Citi Trends Inc (CTRN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends third 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, Monday November 23rd, 2009. I would like now to turn the conference over to Bruce Smith, Chief Financial Officer with Citi Trends. Please go ahead, sir.

Thank you, Sean. 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 third quarter earnings release was sent out at 4:00 PM Eastern Time today.

If you have not receive the release it is available on our 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 if response to your questions. These statements do not guarantee future performance, therefore undue reliance should not be placed on them. We refer to you, 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 over 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 third quarter results, as well as guidance for the fourth quarter, and then David will discuss further the third quarter results and our business outlook. After which we will address any questions you might have. Total sales in the third quarter increased 21.4% to $127 million including the 6.3% increase in comparable store sales. The improvement in comp store sales was comprised almost entirely of higher customer transaction counts, as the average ticket was virtually the same as in last year's third quarter.

By month, comparable sales were up 1% in August, 15% in September, and 4% in October. By merchandise category, sales in the third quarter and comparable stores were as follows, accessories were up 19% after being down 16% in 2008 third quarter. Men's increased 7% compared to being 7% lower last year, and women's was 6% higher versus a 9% decrease in last year's third quarter. Home sales were up 4% after being down 3% last year, and the children's department increased 4% on top of a 10% increase in the third quarter of 2008. Sales of nationally recognized Urban brands represented 48% of total sales in the quarter, compared to 49% in 2008's third quarter. While for the nine months year-to-date branded sales were 46% of sales, in both years. Year-to-date through the third quarter total sales are up 11.8% to $382 million, and comparable store sales were up 0.4%, driven by an increase in the average transaction of about 1% partially offset by a slight decrease in customer transactions. Comp store sales of accessories have increased 7% during the first nine months while home and children's are both up 2% and men's and women's are both down 1%.

Gross margin in the quarter improved to 37.4% from 36.9% in last year's third quarter, driven by a 50 basis point reduction in inventory shrinkage consistent with trends recognized in recent quarters due to several initiatives that were implemented to better control shrinkage. For the year-to-date gross margin was up 40 basis points to 38.6% from 38.2% in last year's first three quarters, including a 50 basis points improvement resulting from lower shrinkage. SG&A expenses continue to be tightly controlled in the quarter, increasing 15% compared with a 17% increase in store selling square footage. Importantly as a percent of sales, SG&A expenses decreased 180 basis points to 33% in the third quarter of 2009, from 34.8% last year due to the tight monitoring of expenses and the leveraging effect on the expense percent from a 6.3% increase in comp store sales. For the nine months year-to-date, we were able to achieve a 40 basis points decrease in SG&A expenses as a percent of sales, on a relatively flat comp sales. SG&A expenses year-to-date have increased 10.5% while selling square footage on average throughout the nine months has been up 14.7%. In particular, store and distribution center payroll as well as corporate overhead have been well controlled all year long.

In the first three quarters of 2009, the combination of higher gross margin and a lower expense percent is reflected in a 42% increase in operating profit on a total sales increase of 12%. The result is a 70 basis point improvement in the year-to-date operating margin. Interest income has continued to decrease due to the declining overall interest rate environment. In the third quarter, interest income was down by $700,000, and is $1.9 million lower for the first nine months of the year. The effective income tax rate was 34.2% in the first nine months of 2009 and is higher than 2008's full year rate at 31.2% due to having less tax-free interest income this year. For the quarter, we had net income of $606,000 or $0.04 per diluted share versus a net loss of $687,000 or negative $0.05 per share last year. For the year-to-date net income is $8.5 million or $0.58 per share this year versus $7.3 million or $0.51 per share last year.

In reviewing the balance sheet, inventories were up 17% from 2008's third quarter, consistent with the growth in selling square footage. Our cash and investments position has continued to improve increasing $20 million in the past 12 months to $75 million demonstrating the strong cash generation and high contribution margin of our store model.

Now, looking forward to the rest of the year, we are currently estimating 2009 earnings per share in a range of $1.30 to $1.35. This estimate includes a comparable store sales increase assumption of 1% to 3%, in the fourth quarter. In addition the guidance reflects 15% growth in selling square footage for the full year, and an effective tax rate of approximately 34%. Now I will turn the call over to David.

Thank you, Bruce. Good afternoon, everyone. The positive sales trends that began in August and were highlighted in our last conference call continue throughout the third quarter resulting in a strong 6.3% increase in comparable store sales. While we clearly benefited from an easier comp comparison in this quarter, we believe the sales improvement was also driven by tight inventory management, excellent product selection, and solid execution at the store level. Some of the other significant achievements for the quarter included the completion of our 2009 real estate program exceeding our plan for new stores, expansions, and total square footage growth. Strong shrink control with year-to-date shrink results 50 basis points lower than last year. The completion of enhancements to our allocation system, which should result in further improvements to our inventory management capabilities. Solid leveraging of our SG&A, with the stores, distribution centers, and corporate all showing improvement. And finally significantly lower store manager turnover, an important contributor to our good sales, shrink and expense results.

On the real estate front, in the third quarter, we have been 22 stores and also expanded five others. This month we have opened an additional 11 new stores and relocated one other. We have now concluded our 2009 real estate activity, with 49 new stores, against the plan of 45 and 11 relocations or expansions versus the plan of four. Our square footage growth for 2009 slightly exceeded 15%, including the netting out of three closed stores and we'll end the year with 403 stores in 24 states. For 2010, we plan to again target 15% square footage growth with approximately 55 stores and 10 to 12 relocations or expansions. With two months left in the 2009 fiscal year, we have already improved and slotted approximately half of 2010 openings, putting us well ahead of last year's pace.

During the quarter, we continue to strengthen our management team, with the addition of a new Vice President of Supply Chain. Dave Navarro, joined us in September, having most recently served as VP of Distribution and Logistics for Gottschalks and bringing over 30 years of supply chain experience from Liz Claiborne and various [make] company divisions. Dave will add significant expertise as we continue to improve our supply chain processes, and plan for the opening of our third distribution center in late 2010 or early 2011.

On the customer service front, on Monday this past week, we began a pilot of our new Citi Trends gift card. Our plan is to test this in several markets through Christmas with a chain wide roll-out plan for 2010.

As we shift our focus to the fourth quarter we are forecasting a comp increase of 1% to 3%. For the first three weeks of November, our comps stand at a negative 1%. Almost all of this comp short fall has come from slow sales of outwear and other cold weather items. In fact, excluding these categories, our month to date comps equate to a positive 2%. Most of our markets have experienced a very warm November. In the few area that is we have seen cold snaps, our outerwear selection has been very well received. So we believe this business will come around.

From an inventory standpoint we entered the fourth quarter with comp store inventories roughly equal to last year and more current. In fact, our inventories are the freshest that they have been in several years. With much of this product having just arrived in the stores. This is the first time in awhile that our increasing inventory has been as high as the square footage growth. However, we are comparing to the third quarter of 2008 when comp store inventories were 15% lower than the same time the previous year. Overall we are very pleased with the rebound in sales we saw in the third quarter, and while we would certainly like to see a more robust economy, and a lower unemployment, we believe we are well positioned for a successful fourth quarter. We will now turn the call back to the operator and we'll take your questions.

Thank you. (Operator Instructions). One moment please for our first question. Our first question comes from the line of Brian Tunick with JPMorgan. Please proceed with your question.

Great. Thanks. Hi. Just a couple of more modeling questions, the DNA for the quarter came in a couple of a million dollars higher than we were expecting. Is there anything that happened in the quarter or should we think that number could be over $20 million, $21 million for next year. Then from an inventory planning perspective, you got a nice 50 bits benefit on the shrink side, but was there anything else going on on the gross margin line whether it was IMU or mix shift that we can expect to benefit you into next year?

On the question about depreciation, there really wasn't anything that unusual during the quarter. It was slightly higher than what we had been seeing earlier in the year, but that's growth related and as far as next year goes, the number will probably be somewhere around $20 million to $21 million. Your other question regarding the gross margin components, there really wasn't a lot of bouncing around in the other components, the initial mark up, or the freight shrinkage, mark downs were close to last year also, so it was really all a shrink story.

Assuming you hit your comp plans for the quarter, where would you expect inventories to end the quarter?

Are you talking about the fourth quarter now?

Yes. Yes.

I think what you saw in the third quarter is probably pretty consistent with what we would guide to in the future. Something that -- an increase that looks like the square footage increase. So 15% there abouts in total inventory, flat comps, comp inventory.

Right. Okay. Terrific. Thank you. Good luck this holiday.

Thanks, Brian.

Our next question comes from the line of Elizabeth Montgomery with Longbow Research. Please proceed with your question.

Yes. Hi, congratulations on a good quarter.

Thank you.

I guess my first question is on just outerwear as a classification, in the fourth quarter. How large is that as a percentage of the whole?

We are looking that upright now. It is a.

I can ask my next one then.

We would estimate it is mid single digits.

Okay. Did I hear correctly if it weren't for outerwear, otherwise the comps would be up 2.

They would be. Our outer wear sales are down.

A lot.

We are down about $6 million to $7 million in outerwear.

Thousand.

I am sorry, $600,000 in outerwear. So the impact, if we adjust for that it puts us to about 2% positive comp.

Okay. All right. That is helpful. And then the California stores, are those open already?

We have five that are open. We have one in Oakland, two in Sacramento and two in the Moreno Valley, Rialto, San Bernardino area. In terms of --

I know it is early but any thoughts on those so far?

We have three that we are seeing good results, that we are pleased with. We have two that we are not as pleased with from a sales standpoint. Our intention is to watch things through Christmas and then we'll make decisions about additional openings next year in California. We certainly haven't seen anything that would prevent us from continuing to open in California, but we have seen some differences in markets between, again three stores we are very pleased with, two we are not as pleased with.

Okay. And then I never get to be the second caller. So I was still thinking of my other question, and then you called on me. Let me get back in the queue once I have thought of it but I did have more.

Certainly.

Thanks.

Thank you.

(Operator Instructions). Our next question come frass the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Thanks. Hi, everyone. Question on just the month to month trends in sales, and you had mentioned on last conference call in late August that comps, I think at that point in time, were tracking up for month of August by 3% or 4%, and then you said just a few minutes ago that August same-store sales increased I think you said 1%. And then September was up 15%, and then October was up, I think 4%. So, I am just trying to get some sense of the volatile month to month trends, I was wondering if you can just add a little color on what happened in late August to bring comps down a bit from where they were trending when you had the conference call. I know we had the shift of the Labor Day holiday, in September.

That was part of the biggest impact, Patrick, was the shift in the Labor Day holiday. In fact with three or four days left in the month of August, we were above a 5% comp. We had a fairly dramatic shift in Labor Day, and the effect of that was that our customers got paid quite a bit later and therefore they didn't have money out at the end of the month of August. If I look at August and September, the August numbers are really -- August comps are understated because of a calendar shift, September comps are really overstated for that same reason. If you look at the trends on a week by week basis, August really comped more like a 5% most of the way through the month. September comped less than, less than mid teens most of the month but there was a benefit into September and detriment to August related to Labor Day shift.

Last call you talked about the high unemployment rate for African American teens and some of your, I guess they're not direct competitors, but other apparel retailers lets say, have talked about high teen unemployment hurting their business more recently, and I guess the question is, what are your thoughts on just the general economic situation and for your core customer, the high unemployment rate for African American teens and the high unemployment for African American consumers in general?

Well, the call out that we made on African American teens was really summer specific. Obviously, there are a lot of African American teenagers who are unemployed who had jobs in the past. The real effect we felt were the teenage kids were more high school or college age and specifically look for summer jobs and with almost a 40% unemployment among African American teenagers this summer, we felt are really affected our summer sales. We certainly are affected by unemployment. But the rates are what they have been all year, and we have produced, in most quarters, fairly good numbers this is year. So, we would certainly like to see the economy turn around, we would certainly like to see lower unemployment, but we have been managing through that fairly well with the exception of some of the issues we had in the summer.

Just my last question, A J Wright going into Atlanta, again this summer, did that have any impact on your business or have you seen any impact on stores where you're close to A J Wright in that market in particular?

I would describe Atlanta sort of like any market where we are established and a new competitor comes in and comes in in a big way with a number of new stores. When that happens, we do have an effect on sales for a period of time, and in the case of Atlanta, they opened a number of new stores and opened them relatively close to our stores, and we are pretty established in that market. So, we have seen some effect. I can tell you that generally, we compete very well with AJ Wright.

In fact when AJ Wright is in the same center with us, we actually view it as a positive because it creates more traffic from an apparel standpoint to the center. But again in a new market for them, came in with a lot of new stores, we saw some impact. Historically that's a limited time type of issue. And historically we do just fine against them or any other competitor as long as we execute our business properly.

Got it. Thank you, David.

Thanks.

Our next question comes from the line of Robert Samuels with Oppenheimer, please proceed with your question. Your line is now open.

Can you hear me?

Yes.

Great. Good afternoon. Just curious, why wouldn't gross margins this quarter be better than they were with this 6% comp you did?

The third quarter gross margins.

Yes, in the third quarter.

We have said consistently that our gross margin is going to be right around 38%. If you look back over time that has always been the case. We would even say that that is our expectation going forward. We were real close to that during this quarter. There was really nothing unusual in the way of markdowns, shrinkage was much better and the other components really didn't, didn't impact us.

Yes, the other comment I would make is where you would expect to see leverage in SG&A we saw pretty substantial leverage. We had 180 basis points of leverage during the quarter.

Got it. Then when we think about next year, especially the first quarter when you face a pretty difficult compare, how should we think about both expenses and margin.

I would say with expenses, what you would generally expect to see is growth somewhere along the lines of the square footage growth. We have historically said that if we get a comp store sale increase somewhere around 2.5% to 3%, we start to at least break even on leverage and maybe even start to get a little bit of leverage this year. We have done a lot better than that. And part of that we really pointed out in the second quarter was that we knew we would have a difficult quarter and we really held the expenses the best we could. We have been doing that all year long, our expense growth has been less than our square footage growth, and I think that's a pretty good barometer to go by. On the gross margin side, something in that 38%, maybe even as high as 38.5% range is a reasonable expectation.

Great. Thanks very much.

Our next question comes from the line of Sean Naughton from Piper Jaffray. Please proceed with your question.

Thanks for taking my question. First on the -- maybe just start with some category dynamics, you had mentioned I think on last call, that you were a little bit light in a key category miss in dresses, is there anything starting in terms of fashion that you are seeing that is resonating well with this customer right now?

I'm going to give a quick comment about dresses and then I'll let Beth talk about fashion trends and what we are seeing. As we mentioned, dresses have not historically been a significant category for us. But we saw significant interest on the part of our consumer last summer in dresses. And as a result as we planned out spring/summer of 2010, we have expanded fashion dresses, junior dresses and also what we call junior plus, the more fashioned looked dresses for plus customers, we have expanded those from 190 stores to the entire chain, and we have planned to have a much broader selection of dresses for next spring and summer. Dresses are not a big fall trend, so let me turn that over to Beth to talk about what trends we are seeing right now.

Hi, Sean. We are actually excited about the fashion trends that we are seeing in the categories that are important to us here at Citi Trends. The most significant is denim which gave us double digit increases in the third quarter and is critical to our success in the fourth quarter. The key there is the skinny leg in ladies and the new treatments in finishes like destructed, crinkled, or baked creased looks. Outerwear, which which we talked about, has been slow in November due to the unseasonably warm weather, during a brief cold snap we did get in October we saw excellent outer wear business in ladies, mens and kids, and therefore we do feel confident that when the weather gets cold again that we will see nice increases there. We also like the continued momentum that we have seen in the jewelry area, hand bags and ladies accessories and feel this will continue into the fourth quarter.

Okay. That's useful. Thanks. A couple of margin questions here. First of all on the SG&A side, you have been doing a nice job on getting some leverage on the comp, and then also tightly managing expenses at the corporate level. Can you talk about any of the benefits that you are receiving from the -- what you were doing within the warehouse management system, and then what sort of additional leverage we could still see here on the distribution center?

Certainly. As you are aware, in 2008 the Company expanded the size of the [Dollington] distribution center, we doubled the size, came back in 2009 and in April we installed a new warehouse management software package. We also installed put to light technology for our picking for our stores -- our sorting for our stores. We have consistently beaten the plan and last year in terms of productivity in our DCs this year. We are continuing to look at ways to refine and improve those processes and as I mentioned we have in September, hired a new Vice President of Supply Chain. His focus will be on continuing to improve process in our current D Cs as well as opening of a new D C, which will be in the southwest, which with we would envision coming late this year or early next year. So I think we have still got plenty of room to continue to improve DC processes, and he has a background of doing that. So we view that as an area we can continue to get better.

On the gross margin front, freight didn't seem like it was a big deal in Q3, but obviously wer are lapping some significant benefits that you may of have had last year in Q4, how do we think about the offset between better shrink and potentially a negative to the gross margin on freight expense in the fourth quarter?

I don't think we are looking for a negative impact in the fourth quarter. We -- I guess one thing you have to remember about our freight cost is that it is not very big as a percentage of sales. So, even when it is spikes one way or the other, we are talking about a 20 basis point increase or decrease for something that is unusual. So I don't think we you have to look at us up against a difficult number in fourth quarter.

Okay. That's fair. And then lastly, on the Q4 comp guidance, obviously you are running down about 1% now, looking for a little bit of improvement as we move through quarter. Anything in terms of tax holiday shifts that may be happening from January to February of this year, similar to what happened in 2009?

We believe we have, we will have anniversaried that. Obviously, our last year delayed E filing as a result, people like H&R block and Jackson Hewitt, were later with advances on income tax. We think that, again, has already occurred. This year will identical to last year, so we don't view that as an issue this year. The other thing I would tell you is that we are down 1% month to date, again adjusting for outerwear that becomes a positive 2% and also call out that the last two weeks prior to Christmas, we do more sales than we do the entire month of November. So, November isn't necessarily that predictive of the entire quarter.

Nice job on Q3 and best of luck in Q4, thanks.

Thank you.

Our next question comes from [Everyn Couplemen] from Wells-Fargo Securities. Please proceed with your question.

Thanks. Good afternoon.

Hi, [Everyn].

Question on the outerwear, when, I guess if the weather continues this way and the trends continue, when you start responding how are you feeling about the inventories in outerwear, should we be concerned about gross margin pressure from possibly marking down the outerwear inventory?

We are actually well positioned right now in our outerwear inventories. As we saw the first couple of weeks of November starting to back up, we also worked at getting back our inventories back in line from those sales that we thought we were going to miss. As a result we will think we are going to exit at the end of January clean or cleaner than we did last year.

I would add, [Everyn], from a temperature standpoint, we monitor temperatures in a number of different markets across the country to get a blended average for our chain. And last week for example, the average high in our markets was 11 degrees warmer than last year, the average low was 13 degrees warmer than a year ago. So we really in our markets saw some very warm weather, and the week before was similar. We believe that will change, hopefully as early as this weekend. So we are not -- we certainly are not giving up on outerwear. In October, we had a few days of fairly cold weather, and saw very good response to our outerwear selection. So we believe that is going to end up being a good positive for us, not a negative.

Okay. Thank you. And then on the October comp, it looks like it is a deceleration from the September trend, even if you exclude the Labor Day shift. What categories may be slowed down versus September?

There was a lot of movement all over. A lot of that I believe though, September was a relatively easy comparison for us. If you remember last year, fuel prices were very high in September and throughout the south, particularly the last half of September, there were fuel shortages, post hurricane, there were fuel shortages across the south. We were up against fairly easy numbers in September. That's probably a lot of why you see that difference between September and October. Plus, the Labor Day benefit we saw in September.

Thank you.

Our next question comes from the line of Elizabeth Montgomery. Please proceed with your question.

So my follow ups are, Beth have you seen any or do you expect to see any impact from the CIT issues with some of your smaller vendors?

No. We have seen no impact from CIT.

Okay. That's great. Then David in term of the shrink rate, which I guess is now 1% or around there this quarter. Do you think that the bad economy and high unemployment is helping to keep that under control in terms of reducing store manager turn over and do you have strategies in place to deal with that should fingers crossed everything start to improve going forward.

I don't think that's a big reason for our shrink. I think lower turnover is and we are pleased with where manager turnover is today. There are three or four initiatives that we have implemented in the last year and we think are paying big dividends in our shrink numbers. One in 43 of our stores, we have put in a 24/7 monitoring system, 15 cameras per store, two way voice communication, live two way voice communication, where our employees are operating with a remote operator. In those stores, we have seen significant reductions in shrink. In addition, as you mentioned, we benefited from lower turnover. Thirdly, we have restructured the focus of our LP people to put more attention on higher risk stores. So we have done several different things and we have had lower inventory, which we also think has been a very big deal. So with all of those things we think we have done significant things that is have driven down shrink and we think that is relatively sustainable. We don't know that we are going to be able to sustain it one or a one one, but I would say one one two to a one three range is realistic going forward.

Okay. Good. Bruce, one follow up in terms of SG&A per square foot. In Q4 keeping in mind the occupancy is in the SG&A, if I am correct, right?

That's correct.

So should -- on a 1% to 3% comp we should anticipate that would be up low single digits versus the prior year whereas it has been down the first part of the year, and then flat in Q3?

It would look a lot like third quarter. I think you'd expect an increase somewhere along the lines of 15% in line with the square footage growth.

Okay. And it seems like the tax rate went down a little bit too in terms of guidance for the year. Is there any --

We have been running at 34.2% all year long. So, I think earlier we may have said 34% to 35%, and now as we get closer to the end of the year we were able to refine that and say that it is going to be around 34%.

All right. Okay. Great job and congratulations and good luck for holiday.

Thank you.

Mr Alexander, there are no further questions at this time. I will turn the call back to you. Please continue with the presentation or closing remark.

Thank you, operator. Thank you, everyone for attending. We hope you have a wonderful Thanksgiving. Good-bye.

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