Citi Trends Inc (CTRN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends fourth quarter 2010 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 Friday, March 11, 2010 (sic). I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you, Todd. Our earnings release was sent out at 6.45 AM Eastern Time this morning. If you've not received a copy of the release, it the 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 the factors that could cause actual results to differ materially from those described in any forward-looking statements. I'd now like to turn the call over to Bruce Smith, Chief Financial Officer. Brice?

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, and Beth Feher, Executive Vice President and Chief Merchandising Officer. First, I would provide you with details related to the fourth quarter and full year results, as well as guidance for 2011. Then David will discuss further the results and our business outlook, after which we will address any questions you may have.

Total sales in the fourth quarter increased 1% to $172 million, and comparable store sales decreased 11%. Comp store sales by month for the fourth quarter were down 3% in November, down 11% in December, and down 24% in January. Most of the decrease in the fourth quarter comp store sales was reflected in fewer customer transactions, with the remainder due to a lower average ticket. Sales for the full year increased almost 13% to $623 million, and comparable store sales declined 1.8%. Customer transactions were up slightly for the year in comparable stores, with the entire amount of the comp sales decrease being reflected in a lower average ticket.

By merchandise category, sales in the fourth quarter for comparable stores were as follows. Accessories were up 2% in this year's fourth quarter on top of a 24% increase in the same quarter last year. The home division decreased 3% after being up 14% last year. Children's sales were down 12% compared with flat comps in last year's fourth quarter. Men's was down 13% in this year's fourth quarter and down 3% last year, and women's was down 16% after being down 4% last year. Sales of nationally recognized urban brands represented 47% of total sales in the quarter, compared to 50% in 2009's fourth quarter, while for the full year, branded sales were 46% in 2010 and 47% last year.

Gross margin in the quarter increased to 38.9% this year from 38.6% in 2009's fourth quarter. In the press release, we disclosed that we corrected our accounting for freight-in cost and began capitalizing a portion of such cost into inventory in the fourth quarter. This correction resulted in a pre-tax benefit of $2.7 million to gross profit and 1.6% to gross margin. Higher merchandise mark-downs necessitated by the comp store sales decrease, and the need to keep inventory current in the quarter, pressured gross margin in relation to last year's fourth quarter by 1.3% of sales. For the full year, gross margin was down 20 basis points to 38.4% from 38.6%.

SG&A expenses in the quarter increased only 7%, despite a 16% increase in store selling square footage due to efforts to minimize costs in the slow sales environment, and because incentive compensation expense declined this year by approximately $2.5 million. For the full year, SG&A expenses increased 13% and as a percent of sales, increased only 20 basis points despite the deleveraging effect from the decline in comp store sales.

For the quarter, we had net income of $9.4 million or $0.64 per diluted share, versus net income of $11.3 million or $0.78 per share last year. For the full year, net income increased to $20.9 million or $1.44 per share, compared with $19.7 million or $1.36 per share in 2009. The correction of our policy for expensing freighting cost provided a nonrecurring benefit of $0.12 per share in the fourth quarter and the full year. In reviewing the balance sheet, inventory increased 20%, of which eight percentage points related to an increase in next season buys intended to lock in costs in advance of anticipated merchandise cost inflation, and almost three percentage points related to the effect of capitalizing freight for the first time in 2010.

In looking forward to 2011, we are currently estimating earnings per share in a range of $1.40 to $1.50, which includes assumptions of a comp store sales increase of 2% and an increase in store selling square footage of at least 15%. Now, I will turn the call over to David.

Thank you, Bruce, and good morning, everyone. As Bruce explained, results for the fourth quarter of 2010 were very disappointing, with our sales significantly impacted by three primary factors.

The lapse in extended unemployment benefits in December, the delay in our customers receiving their income tax refunds in January, and a very significant comp miss in branded denim that occurred throughout the quarter. Regarding the lapse in unemployment benefits, we anticipated that this might occur, but were surprised by the length of the suspension.

While Congress re-authorized the benefits on December 17, in most cases the money did not get into our customers' hands until December 23 or later. Fortunately, based on the actions taken by Congress, this issue should not recur during the 2011 calendar year.

Regarding the delay in tax refunds, this resulted from a significant reduction in the availability of refund anticipation loans. While we've historically seen a strong refund-based sales reaction by mid-January, this year's refunds did not begin to impact our sales until the final weekend of the month. Finally, in regards to long denim, this is our number one category in the fourth quarter, and on the branded side, we had comp misses in excess of 25%. The comp miss in branded denim was nearly three times more severe than in fashion denim, so part of it related to our customers' lack of money. But a large part of it related to a lack of newness and a lack of excitement in the category. I'll provide an update on this category and steps we're taking to address it in a moment.

Before I review our plans for 2011, I'd like to highlight a few of the positive steps that were taken in 2010 to make Citi Trends a stronger company. In the past 12 months, Citi Trends has continued its rapid growth, opening 60 new stores and relocating or expanding an additional 13 stores. Designed, tested, and begun the rollout of a new store prototype, providing a much more exciting shopping experience for our customers. Taken steps to increase distribution productivity and throughput capacity with the acquisition and up-fitting of a new distribution center in Roland, Oklahoma. This new DC will begin shipping in approximately six weeks.

We've improved applicant flow, applicant screening, associate pay and associate benefits management, as well as eliminating paper paychecks with a chain-wide rollout of the Virtual Edge and Work Day systems. Eliminated twice daily bank trips by our store managers through a new chain-wide vault program. Begun to use the social media for marketing with the launch of a new Facebook page. And we continue to build a management team that will support our future growth and success. While 2010 was a disappointing year financially, I'm proud of the major initiatives completed by the team at Citi Trends, and I appreciate each of their efforts.

Now, let's turn to 2011. As mentioned earlier, the first tax refunds finally began to arrive in our customers' hands on January 28. These initial refunds were sufficient to create an immediate improvement in some very difficult sales trends. But at that point, the refund dollars in circulation were still far short of what was available last year, and far short of what was needed to produce positive comps. By the third week of February, the cumulative effect of tax refunds allowed same store sales to return to the plus side for the week, and we've now had three straight weeks of positive comps.

As a result, we've erased most of the deficit from earlier in the quarter, and now stand at a negative 2% comp year-to-date against last year's very strong 11% comp for the same period. With Easter three weeks later this year, we expect that comps will soften for the rest of March but rebound well in April, and we hope to end the quarter with at least a flat comp result. This would provide a relatively good foundation for the year, since Q1 of 2010 was the best earnings quarter in our history and is by far our most challenging comparison in 2011.

Regarding long denim, in this category we are unfortunately still running negative comps. In fact, excluding long denim, our overall comps are running positive this quarter, with most spring/summer categories very positive. Fortunately, beginning this month and continuing to late summer, long denim becomes a much less significant percent of our sales. Obviously, we are concerned about long denim trends and are testing new styles, new fits and new washes, evaluating additional brands we may add in the fall, and planning for conservative denim sales until we see a turnaround.

On the real estate front, we remain committed to annual selling square footage growth of 15%. For 2011, that will mean approximately 65 to 70 new stores. In addition to new store growth, we also plan to expand or relocate a dozen stores. As previously announced, all 2011 store openings, relocations, and expansions will utilize our new Citi Lights prototype.

In January, we converted 15 existing stores to this new prototype. While it's far too early to form conclusions about the ultimate pay back of this investment, the initial results are quite positive, and we'll be monitoring the comp performance of these stores versus the chain over the next few months to see if we should proceed with additional conversions.

While we continue to have concerns about the overall economy, the rate of unemployment, and rising food and gas prices, we are pleased to enter 2011 with very clean inventories, a strong balance sheet, and far less uncertainty on the important issue of unemployment benefits. We're also confident in the benefits we'll gain from a number of initiatives that are under way to improve productivity and efficiency. We're excited about our foray into the social media with the new Citi Trends Facebook page, and we're very encouraged by the positive comps we're seeing in almost every spring and summer category. With that, we'll now turn the call over to the operator and take your questions. Todd?

Thank you. (Operator Instructions) And our first question comes from the line of Sean Naughton with Piper Jaffray. Please proceed with your question.

Hi. Bruce, maybe in terms of the distribution center, I know you're bringing that online this year. You had talked about an additional $1.6 million of a depreciation above the normal growth rate. Is that still an appropriate level for us to be thinking about for 2011?

Yes, it's in that ballpark. When we look at the new DC and think about the impact it will have on 2011, it will have a little bit of pressure on the expense. However, by the same token, we won't be as aggressive as we would have otherwise been in growing the infrastructure in other areas of the company. So as a result, we think there's some corporate overhead leverage that will offset the incremental distribution center cost, and really won't have a significant impact in 2011.

In terms of competitor store closures, have you seen any pickup in business in stores that have a close proximity with these particular stores? Any sort of detail you could share on that or that you've been able to measure would be helpful.

Without giving a lot of competitive detail, we have seen some gain in our stores that are, let's say, within three to five miles of the closed competitor stores.

Okay. And is that broadly across the store, or just particular categories that you competed in directly with them?

We really haven't done that level of detailed analysis. What we are looking at, there are 80 some odd stores that were within five miles of one of our stores where a competitor, where A.J. has closed a store. As you're aware -- I don't know that I've said this, but about half of those will become TJ or Marshall's, about half will be leased to someone else. For half of them, fairly quickly they'll become another TJX brand. The other half, my understanding is there are a lot of those that have been leased. But across those stores, we are seeing some gain from the fact that A.J. has closed.

You mentioned it in the script some of the macro pressures. Maybe you could remind us of what you've seen historically on some of your trends when we do have a little bit of a spike here in key categories like food and gas for your customer?

Yes. The one quarter that really stood out was the fourth quarter of 2008. That was when gas prices not only went to $4.25, but gas availability was limited, particularly in a lot of southern markets. And we did have a negative comp that quarter, I think it was about 4%, and once we got past that quarter and gas prices came back down to more reasonable levels, we got over it fairly quickly.

Okay. Best of luck this year, guys.

Thanks, Sean.

And our next question comes from the line of Evren Kopelman with Wells Fargo. Please proceed with your question.

Thank you. I hope you guys can hear me.

We can.

You know the six Citi Lights stores from last year, one conversion and the five new stores, can you talk about the performance of those stores over the past, I guess, four or five months, compared to the rest of the chain? And secondly, and I'll mute my line, do the new store locations for this year, the 15% square footage, are there regions you're focusing on? Can you give us a little bit color where those stores will be? Thanks.

Thank you, Evren. First of all, regarding the six Citi Lights stores that we opened last year, and also for the -- I would also comment regarding the 15 that we remodeled, we are seeing higher sales. We're seeing higher sales throughout the stores based on the look, the feel and the signage of the store, and then we're particularly seeing higher sales in the number of key categories that tend to be higher margin. Impulse items, accessories, intimate apparel, kids, footwear. And the thing about every one of those categories, is we've either changed the placement, we've changed the space allocation, or we've changed the type of fixtures. So again, across the store, we're seeing better sales, and in specific categories that we targeted, we're seeing even better sales.

Regarding new markets, we opened a number of new markets last year. We added three new states last year. This year we expect to add two new states. This year we'll be going into Nebraska and Minnesota. Last year it was Nevada, Iowa, and New York. But in terms of concentration of stores, we're really opening in 27 states and we're opening across all those states. If you want to look at areas, I would say the upper Midwest, and that may not be a right term, but Michigan, Indiana, Ohio, Illinois. Those are areas that we'll probably see a lot of growth. Secondarily in the south, and then third in some new areas. We're developing upstate New York and we're going into Minnesota and Nebraska this year.

Our next question comes from the line of Brian Tunick with JPMorgan. Please proceed with your question.

Hi, guys, good morning. It's actually Ike calling in for Brian. I wanted to ask you two quick questions.

First on the inventory of -- the inventory build, I know you extrapolated it a little bit in terms of what -- try to look at it on an apples to apples basis. My question is, how much of this branded denim that has been pretty soft for you guys in Q4 makes up that inventory? And the second question is, when you talk about the comp trends quarter to date, and the refund anticipation loans kind of impacting week one and two, can you give any color on how negative weeks one and two were? And where exactly are we trending quarter to date? Are we low singles? A little better than that? Any help there would be great.

Yes. Ike, if you would, say the last part of your question again? You asked about quarter to date trends?

Right. You guys commented that quarter to date you guys are running negative, but I thought I heard you say that the last three weeks have been positive, and it's negative because the first two weeks were still being negatively anticipated from the refund anticipation loans, or the denim, or what not. I was just trying to get a better feel on what kind of positive trends we're seeing over the last three weeks, if it's --

I'll answer that. The first week of February, we were still significant double digits down. We saw tax money get out the last week in January. We had a fairly nice pop that weekend, but there wasn't enough tax money to sustain it through the week. So, when we got to Sunday, Monday and so on, we saw pretty significant double digit down comps the first week of February. The second week of February it became single digit down comps. Third week of February it became positive comps, and it's been positive comps that week and the last two weeks has continued to be positive comps. That's how we ended up at about down 2% at this point.

Regarding your second question about denim and how much of our next season buys might be denim, there is some denim in next season buy because denim is a major category, and we're trying to prepare for the fall because we're concerned about price increases in the fall. What I can tell you about the next season buys, and I think we've talked a little bit about this in the past, next season buys are done at the end of the season, and what we buy into are the brands and the trends that are still strong at the end of the season and that we believe will be strong for that season the next year.

If we have particular styles or brands in a category that aren't doing well, we certainly would not buy into that category for the following year. So, while there is some denim in it, it's 10% or less of what's in next season buy, it would be the items in denim that were doing well at the end of last season. So again, if you think about next season buy, we're buying into things that are strong that we believe will continue to be strong, and things that are not, we're not buying.

Great. Good luck.

Thanks.

(Operator Instructions) The next question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Hi, good morning. Just a question on inventory levels up 20% in total, which is not too far above the 15%-ish square footage growth. I think the last call you had indicated, David, that you were doing a little more upfront buying than usual as a potential hedge against higher apparel costs in 2011. I was just wondering if that is what we should think about when thinking about your inventory levels? Thanks.

Yes, Patrick, that is exactly right. I think I mentioned that eight of the 20 percentage point increase related to next season buys, and that actually, that trend actually started in July, late second quarter, continued through the third quarter and into the fourth quarter. And we've got that merchandise in our distribution centers, but it is specifically related to our efforts to lock in some cost in advance of the expected inflation that's coming.

And the 3%.

Yes, and then the other piece was the 3% increase because of the change in the accounting policy for freight in cost.

Okay. You must have -- you must have mentioned that earlier. I was -- I got on the call a little bit late. Sorry if you already said that.

We actually think our inventory is in real good shape in terms of current inventory. Again, we've invested -- because we think it gives us a competitive advantage if we can buy before the price increases on things we know are strong. And again, a portion of it related to the freight capitalization.

And just on the increases for 2011, the cost increases, would you take a similar view to some of the bigger players in the off price space like TJX and Ross, both of which have said they actually view the higher costs as a possible positive? Just given the fact that you're going to see the department stores and others raising price, and as long as they maintain the price differential between -- to keep that spread, that the overall value proposition will become that much more attractive. And they'll get some benefit to sales from somewhat higher prices, and those kinds of things. Would you have a similar view?

Here's where I would view it positive, here's where I kind of view it neutral. In terms of the neutral side, I agree completely. We're all about keeping the price gap between ourselves and department stores and specialty stores. So, if there's price inflation pleasure, they're going to raise their prices, we then have the opportunity to raise our prices. The key is to keep the gap, and as long as we do that we should be successful.

The place I think we have a competitive advantage over non-off pricers is the fact we do buy several ways. We buy up front, we buy in season, and then we buy opportunistically post-season. And because we're able to do that and are quite capable of knowing how to do that, I think that's a competitive advantage for us. And we have invested in a way that we're going to be able to have some attractive prices in the fall when there's price pressure on non-off pricers.

Okay. That's great. Thank you very much.

Thanks, Patrick.

And our next question comes from the line of Brian Rounick with BLR. Please proceed with your question.

Hi, guys. How are you doing? A couple of questions. Can you help me reconcile what happened in February with weeks one and two, because I understand the lack of refund anticipation loans, but I'm assuming that that's a similar effect from last year, and that you would have picked up on the benefit of that for February, at least in the early part, as a result of the government sending out those tax refund checks and customers utilizing the checks as opposed to the loans.

Well, let me kind of explain how it has historically worked. Normally, our customers would attempt to get refund anticipation loans around the 14th or 15th of January. They'd see those loans a couple days later and then they would be spending money by as early as the 15th or 17th, depending on what that Monday was, in January.

With refund anticipation loans virtually drying up, the very first date that you could get a direct deposit into your account was the 28th of January. And that was for early filings if you were -- if you had an account and could take a direct deposit, the first day you could get it was the 28th. If you were getting a check, the date was later than that, about a week later than that.

And again, that was just for the folks who were able to file very early. And with some of our customers, not having the opportunity for refund anticipation loans, they did not file as early, so what we saw was a buildup over the first few weeks that every Friday, and IRS was doing direct deposits on Friday, every Friday more money would flow into the market, and then checks began to flow into the market for those who didn't have bank accounts, and we saw a build.

So the last two weeks of January we saw very negative comps. First week of February, those negative comps continued. It began to moderate in the second week of February, and then third week, there was enough money out there that it turned positive.

Got you. Going back to January, would January be an apples to apples comparison, the earlier part of January? What would have affected business there to cause that to be down like 24%?

The 24% was for the whole month.

Right.

And, most of that occurred in the last two weeks because of the comps during those two weeks were down 40% to 50%.

Beginning the 17th of January, we were running negative 40% to 50% every day until the 28th.

Got you. Okay. Another question, regarding the Citi Lights stores, can you guys -- is sales productivity in those stores a lot great? Can you put some numbers on to square foot productivity differences between the Citi Lights stores versus a normal store?

Sure. With the Citi Lights stores, the new stores that we've opened, the incremental capital cost was about $50,000. And when we look at that and think about depreciation on that, that's going to add about $10,000 of incremental depreciation each of the first five years. And to offset that, we've got to get at least a 2% higher sales level just to offset it from a P&L standpoint. But from an ROI standpoint, we need a sales increase that's probably in the high single digits in order to get, let's say, an 85% ROI, which is what we're accustomed to with new stores.

Based on what we've seen with those new stores, we believe that that increase of 8% to 10% in sales is attainable, for several reasons. David mentioned some of them earlier, including the fact that just the look and the feel probably adds something to the sales. But more importantly, some of the areas we've enhanced, like the impulse areas up front, the shoe areas, even the kids' wall, would tend to cause us to expect to have higher sales level and something in that 8% to 10% range.

So, when you think about our new store sales historically being a $1.5 million plus, we would hope it would be $1.6 million plus with the Citi Lights stores. And based on what we've seen, we think that, that should be attainable.

Got you. Okay, great. Also, Bruce, did you say if you X out the freight accounting change for the quarter, the gross margin would have been 37.3% and the 130-basis point decline would have been the result of merchandise market erosion?

That's right.

Okay. Thank you.

And our next question comes from the line of Jonathon Grassi with Longbow Research. Please proceed with your question.

Good morning, guys. You guys had spoken on, I think it was competitor store closing and how you had seen a little bit of benefit as those stores have been completely converted or closed. Can you talk about what kind of impact you saw on your 80 stores during the December to January period, when your competitor was highly promotional?

Yes, Jonathon, we have -- we've not disclosed that information. We try to stray from talking too much about competitive type things, but when we put our press release out related to sales back in early February and we talked about the various items that impacted us, it was the item that we listed last. In other words, it had the least amount of impact on our total sales results, but it did have an impact.

Okay. Can you remind us, of your 80 stores that are impacted by the competitors' closure or conversion, how many of your stores overlap with how many of their stores? 80 of your stores overlapped with how many of their stores that closed or converted?

Probably half that many of their stores, actually. And then of that half, again about half of those are being converted to other TJX stores, and about half will become something else.

All right. Okay. And then did you guys experience any days closed from weather in the fourth quarter, or how many did you experience?

We did. In the second week of January, we had several days that significant portions of the chain were closed due to weather.

Was it a -- did you guys have more doors closed this year relative to last year?

No, not many, because there were other times during January where it worked the other way, and that's why we didn't mention weather as an issue as it related to sales.

Okay. And then just lastly, regarding the adjustment to the inbound, or I guess your accounting change. Should we look at this -- is this going to have any effect on the quarterly EPS distribution? I assume some quarters have your shipping volumes relative to sales that you're trying to restock ahead of higher demand, does this--I mean, this would mitigate some of that impact. How should we look at that?

There won't be a lot of movement between quarters, except that whatever the full year amount is would tend to fall in the fourth quarter, and maybe it's $0.01, $0.015, something like that.

Okay. Thank you.

Thanks, Jonathan.

There are no further questions at this time. Mr. Alexander, I'll now turn the conference back to you for your closing remarks.

We appreciate everyone attending today. We appreciate your interest. Hope you have a wonderful day. Thank you.

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