Citi Trends Inc (CTRN) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Citi Trends second-quarter 2010 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 18, 2010.

I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead.

Thank you, Frank. Our earnings release was sent out at 6.45 a.m. Eastern Time this morning. If you have not received a copy of the release, it is available on the 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 factors that could cause actual results to differ materially from those described in any forward-looking statements.

I would now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce?

Thank you, Tripp. Good morning, everybody, and thank you for joining us today. Also on the call is David Alexander, President and Chief Executive Officer. Beth Feher, our Executive Vice President and Chief Merchandising Officer, is attending the MAGIC tradeshow and therefore will not be able to join the call.

First, I will provide you with some details related to the second-quarter results as well as guidance for the remainder of 2010. Then David will discuss further the second-quarter results and our business outlook, after which we will address any questions you may have.

Total sales in the second quarter increased 15.6% to $129 million while comparable store sales decreased 0.6%. In comp stores, the number of customer transactions was up 2% plus; however, that was more than offset by a 3% decline in the average ticket. Comparable store sales were up 2% in May and were up 3% in the first four weeks of June before becoming markedly weaker at the end of June and continuing through July and into the first couple days of August. After the positive start to June, comps ended the full month flat and were down 4% in July.

As we have entered the third quarter, comps thus far in August currently stand at negative 2% but have trended flat the last two weeks. The period in which comp sales were negative would appear to be consistent with the timeframe during which extended unemployment benefits were allowed to temporarily expire by Congress.

By merchandise category, sales in the second quarter in comparable stores were as follows. Home sales increased 15% after being down 11% in 2009's second quarter. Accessories were up 11% versus down 4% in last year's second quarter. The men's department decreased 2% this year after being down 15% last year while women's was down 4% in the second quarter of 2010 and down 13% in the second quarter last year. Children's was down 6% this year and down 11% last year.

Sales of nationally recognized urban brands represented 40% of total sales in the quarter compared to 41% in 2009's second quarter. Year-to-date now through the second quarter, total sales are up 21.9% and comparable store sales are 5.1% higher.

Gross margin in the quarter declined to 37.4% this year from 38.2% last year. Higher merchandise markdowns necessitated by the comp store sales decrease caused a reduction in gross margin. For the year-to-date, gross margin is down 30 basis points to 38.9% from 39.2% in last year's first half with the decline resulting from markdowns being 0.5% higher, partially offset by a 20 basis point improvement in inventory shrinkage.

SG&A expenses were tightly controlled in the quarter increasing only 13.9% despite a 17% increase in store selling square footage. As a percent of sales, SG&A expenses decreased to 34.4% in the second quarter of 2010 from 34.9% last year even with the deleverage that results from negative comp store sales. Payroll in particular was very well managed during the quarter.

For the six month's year-to-date, SG&A expenses have increased 17.4% in line with our square footage growth. As a percent of sales, expenses year-to-date have improved 120 basis points, decreasing to 29.9% from 31.1% as they benefited from the leverage provided by the strong comp store sales increase in the first half and excellent payroll control by our store and distribution center teams.

Year-to-date our operating profit as a percent of sales has increased 130 basis points to 5.9% from 4.6%. Below the operating line, the main thing to point out is last year's second-quarter unrealized gain on investments of $671,000, which caused the quarterly earnings comparison to be more difficult by $0.03 this year. That gain had virtually offset a similar unrealized loss in the first quarter of 2009 so the effect on the first six months with negligible.

The auction rate securities that created the unrealized gain and loss activity last year were fully redeemed in the second quarter this year by our investment bank. Since they were redeemed at par value, there was no resulting gain or loss.

For the quarter, we had a net loss of $567,000 or $0.04 per diluted share versus a net loss of $69,000 or zero cents per share last year. For the year-to-date, net income is up 51% to $12 million or $0.82 per share versus $8 m million or $0.54 per share last year.

In reviewing the balance sheet, inventories increased 21% from the second quarter of 2009 on a 17% increase in store square footage. Comp store inventories increased 4% but only after back-to-back years of significant reductions in comparable store inventories. In last year's second quarter, our comp inventories declined 10% on top of an 18% decrease in the second quarter of 2008.

Our cash and investments position has continued to improve, increasing $9 million in the past 12 months to $88 million.

As we look forward to the rest of the year, we are currently estimating 2010 earnings per share in a range of $1.60 to $1.70. This estimate includes a comp store sales increase assumption of flat to 2% in the second half of 2010, which would result in a full-year comp range of 2.5% to 3.5%. In addition, the guidance reflects 15% growth in selling square footage for the full year and an effective tax rate of approximately 35%.

Now I will turn the call over to David.

Thank you, Bruce, and good morning, everyone. As Bruce has outlined, it was a very tough sales quarter with our customers feeling the strain of this economy and some of them enduring disruptions to their unemployment benefits. There is no doubt that we were disappointed with the top line.

Looking at other aspects of our performance though, there were a number of things we were quite pleased with. We continued our track record with solid real estate growth. Inventory management, expense control, and shrink control were all strong. Customer traffic increased even though our customers clearly had less to spend.

During the quarter, we completed the rollout of our Virtual Edge system for applicant screening and on boarding, began the conversion to our new workday system for payroll, and benefits management and finished installing new safe vaults in roughly 150 stores. And after 11 months of development and feedback from customer focus groups, in July, we opened a new Citi Trends prototype store with a totally new layout, new color palette and even a new logo.

On the real estate front in the second quarter, we opened five new stores and also expanded two others. For the first half of fiscal 2010, we have now opened 24 new stores and expanded seven others.

For the back half, we were on track to open over 30 additional new stores and complete six additional expansions or relocations. Included in these new store openings will be our first stores in the markets of Las Vegas, Pittsburgh, Buffalo, Rochester, Syracuse, and Des Moines.

Inventory management continued to be strong as we addressed needed markdowns and ended the quarter with inventories that are more current than last year. Shrink performance also continues to be good with results that are at historically low levels. Payroll and expense management for the quarter were also excellent.

On the technology front, we continue to invest both to drive results and to support our rapid growth. Last month we completed our chain wide rollout of Virtual Edge. This month we are implementing online payroll and benefits management and converting all employee pay to direct deposit or pay cards eliminating the weekly need to print and overnight paper paychecks.

Finally, in 150 of our stores, we have now eliminated the need for our store managers to leave their stores twice a day to make bank deposits through the implementation of our new in-store vault program.

One year ago this month, we began working with one of the top design firms in retail, Miller Zell, to create a brand-new look for Citi Trends. On July 22, we opened our first new prototype store here in Savannah. This store features a new color palette and logo, a new layout, new fixturing, a totally redesigned checkout area, new graphics, lighting and other enhancements. The initial reaction from our customers has been overwhelming positive. Our plan is to open five additional test stores over the next 90 days, monitor the sales results, and conduct intercept surveys with customers.

In November, we will announce our plans regarding the use of this new look for next year's new store openings and also possible retrofits of existing stores.

For the remainder of the year, we are forecasting comps in a range of flat to 2%. We are approaching the second half cautiously based on the fact that our customers are obviously hurting financially and are spending less on apparel.

In addition, we remain concerned about the state of the economy, the continued high unemployment, and the uncertainty around government assistance. Balancing our concerns, we are pleased with the freshness of our inventory and the quality of our fall merchandise offering. We are also encouraged by the fact that our customer traffic was up every month in the second quarter despite the fact that our customers had less to spend.

As Bruce explained, since August 2, our comps have been flat. There is some shift to later school openings this year and we also believe our customers are delaying their purchases as long as possible. So we believe we do have some upside in the remainder of the back-to-school season.

We believe that as a Company, Citi Trends is in an excellent position to continue to grow and succeed. Payroll and other expenses are well controlled. All components of margin are well managed. We are making intelligent investments that continue to improve our efficiency, allow for better inventory management, and support our historically low manager turnover and inventory shrink.

In the second quarter, we had one issue and that issue was sales. We are navigating through a period of great economic uncertainty but we believe we are taking the right steps for our continued success.

With that, we will now turn the call back to the operator and take your questions.

(Operator Instructions) Brian Tunick, JPMorgan.

It's actually Ike calling in for Brian. Just a couple questions on the gross margin line. I think -- I'm not sure if you had mentioned all the metrics that got you to the 37.4% but I think you said shrink was a 20 bps benefit. Does that mean that merchandise margins were down about 100 bps in the quarter?

The 20 basis point improvement in shrink was actually the number for the year to date and the 80 basis point reduction to 37.4% was the quarterly number. And what I said there was that that was all related to markdowns. So the combination of initial markup, freight and shrinkage was zero during the quarter. And none of those items individually were off by more than 20 basis points from last year.

Okay. You know, you guys mentioned the inventory levels right now -- do you still feel -- it sounds like you are not negative on that. It sounds like your inventories are still in pretty good shape for the rest of your even though the comp slowdown obviously hurt you the last month. Could you talk about how you see the rest of the year progressing from a markdown perspective and kind of where the inventory levels are now relative to the sales trends?

Yes, inventory are up about 4% but that's after being way down the last two years. Bruce, I believe the number was down 10 last year second quarter and 18 year before last second quarter. So we're not concerned about that 4%. We think that's about where we ought to be.

Sales again, really were doing fine until the last week of June. We went through a very difficult five weeks where sales dropped pretty significantly. After the first two days of August, they turned back flat and we have some expectation that they could be a little better than that the next few weeks. There has been a shift in maybe 10% of our stores to a later back-to-school that moved things to the end of August versus September. So we are hoping that that flat trend will increase slightly.

Based on how fresh our inventories are and as we look across the Company, almost every division is fresher this year than last year. We really don't have a lot of concerns about where our inventories are right now. (multiple speakers) And again, we addressed markdowns in the second quarter as they needed to be addressed.

Right, okay. So it sounds like you're just running the business conservatively and you're not too worried from an inventory standpoint for the back half.

That's correct.

Okay, great. Good luck, guys.

Evren Kopelman, Wells Fargo Securities.

Thanks, good morning. I don't know if you can hear me well. My question is even before the unemployment benefits expired, comps started slowing from the March, April combined trend, which of course was very strong at about 9%. But aside from the unemployment benefits, can you talk about the slowdown even before that? Is that macro? Is there any differences between geographies or types of stores that you can -- or any category -- or is it just across the board and you think it's more macro related?

Well, we had a very strong February. We had a very strong February and March. Evren, I think I'm picking up a lot of background noise. There we go.

I'm going to mute now. I'm at the airport, so --

Okay, great. We had a very, very strong February and March. Part of that was tax refunds were shifted again from January into February. That drove a lot of sales in February. March, we had an Easter shift and we had the continued benefit of the tax refunds. We had an extremely strong March.

Things had slowed a little bit after Easter. As we came in today, May and June are not a timeframe that our customer has a lot of needs and they are really buying close to need. So things softened in May to about 2%. We came into June and they actually began to pick back up a little bit. We were at a 3% through the first four weeks of June. We then saw things drop off dramatically the last week of June and that stayed true all through July. Part of that is that is not a big time of need for our consumer. The next big time of need is back-to-school and they are buying very close to need.

Secondly, the timeframe that we saw very weak sales coincided almost identically with when the government began to allow benefits to expire. So while we've done a lot of research on that, we have looked everywhere we can, it's very hard for us to make a definitive statement that yes, we can tie that whole mess to that. But looking at the timing and looking at the magnitude of the miss, we believe it had a lot to do with our sales miss during that timeframe.

We are concerned about the economy. We are concerned about unemployment. But we do feel like there was absolutely the pretty significant issue around the discontinuation or temporarily discontinuation of unemployment benefits this summer.

Sean Naughton. (Operator Instructions)

Thanks, can you guys just discuss about any sort of the impact that you have been able to quantify from any of the back-to-school sales tax holidays? Obviously I think Georgia rolled off a little bit this year and I think that's a pretty big state for you in terms of concentration for total stores. And then what you are seeing during these times in states that have already had these sales tax holidays, how your customer is responding during those times?

I can. The end of July was when Georgia had had their tax-free holiday last year. They canceled this year and that definitely impacted the last weekend in July. That was a tough weekend, though, apart from Georgia. But we were definitely impacted. Georgia is our number one store count state. We were definitely impacted at the end of the month from Georgia canceling.

This month we have had some benefit. Illinois had their tax-free holidays. Maryland I think was a plus for us but Maryland is like three stores, Illinois is a small number of stores. Florida was more of a positive benefit. We saw a benefit around the back-to-school. We continue to see a benefit as Florida -- excuse me -- around the tax-free days. We continue to see a benefit as the Florida schools have started back.

So there was some loss related to Georgia, some plus related to Florida, to a much lesser extent Maryland and Illinois. The biggest thing that doesn't equalize at this point is the fact that again, we've had about a 10% shift to later school starts and we have schools that had started at this point last year that have now moved to the fourth week of August and the first week of September. So we have had a little bit of a comparable loss. On an apples-to-apples basis, we're down a little bit relative to the number of schools that have started at this point.

Got you. And then could you just describe a little bit for me, I know Beth is not on the call -- just in terms of what the current buying environment is like right now in terms of your ability to access goods and kind of the brands that you are seeing right now? And are you happy with the apparel merchandise that you have in store right now?

I think we are happy with what's in the store. To kind of tell you the environment, we really haven't had an issue with inventory availability. We have had some issues in the second quarter with inventory flow sort of in two or three ways.

Number one, a couple of our most significant women's vendors, the licensee changed on those brands and that licensee change, although that in and of itself is not a negative, that transition timeframe we definitely saw some disruptions in flow in two of our most significant brands in women's. In addition, some of our other brands and some of our fashion vendors in the summer, we had some issues with order cancellations and late shipments. And the answers we got when we would investigate that related either to issues in China or they related to shipping capacity issues.

So when we take that into consideration, and the fact that we have seen some disruptions this summer and then we add to that the fact that we are hearing a lot of noise around price increases in 2011, we have allowed our buyers to increase the amount of opportunistic buying they are doing and to increase what we refer to as our next season buy inventory.

One of the things I have talked a little bit about in the past is we really have three different ways we buy. We buy up front of a season. We buy in season and we buy opportunistically and we kind of increase or decrease each of those based on market conditions and based on things we are hearing about the future conditions in the market.

So we have actually encouraged our buyers to increase opportunistic buys right now. There is a lot of availability of opportunistic buys for next spring and even next summer. So we are building up that inventory a little bit. We think that does two things for us. One, if there are any kind of product flow disruptions, we have an ability to draw out of our own warehouses. Secondly, if their price increases, we have a competitive advantage by having already purchased that.

Another comment I'd make about price increases, because that's getting a lot of play right now in the press. Our key from a price increase standpoint is we are an off pricer, and our objective is to maintain an appropriate price gap between us and the department and specialty stores. And we've always been able to do that and we believe we will continue to be in a good position to do that and by doing some next season buys, we think we give ourselves an additional advantage in that area.

Okay, thanks. That's helpful, David. Then lastly maybe Bruce, you could give us an update on kind of what we are expecting in terms of any sort of spending on the DC and then maybe for the back half of this year. And then what the timing of that looks like to come online. That would be useful, thanks.

Yes, in the back half, we will still have some CapEx to incur. We've already bought the building, but we will start the spending on the equipment to go in the building and also some building improvements. So we will have some CapEx in the back half. There shouldn't be a whole lot of expense hitting the P&L though in the back half. We are talking about a late first quarter go live date, so -- first quarter 2011, so I don't think you will see a lot in the way of expenses this year.

Okay, that's helpful. Thanks, guys. Good luck.

Patrick McKeever, MKM Partners.

Great, thank you. Good morning, Bruce and David. Just could you just run through the months again and then the August month to date comp figure?

Yes, the month of May, comps were up 2% and then we mentioned that as we got into June during the first four weeks, they were up 3% with the last week of June being down significantly and therefore resulting a flat full month. So 2% up in May, flat in June, and then down 4% in July. And that -- the negative continued into the first couple of days of August but the last two weeks have been flat since August 2.

So month to date, negative 2 in August, but really all of that in the first two days.

Okay, okay, got it. Okay, then could you talk about the push that you are making in accessories, handbags, fragrances, those kinds of items. Are you -- I know you saw some strength there in the first quarter, incremental strength there in the first quarter, just wondering how that looked in the -- how that area looked in the second quarter? And I've seen these new -- I guess they are fragrance impulse racks at some stores that I've visited. Just wondering if you would comment on those as well. Thanks.

Sure. Thank you, Patrick. We had very strong comps in what we call the home category and again, we define that differently than probably any other retailer. Home for us is home decor but it's predominantly fragrance, books, and toys. Fragrance has been very strong. Comps overall for home for the quarter were up 15. Fragrance really drove that and what we found is we began with 20 or 30 stores that we put the fixtures that you refer to, Patrick, the perpendicular checkout fragrance fixtures, we bumped that up to 50 in the second quarter. We have 100 -- we have enough for 100 more stores, so three fixtures per store, 300 more fixtures that will be shipped over the next two weeks.

So for the fall, we will have those fragrance checkout fixtures in 150 stores. The stores that have those fixtures have produced roughly 75% higher fragrant sales than stores that don't, so that's been very positive. Also in the home category, we have had very good sales in toys.

You also talked about accessories. Accessories in addition to jewelry and handbags also includes footwear and in the second quarter, we had very strong comps in jewelry and handbags and extremely strong comps in footwear.

So all of the sort of add-on areas in our store outside of the basic apparel, we are really doing very well with. We've made some changes in terms of our merchants in some of those areas in the last year and we are seeing a lot of positive sales in accessories, again both jewelry, handbags, and footwear, and in home particularly the fragrance area.

Okay. And then just a question on the suspended unemployment benefits. My understanding is that retroactive payments have been going out for that time that was missed during June and July. So I would've thought that that would have a nice impact on your sales in August. But it doesn't seem like that's -- maybe it is, I don't know. But how do you I guess reconcile that?

Yes, we are having a very hard time identifying exactly when each state is sending that money out. Because it's really state specific in terms of timing. And then in addition those -- because those checks are retroactive and the size of the check and the fact that in a lot of cases consumers haven't had money in four or five weeks, we don't know exactly how they will plan to spend it and we don't know how much of it they may choose not to spend based on the disruption to their lives they went through.

So we do -- we would expect to get some of that. But we haven't had the ability to really understand when those checks are flowing and we do know every state is different. So it's a good question, one we have not been able to dig down to because that information is just very hard to get at.

But your overall sense is that maybe some of those -- the distribution -- some of those -- the distribution is yet to come. It hasn't necessarily been paid?

No. I have a real hard time answering that because again, while Congress approved it towards the end of July, each state is at a different pace getting it out and in some cases, people have to reapply for it. In other cases they don't, so we don't know exactly where all that stands.

So I'm very hesitant to make comments about how much of it is out and not out because I obviously don't know, but my impression is that it is flowing but all of it may not be out at this point.

Right. And then just the last one. The same basic topic. Those -- that federal -- the federal -- the extended federal unemployment -- the EUC, the Emergency Unemployment Compensation program or ACT I guess, those funds will dry up in November, correct, entirely? Is that when the ACT runs its course? And how do you plan beyond that? The timing of that is not great as it relates to the holidays.

Right. Our understanding is exactly what you just said, provided Congress doesn't again extend. Congress has tended to extend every time this has happened. But that's one reason we are being conservative and I did call out in my comments uncertainties around government assistance is one of the reasons that we've given a flat to 2% range because there's just a lot of things we can't be sure of from a macro standpoint.

Okay, great. Thank you very much.

(Operator Instructions) Jonathon Grassi, Longbow Research.

Good morning, guys. Going back to the unemployment checks, the retroactive unemployment checks, can you speak to any states that you know have actually sent out these checks at the end of July and kind of how your performance has comped in those states?

Not intelligently. That's an area that, again, I don't feel like we have enough details to be able to address accurately. Even in states that it is being sent out in some cases people had to reapply. In other cases, they didn't have -- there were different rules about what people had to do. So I have a very hard time commenting intelligently and accurately on that.

Okay, and then I guess looking at the second quarter, can you speak to the performance of some of the larger MSAs and if you saw any notable strength or weakness in any particular region or I guess city?

Not really. We did -- I would comment that in the second quarter the deep South, particularly Florida, tended to be a little stronger than the rest of the country. And part of that may have been the fact it was extremely hot in the month of July and our mix is more shorts and summery type goods in our Florida stores.

And as we begin to transition a little more fall type inventory with it continuing to be extremely hot throughout much of the country, that may be a reason the deep South outperformed, but not a lot of difference beyond that. The rest of the country was pretty consistent apart from the very deep South.

Okay, so there is no larger MSA that I guess was lagging behind the group significantly?

None that come to mind, no. As I say, we focus both in terms of operating regions and weather zones and we have what we call our weather zone one, which is predominantly Florida, but very, very deep South. That zone did better than the other four weather zones and the other four weather zones were fairly consistent with each other. And in the case of Florida, again, I believe a lot of it was the fact that its a -- our mix in those stores was very much a summer mix throughout the entire quarter. And that's probably why we did a little better when the rest of the country had the heat issues that it did.

Okay, and then just finally, when you look at your store openings, you said you are going to be opening at least 30 more stores in the back half of the year. How do you see that trending on a quarterly basis?

Almost all of it will be in the third quarter. There may be just a few stores in the fourth in early November, but it will almost all be in the third. It will probably be -- it will be fairly balanced across the three months of the third quarter and again, 30 is sort of the minimum. It will be 30 to 35 new stores. And most of it is spread throughout the third quarter.

Okay. Thank you.

Mr. Alexander, there are no further questions at this time. Please continue with your presentation or closing remarks.

All right, well thank you for participating in our call this morning and we hope that you have a great day. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.