Citi Trends Inc (CTRN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Citi Trends first quarter 2011 conference call. During today's presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, May 18, 2011. And I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, Mr. Sullivan.

Thank you. Our earnings release was sent out at 6.45 AM Eastern Time this morning. If you have not received a copy of the release, it is available on the Company's 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. Bruce?

Thank you, Tripp. Good morning, 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. First, I will provide you with some details related to the first quarter results, as well as guidance for the remainder of 2011. Then David will discuss further the first quarter results and our business outlook, after which we will address any questions you may have.

Total sales in the first quarter increased 4.3% to $189 million, including a 6.9% decline in comparable store sales; up against a very strong first quarter last year, when comps sales increased 9.6%. The decline in comp store sales was reflected in an 8% decline in customer transactions, partially offset by a slightly higher average ticket. By merchandise category, sales in the first quarter in comparable stores were as follows. Accessories were up 2%, on top of a 25% increase in 2010's first quarter. The Home division was down 4%, after being up 15% last year. Children's sales were down 6% this year and up 4% in last year's first quarter. Women's was down 8% after being up 8% last year, and the Men's department was down 12% this year and up 8% in last year's first quarter.

Sales of nationally recognized urban brands represented 46% of total sales in the quarter, compared with 49% last year. Comparable store sales by month in the first quarter were down 4% in February, down 15% in March, and up 2% in April, with the Easter shift transferring sales from March to April. As we've entered May, comp store sales have been down 12% for the first two weeks. Gross margin in the quarter was down 20 basis points from last year's first quarter -- 39.7% this year and 39.9% last year. Our core merchandise margin was 40 basis points lower this year, due to higher clearance markdowns necessitated by the negative comp store sales, while inventory shrinkage improved by 20 basis points.

SG&A expenses were well controlled in the first quarter, increasing only 5.4%, despite a 14.4% increase in store selling square footage. As a percent of sales, SG&A expenses increased 30 basis points, to 27% in the first quarter of 2011 from 26.7% last year. All of the deleverage occurred in occupancy expenses, which are largely fixed-cost; and therefore, increase as a percent of sales when comp store sales decline. Depreciation expense increased to $5.6 million from $4.8 million, due primarily to new stores, relocations and expansions, and conversions to Citi Lights. In addition, the Roland distribution center added $75,000 of depreciation in the first quarter. First quarter net income in 2011 was $12.1 million, or $0.83 per share; compared to $12.4 million, or $0.86 per share, last year.

In reviewing the balance sheet, inventory increased 18.5%, of which seven percentage points related to an increase in next season buys that are intended to lock in costs in advance of anticipated merchandise cost inflation. Also, three percentage points of the increase was a result of capitalizing freight for the first time in the fourth quarter of 2010. As a result, store inventory and distribution center inventory, other than next season buys, was up 8.5% on an increase in store selling square footage of more than 14%.

And looking forward to the rest of the year, we are currently estimating 2011 earnings per share in the range of approximate $1.25 to $1.35, which includes an assumption that comparable store sales will be up 1% to 2% in the final three quarters of the year. This assumption would result in comp store sales being down 1% to 2% for the full year, when combined with the decrease from the first quarter. Now, I will turn the call over to David.

Thank you, Bruce, and good morning, everyone. As Bruce explained, sales for the first quarter of 2011 were disappointing. Our customers' discretionary income was significantly pressured by increases in the cost of food and gas. In addition, it's clear that they did not respond well to parts of our merchandise offering. Specifically, we were disappointed with the sales of some of our branded product.

With our customer feeling financially pinched, we expected that there might be some trading down from branded product to less expensive fashion merchandise. However, with some of our brands, we have seen signs that the issues go deeper than this. Our merchandising team has been working hard to elevate -- to evaluate our brand shortfalls and to ensure that our total assortment, including our brands, provide what our customers want in the months ahead. I will speak more about this in a moment.

On a more positive note, sales in our Citi Lights conversions have continued to exceed our expectations. New store sales continue to be good, and expense control for the quarter was excellent. Despite the sales miss, our store execution this quarter was strong, with historically low management turnover, inventory shrink of less than 1%, and a 36% reduction in customer complaints to corporate. The reduction in customer complaints is the result of the new Customer First initiatives, in which we are focused on resolving our customers' concerns at the earliest possible point of contact, hopefully in the store. But if not in the store, certainly at the District Manager level.

During the quarter, we also rolled out the first phase of a multi-year store re-engineering program, with a new payroll-planning matrix, which is already increasing our store payroll efficiency. In the supply chain, we successfully opened our third distribution center -- a highly automated, highly mechanized, 460,000-squaref foot facility in Roland, Oklahoma, which began shipping at the end of April. This addition now positions our distribution network to support our growth for the next five years.

During the quarter, we also welcomed Drex Crowell, our new Senior Vice President of Supply Chain, to the team. Drex brings extensive supply chain experience, having served in executive roles at Hecht's, Home Depot, and Macy's. At the start of the first quarter, we launched our new Facebook page, and the response has been phenomenal. After only 3.5 months, we now have roughly 100,000 fans following us on Facebook. And it is becoming a very valuable tool for interacting with our customers and understanding their views and preferences.

On the real estate front, we opened 15 new stores in the first quarter, and relocated or expanded five others. For May, we are opening an additional eight new stores, and are relocating or expanding three others. Our new store openings continue to perform well, and we continue on track for 15% square footage growth for 2011.

The most exciting news from the first quarter is that our Citi Lights conversions outperformed our expectations, delivering positive comps while the chain was negative, and providing solid gains in operating income. While we only have four months of history on these conversions, our confidence in their success is climbing; and we will now add 10 additional stores to the 15 store test group this summer.

Now, let me go back to the brand issue for a moment. In the first quarter, sales of our branded merchandise significantly under performed sales of our non-branded, or what we refer to as fashion merchandise. Because of this, we have been conducting a very deep review of our branded merchandise performance. We have identified opportunities to grow certain brands, to shrink certain brands, to move dollars between categories, and to refine our allocations to our stores. Realistically, these changes will not significantly impact our sales results for a number of weeks. But we are confident that as we move forward in 2011, our branded performance will move back on track.

As we look at the remainder of the year, we believe that our comp trends will become progressively better. Correcting our brand issues, combined with some exciting marketing ideas, and a strong plan for the holiday period that includes some exceptional merchandise and a major expansion of our gift offering, should allow us to achieve a total comp of a positive 1% to 2% for the remainder of the year. And with that, we will now take your questions. Chantel?

Absolutely, thank you. (Operator Instructions) Sean Naughton, Piper Jaffray. Please go ahead.

Thanks for taking my question. A question on the comp trend, just for clarification. Are you expecting a 1% to 2% comp increase in each of the remaining 3 quarters, or the 3 quarters combined? And then, secondly, what do you believe is attributing to some of the comp deceleration, it looks like, as we move into May?

With respect to the first question, we said 1% to 2% up in the last 3 quarters of the year, not specifically identified by quarter. We don't give quarterly guidance, but David did mention that he thought the comp opportunity would get progressively better as we go through the year. If you remember, the trend last year was that the comps were down 11% in the fourth quarter, and were just barely down in the second quarter. So, clearly, from a comparison standpoint, the fourth quarter should be the better opportunity. That was also when the unemployment benefits were not extended by Congress at the end of November. So, we would think that the better opportunity is in Q4.

Yes, and regarding the comp trends that we started the month with -- very honestly, April was a disappointing month for us. We did not see the brand sales we expected in April related to Easter. Our fashion sales were not a big issue, but our brand sales were a concern. And as we have come into May, that's kind of been the continuation. We're -- our fashion sales are fine, our brand sales are not. And that has caused, really, over the last month or a little longer, for our buyers to really do a deep look at what's going on with brands, to figure out which brands we need to invest more in, where we need to move dollars between brands.

And they've done a fairly deep review of not only the plan for the rest of the year, but even adjusting already-issued orders over the next few months. I would like to be able to say that that is going to result in immediate changes in that trend. I don't think that's realistic. I think it's going to take several weeks for the changes that have been made to be reflected. And that's why I think the trend is where it is right now.

Okay, that's fair. And then, two more questions. One on the branded inventory. Does it feel like that there has been less availability of the type of product that you want to put in the store from some of the brands, in terms of different price points that you are willing to put in the store, from that perspective? Is there anything in availability on the branded product that you want in the store that you haven't been able to get, and may be causing some of the weakness, number 1? And then, number 2, following on some of the top-line trends, is there anything from a regional perspective that you can call out, as you guys branch out from the Southeast? Were there any differences in trends there? Thanks.

Regarding availability of brands, I actually think brand availability is probably better now than it was in the fall. In the fall, we had called out some issues about order cancellations and short shipments and some issues like that. And we have some of those still, occasionally, but I think if anything, brand availability is probably better. What I would say is that we are really seeing two things happen -- one, we are seeing some trading down, our customers obviously are pinched financially. So, we are seeing them trade from brand to fashion.

Secondly, I think we are seeing them buy brands less often, because of where they are financially. Third, they are buying brands in accessories, in things like handbags and shoes, to update an outfit without necessarily buying the sportswear. So, those are things we are addressing. We've also seen some issues in terms of how we have allocated our brands. Maybe we have sort of starved our lower half of the chain a little bit. So, we are going back and looking at how we allocate, and make sure we have a good brand presentation at all stores.

And again, we have taken a very hard look at which brands are performing well, which brands are not performing well, which brands from feedback from our stores should we be testing, and we are taking steps to address all that. But it's not an instant change. Regarding your comment about regional, really, the only thing we've seen regional is, as the -- it's been a very late spring in our cooler weather regions, so we've seen a little bit of an issue there. And we have seen -- if we break sales down by volume groupings, we have seen weaker sales in our lower volume groupings. And as we have dug into that, we believe a lot of that is related to the brand offering we presented in those stores.

Okay, thank you.

Yes, sir.

(Operator Instructions) Ike Boruchow, JPMorgan. Please go ahead.

Hey, guys. Good morning and thanks for taking my call. Question to Bruce. Despite the comp deceleration in Q1, you guys did a pretty remarkable job of managing the SG&A within the quarter. My question is, if the comps -- and obviously, the comps are off to a slow start in Q2. If the comp trends remain soft and miss your internal plan throughout the back half of the year, are there additional levers you can pull on the SG&A line? And then, also, Bruce, I think I missed it -- could you also break out, on the gross margin line in Q1, the breakout between merch margin, shrink and freight?

Yes. As for your first question -- yes, I think there are some levers that we can pull and we have done a good job of that, even if you go back as far as a year ago, in terms of reacting to the sales. Store operations and distribution operations both have done a very good job of monitoring their payroll, in relation to sales. And some of the efficiency things that David mentioned have also helped, and should continue to help us.

So, I think that if the comps don't recover to the extent that we anticipate, you will see some reduction in expenses that goes along with that. As for the gross margin in the first quarter, as I mentioned, the markdowns caused a 40 basis point drop in gross margin, and partially offsetting that was a 20 basis point improvement in shrink. Shrink was actually 0.8%, compared to 1% last year in the first quarter. And freight was flat, year over year.

Okay, great. Thanks.

Thanks, Ike.

Evren Kopelman, Wells Fargo. Please go ahead, Mr. Kopleman.

Miss. The first question is, you mentioned your average ticket was up slightly. How is that -- how did that happen? Because branded was lower, and also you took markdowns to clear inventory. What drove the higher ticket?

It was primarily due to a mix shift, Evren. When you look at the 5 divisions that I discussed, as far as their comps go, the one area that was up was accessories. And even when you drill down into accessories, in particular, handbags and footwear drove that increase in accessories. And those are -- they have much higher retails than the average unit. So, the average ticket was only up about 1% -- the average ticket and the [AUR] was only up about 1%. But it all came from that shift in accessories, while altogether --

Yes. Can I ask you what percent of sales is in accessories right now? And what's your goal? From what I understand, you're increasing the presentation of them in the Citi Lights format?

Yes. Accessories are in the mid-teens, in terms of as a percent of sales.

Yes, let me address where we think we can go with that, Evren. If you look at most other off-price retailers -- realizing they are not focused on our same income demographic. But if you look at most other off-price retailers, you see a pretty significant amount of their floor space dedicated to handbags, dedicated to jewelry, dedicated to footwear. We have said for a year or two, we think we have a lot of upside in those areas.

And as we designed Citi Lights, as you mentioned, we gave more space to footwear, and we created a lot more impulse fixturing at the front -- featured jewelry, feature branded handbags, and -- in both the Citi Lights stores and the rest of the chain, as we have invested in those areas, we are seeing very good responses in those areas. And I don't think we are -- I wouldn't try to state where we think we can take that, but I still think we have got a lot of runway in those three areas to continue to grow that business.

Okay. And in the Citi Lights store, you mentioned they comp positively. Was apparel still a negative comp in those stores?

You know, I honestly have not seen that detailed a breakdown, and that's a great question. But what I would tell you is, while the chain was almost a negative 7%, the Citi Lights were mid-single-digit positive and very good results across the board, but I can't answer the specific question about whether they were positives in apparel.

Okay. And then, lastly, the Citi Lights, you mentioned you're adding 10 additional stores this summer. Can you talk about how you came up with that number? And as you are seeing the positive results, maybe what kind of timeline should we expect to hear, in terms of a faster remodel pace to this format? Thank you.

Sure. What we had said is that we wanted to give this enough time to where we had a high degree of confidence that we could achieve the results. And we're -- the first group, the 15 conversions, all took place in January, most of them were done by the middle of January. So, we have 4 months of results. The 4 months of results are very positive. They are at a level that would encourage us to go forward. But it is only 4 months. And it is only 15 stores.

So, we added -- we selected 10 additional stores. We tried to get some diversity in that group, in terms of the parts of the country and the types of communities, and so on, we are putting them in. And we will now watch this for several more months. If we continue to see these kind of results, I'd say through the rest of this year, then I think we'd be in a position that we have a lot of confidence to create a conversion plan that we could then discuss with you. Chantel, I think we are ready for another question.

Absolutely. My apologies, Miss Kopelman. (Operator Instructions) Patrick McKeever, MKM Partners. Please go ahead, Mr. McKeever.

Okay, thanks. Good morning. I was just wondering if you -- I know this question already came up about the comp guidance for the balance of the year, and the 1% to 2% positive range not necessarily implying that each quarter would be up 1% to 2%. But thinking about the current quarter, about the second quarter, I know you're up against a slightly negative comparison, so it's not as easy as it will be in the fourth quarter. But there was the temporary suspension of the federal extended unemployment benefits in June and whatnot, so -- of last year.

So, I'm just wondering if you could talk about how you see the second quarter shaping up, just from a volatility standpoint, given that comps are down -- or were down 12% through the first couple weeks of the month. Talk maybe about the comparisons, even on a monthly basis, would be helpful, and what you're thinking about for the different months of the quarter. Thanks.

Thank you, Patrick. Let me hit that at a high level. If you recall, last year, the first 8 to 9 weeks of the quarter, we were positive. And we were trending somewhere around maybe a 3% positive through the first 8 or 9 weeks of the quarter. The unemployment extension then lapsed towards the end of June, and then we went into a 5 week period that we went from a positive 3% trend to a negative 4% or negative 5% trend. So, as we get later in the quarter, the comparisons get a little bit easier. As we get later in the quarter, I think we will have begun to have had an effect on the brands. But again, our customers also are very strained right now, and we are trying to get a good handle on exactly where they are financially.

When we talk about the 1% to 2%, as Bruce said, it is for the entire next 3 quarters as a total. And if you get into the third quarter, the comps are much easier. If you get into the fourth quarter, not only are the comps much easier, but we had a fairly major post-mortem immediately after Christmas of our Christmas sales. And we really found 3 areas that we felt like we had a lot of upside this year. And the first was that we were late with our Christmas inventory last year. A lot of our Christmas inventory did not get to the stores until well into December. Our layaway program is one of our key competitive advantages, and to really take advantage of that, we need to be loaded for Christmas in early November.

So, we've looked at inventory flow, we think we have some big upside there. Last year, we didn't have the meaningful gift offering in the November/December time frame. We are going to have a very meaningful gift offering this year. We as a Company have never been a participant in Black Friday. And while we are not going to sacrifice our [EDOP], we have created what I think is a very exciting plan for Black Friday weekend, with special buys and a special marketing plan, some surprises on our Facebook page, a celebration around our 500th store. And that's a time that customers are making final selections or, not totally final, but they are really firming up their selections on Christmas, so we want them in our stores that weekend.

So, what I would say is, second quarter is still a challenging quarter for us, and we still have issues we are trying to address. As we get into the third quarter, we believe the branded performance will be moving back on track, and the comps are easier. As we get into the fourth quarter, we are looking at the easiest comps, we believe we will have our branded performance squared away by then. And we have, I believe, a very strong plan as we get into the fourth quarter. So, that's why we have talked about a progressive improvement in our comps as we go through the year.

Okay, thanks, very helpful. But if you -- let's say you look at the 2 year comp in the first quarter, which was a positive 2.7%, against that positive 9.6% increase last year, and just extrapolate a little bit into the second quarter against a negative comparison. I mean, you could come up with a slightly positive comp for the second quarter. Is that a -- realizing that the trend is not there through the first 2 weeks of the quarter. But is that a flawed way of looking at things? Is it just way too optimistic? Has something changed, even over the past few weeks, versus all of the first quarter, as it relates to just to the economic well-being of your customer, whatever it might be? Thanks.

Thank you, Patrick. No, the only thing I would say is, we don't really want to plan on trends until we see a change in the trends. We've had a few weeks -- Easter was disappointing to us. We expected better results in April than we achieved. The first 2 weeks of May have been disappointing to us. So, with the trends that we are dealing with right now, we're trying to be very realistic about a time frame to get those trends turned around. In terms of your comments, no, they're not unrealistic comments about how the second quarter could perform. But based on the comp trends we are seeing right now, we feel like we need to plan conservatively, and we need to plan towards a progressive improvement, as we correct some things that we found in terms of our own performance.

Okay, got it. Thank you very much.

Thank you, Patrick.

Sean Naughton, Piper Jaffray. Please go ahead.

Just a quick question for you. Did you notice any benefit from some of the AJWright closures, and any of those doors that may have been located near those doors? Anything you can provide, in terms of color there, that you guys noticed within the quarter? Thanks.

Yes, Sean, that was actually sort of a surprise for us. I think we kind of believed that we would really see a positive from that; and it turned out, really, to be very neutral. I think what really happened is, in a lot of cases, we had stores very close to their stores, and while we competed for those sales dollars, they also tended to bring a lot of traffic to centers that we were in. So, it really has not been a positive or a negative, it's really been very neutral. If we look at our sales in the stores affected by an AJWright closing, we really don't see anything very different than what we see in the rest of the chain. Bruce, I know you've looked at those numbers a lot. Anything else you would add?

That's correct. On an individual store basis you can see some ups and downs, but if you average the 80 or so stores that were affected, that were within 5 miles of an AJWright store, there is no difference between the AJWright stores and the rest of the chain.

Okay, thank you.

Thanks, Sean.

Mr. Alexander, we have no more questions on the telephone lines at the moment. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay. Thank you, Chantel. We appreciate everyone joining us today, and we certainly appreciate your continued interest in Citi Trends. Hope you have a great week. Thank you.

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