. And then, on the quarter-to-date sales, I know historically you guys have usually given a number, and I guess today you haven't. But is it fair to say that, since it seems to be more -- I don't want to say it's aggressive because I know the comparisons are easier. But since they are -- 4% is the guidance. Is it fair to say that you guys, month to date, are running at least 4% positive?

No, we are running 3.5% month to date. What we've tried to do is, to the extent we can, take the noise out of those numbers with school shifts and tax shifts and everything else that's going on. And we've looked at how that relates to what we are up against in September, October and so on. And that's how we've come back to saying 4%.

Got it. Okay, thanks.

(Operator instructions) Evren Kopelman, JPMorgan.

The first question is on the kids' business. For the past year or two that had been outperforming the other categories, especially men's and women's, on a relative basis. That wasn't as strong, maybe, on a relative basis in the quarter. Can you talk about that business?

Well, one thing, we were up against very, very strong comps. I'll let Beth comment on that. But we were up against a 17% comp. So that's a pretty steep hill. Beth, do you want to kind of talk about where we are in the kids' business?

Like David mentioned, we were definitely up against the biggest increases in our kids' area. They definitely reaped the biggest benefits last year from the stimulus package. And as we see going into the August time period and we've gotten further away from that noise, we've started to see turnarounds in that area.

Okay. And then on the subject of dresses, a couple of things there. One, you said you were going to focus a little bit more on it. One, when do you expect that inventory to flow into the stores? And, two, do you think these are going to be as strong for the fall period as much as the summer period?

Let me start with the first part of that. I'll let Beth talk about fall trends. But I kind of alluded to the fact that we did have good sales in dresses. Our challenge was that dresses is just a very small part of our business. Our overall comps in dresses in the fourth quarter were north of 40%. So the problem is, it's only between 1% and 2% of our business. So we had extremely strong dress business, particularly the junior dress business, which -- where the numbers were a lot higher than that. But again, it's a small part of our business.

Dresses in the fall are not typically as important as in the spring, but we're continuing to see good dress sales right now; it's just, unfortunately, not on nearly as big a base as lots of other people's.

But let me shift to Beth. Anything you want to talk about regarding fall dress sales?

Not fall, but in response to your other part of your question, we are reviewing what dresses will mean to us as a Company as we go into next spring. And we certainly feel that we can position ourselves stronger than we were this year because we do feel that that trend is going to continue into spring of '010.

The other thing I would add, Evren, is we don't currently even carry dresses in all of our stores. And from what we've seen this summer, that's something we intend to change for next spring. Again, we saw, particularly in junior dresses, a very strong reaction, and we will offer that in all of our stores next spring.

Okay, great. And a question on the gross margin for the second half. So first, freight expense -- do you expect that to be a pressure in the second half? And then, secondly, on markdown, if you deliver the 4% comps that you've guided to, would you expect markdowns to be higher or lower in the second half, year-over-year?

As it relates to freight, I don't expect any unusual pressure. If you remember last year, the third quarter there was quite a bit in the way of fuel surcharges that were being passed on to us that we incurred. So we think over the course of the last half of the year freight won't look a lot different than it did in 2008's second half.

As far as markdowns go, what we've seen historically is that when we have reasonable sales increases we can do a very good job of controlling the markdowns and, even in quarters like this where we had a very difficult comp store sales number, we were in such a good position as it related to inventory that we were able to maintain our gross margin and not let the markdowns get out of hand.

Were they higher as a percent of sales last year? Absolutely, but they didn't kill us.

Okay. And then, lastly, can you talk about advertising, especially television? I think you're doing some new things. If you can talk a little bit about that, that would be great. Thank you.

We are. One of the things that we've found is in this economy we are able to buy more with our advertising dollar. And based on that and based on the fact that we're now going into California, we've sort of broadened our store base. We had an opportunity to begin to advertise with BET. So, in addition to radio, which we're continuing to do, and some local TV, which we're continuing to do, what we've done is shifted dollars away from some of the local advertising we were doing into a BET program that we are excited about. We're not increasing our advertising spend. We are just, I think, being a lot more effective with it, and that is new for us.

And, sir, there are no further questions at this time. And I'll turn the call back over to you. Please continue with your presentation or your closing remarks.

All right. Thank you very much, that's all we have and we appreciate everyone calling in today. Goodbye.

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