Citi Trends Inc (CTRN) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Citi Trends third-quarter 2011 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 Tuesday, November 22, 2011. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you. Our earnings release was sent out at 6.45 a.m. Eastern Time this morning. If you've 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. 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 would now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce.

Thanks, Tripp. Good morning, everybody, and thank you for joining us. Also on the call today is David Alexander, President and Chief Executive Officer.

First, I will provide you with details related to the third-quarter and year-to-date results; 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 third quarter increased 2% to $143 million. Comparable store sales declined 9.3%, which was reflected almost entirely in fewer customer transactions, as the average ticket was down only 1% compared with last year. Comparable store sales decreased 10% in August, 9% in September and 10% in October. As we have entered November, comp store sales have continued to be down 9% in the first three weeks.

By merchandise category, sales in the third quarter in comparable stores were as follows. Home was up 3%, after being up 10% in 2010's third quarter. The accessories division was up 1% in this year's third quarter and up 14% last year. Children's sales were down 8% this year and down 6% last year. Women's was down 11% this year and down 10% in last year's third quarter. And the men's department was down 13% this year and down 9% last year.

Sales of nationally-recognized urban brands represented 44% of total sales in the quarter compared with 47% last year. For the year-to-date through the third quarter, total sales are up almost 3% and comparable store sales are down 9%.

Gross margin in the quarter was down more than 3 percentage points from last year's third quarter, 33.7% this year and 36.9% last year. Virtually all of the decline was due to higher clearance markdowns necessitated by the negative comp store sales. For the year-to-date, gross margin is 36% compared with 38.3% in 2010's first three quarters, with markdowns causing all of the decline.

SG&A expenses increased 12% over last year's third quarter on an increase in selling square footage that averaged 14% throughout the quarter. Such expenses included $1.2 million of severance costs incurred in connection with the elimination of 40 positions, which represented 2 of the 12 percentage points increase. As a percent of sales, SG&A expenses increased to 37% in the third quarter of 2011 from 33.7% last year, due primarily to the deleverage on expenses as a percent of sales that occurs when comp store sales decline, as well as the severance costs.

Depreciation expense increased in the third quarter to $6.5 million from $5.1 million as a result of the new Roland distribution center, new stores, relocations and expansions, and 25 store conversions to the new Citi Lights concept. Asset impairment expense, which is a non-cash charge, totaled $700,000 in the quarter related to nine underperforming stores, because the book value of these stores, property and equipment exceeded their projected future cash flows. Year-to-date, we have recorded $2.3 million of impairment expense for 30 stores.

The third-quarter net loss in 2011 was $6.8 million, or $0.46 per share, compared to a loss of $400,000, or $0.03 per share last year. Year-to-date, the Company has a net loss of $4.7 million, or $0.32 per share, versus net income of $11.5 million, or $0.79 per share, in last year's first three quarters.

It is important to note that even with the losses incurred so far this year, our trailing 12 month EBITDA is positive $30 million.

In reviewing the balance sheet, inventory increased 10%, due primarily to the growth in new stores since last year's third quarter. Also, 2 of the 10 percentage points increase was the result of capitalizing freight, which began in the fourth quarter of last year.

Cash and long-term investments at the end of the quarter totaled $53 million. Additionally, while we don't expect to borrow in the foreseeable future, we disclosed in a press release earlier this month that we entered into a new credit facility to replace our previous facility that was set to expire in March. The new $50 million facility has a five-year term and is secured by inventory and receivables, but not property and equipment. There is only one financial covenant under the agreement, and it generally is not tested unless we have a significant level of borrowings.

Now I will turn the call over to David.

Thank you, Bruce, and good morning, everyone. As you've seen from the press releases of the past 60 days, we've taken a number of very significant steps to improve our business. This morning, I'm going to explain these in greater detail and update you as to our progress.

Approximately 12 months ago, we began to see softening in the sales of our urban brands. Throughout 2011, urban brand sales continued to soften, as our customers struggled with a difficult economy and double-digit unemployment. And many of the brands themselves seemed to no longer resonate with our customers to the degree that they had in the past.

While we felt that our merchandising team was taking positive steps to address many of the issues, unfortunately, the results were not acceptable. In October, we announced a search for a new Chief Merchant, and asked Ed Anderson, our Chairman of the Board, to assume the role of Chief Merchandising Officer during this interim period. Under Ed's leadership, our buying team has focused on a number of initiatives to improve sales and gross margin.

These initiatives include rolling back retail prices on hundreds of items in both branded and nonbranded apparel, while reinforcing the Company's We Will Not Be Undersold philosophy. In branded apparel, many of these reductions have been done to create a more compelling price-value relationship for the merchandise. In other cases, the price reductions are part of an exit strategy for some poor-performing brands.

On the fashion, or nonbranded, side, we focused on a number of key price points that address our customers' shopping needs, such as funding a very successful, $9.99 family denim program. Other key initiatives include significantly expanding our test of new brands to find others that will resonate with our customers. We have one new brand in particular that is already generating $100,000 per week in sales on very high turns.

Improving our in-store signage program by eliminating the clutter of a large number of redundant or ineffective signs and replacing them with a smaller number that impactly communicate our lower prices and great values, while at the same time focusing all of the Company's other marketing efforts, Muzak, Facebook, radio and TV, on this same message of lower prices and great values.

Investing in Christmas gift items, and for the first time, participating in Black Friday in a meaningful way. Dramatically improving our layaway program. We tested this during the summer and rolled out this new program in mid-October. So far, the results have been exceptional, with strong double-digit layaway comps. Since layaway transactions are not reflected in sales until the entire transaction is completed, this increase in layaways will benefit the fourth quarter.

Finally, reducing the level of inventory to better match sales, which will reduce future markdown exposure.

In addition to addressing our sales issues, we put a great deal of focus on expenses. In September, we announced a Companywide reduction in force that will result in a $3.5 million payroll reduction on an annualized basis. In addition, we continue to benefit from steps we've taken to improve store and DC productivity and to lower shrink.

This year, we've invested in significant real estate growth, opening 55 new stores, relocating or expanding 14 stores and converting 10 stores to our new Citi Lights format. While we strongly believe in all three components of our real estate strategy, for 2012, we will scale back new store growth to a projected five openings, and currently envision even fewer conversions, relocations or expansions. While our new stores produce very strong returns, we feel it is prudent to scale back capital expenditures until our sales improve.

We believe that Citi Trends has undertaken the significant steps needed to improve our business. Specifically, we believe that we've enhanced both our product offering and the value we provide our customers, and that we will continue to improve in these areas in the months ahead. Realistically, because our turnaround is dependent on an improved economy, as well as on our own efforts, we believe it may be several quarters before we produce the strong earnings results that our shareholders have a right to expect.

Despite the tough economic conditions our customers are dealing with, we are confident that we can do a much better job of providing excitement and value to them and are very optimistic about the Company's future. While 2011 has been difficult, we remain a Company with a very strong balance sheet, a great niche and a great relationship with our customers.

And we will now take your calls. Frank?

(Operator Instructions) Evren Kopelman, Wells Fargo.

Thank you. Good morning, guys. First question is you talked about the rolling back of prices, but at the same time, your ticket was only down 1%. So can you give us maybe a few examples of what kind of magnitude of reductions you took and kind of how you were able to achieve only a 1% decline in the ticket?

Let me start with some of the things we've done to reduce prices. Across most merchandise categories, we've identified items for price reduction, and I would say really it performed in two key areas.

We have branded product that -- particularly brands that have historically have been very strong that we've seen some softness in, but that we still believe in. In those cases, on a large number of SKUs, we have reduced prices by a full price point.

Secondly, we've taken key categories that we believe are very important to our customer and they are very important at certain price points. So, for example, I mentioned denim for the entire family. One of the things that we've done now, our entry price point in long denim is $9.99 in every category of business. So in plus, in juniors, men's, boys, girls and big men's, we now offer $9.99 denim in every category. And those are things that we've seen very good results in terms of our customer reaction.

We also took a certain number of brands that we saw softness in and we have done sort of 25% off promotion on those brands to create excitement. So in a number of cases, we have done things to reduce prices across the store.

In terms of average transaction, we offer a lot of non-apparel items. We're offering giftware, we're offering accessories, we offer jewelry, we offer cosmetic and perfumes, all of which affect the average total transaction. So our average transaction has not changed much, but we have geared our mix to sell a lot more than just apparel.

Okay. That makes a lot of sense. And then when you say you had good results with the $9.99 denim, can you give a little bit more color around? Because that was, I believe, a reduction from a $12.99 opening price point. It's a pretty significant reduction in the price point. Are you getting enough positive pickup in transactions to offset that? Is that what you mean by good results?

We have positive comps in the $9.99 denim program.

Okay, that's great. And then you mentioned the layaway, the increases. Can you quantify, if possible, how much that could help Q4 comps? Could it be a few points? If there is any way to quantify that.

Yes, we would expect it to be 2 percentage points in the fourth quarter.

2 points. Okay. And my last question, you definitely have categories that are working, such as home and accessories, better than the rest. Is there potential to distort even more to those categories in the assortments going forward?

I would say that we have invested fairly heavily in some of those categories for the fourth quarter. For example, we last year -- I think probably in our first -- actually our first conference call this year -- mentioned that we felt we had a big opportunity in the gift area that we didn't capitalize on last Christmas. So we have invested in that quite a bit.

For the Black Friday shopping day, we probably invested $2 million in gift items and -- apparel and gift items, but special items for that day. We have bumped up our gift purchases for the entire holiday season. We are doing a lot in terms of fragrances, which for us falls in home. We are doing a lot in the book area, which also falls in home.

We've seen strong sales in footwear, so we continue to fund that area. We are seeing good sales in jewelry. So in a lot of the accessory areas, handbags, jewelry, accessories, footwear, gift, books, toys, those are areas that we are investing in inventory in.

Thank you. Good luck.

(Operator Instructions) Pamela Quintiliano, Oppenheimer.

Good morning, guys. Just a few quick questions. You mentioned one new brand that you were very excited about that was already doing very well for you. And I'm assuming you won't tell us what that is, but thought it couldn't hurt to ask. And following up, are there other new brands that you are excited about that should be flowing in?

There are actually a number of new brands. I'm pretty excited about what Ed and our divisional merchandise managers have been doing in terms of bringing in new brands. There are a number of brands that other retailers have had success with, that either we haven't chosen to carry in the past or haven't had access to in the past, that we are now being able to carry, and we are seeing some pretty exciting sales in a number of new brands.

You're right; I can't mention the one that is doing so phenomenally well. But I would say across most merchandising divisions, we are testing new brands, and in a number of cases having a lot of success.

So with this brand, as I try to think about some of the other brands that are newer and that you are potentially rolling out, is it more of a fashion -- a different fashion that the customer is responding to? Or do you think it is more this particular brand, the branded product is hot rather, than the fashion, if there is a way to think about that?

Well, the reality is if you look at the history of Citi Trends, different brands have resonated at different times. If you went back seven or eight years, the brands that were resonating with our customers then versus brands that resonate now are very different.

And if you look at our brands, I'd kind of take our -- I would kind of put our brand in three or four categories. First of all, we have a group of our existing brands that are still very strong and are very relevant, that they've adjusted very well to changes in our customers' taste, they've adjusted their cost for the realities of the current economy, and we are expanding our offering in a number of those brands.

We sort of have a second group of brands that are still important to our customers, they still resonate with our customers, but they've been underperforming over the last few months. And in those cases, we've reduced our prices, and we are working with those vendors to address specific issues.

We have a third group of brands, some of which that have been strong for years, that are either no longer providing the excitement or the value that our customers expect, or for whatever reason they have simply fallen out of favor with our customers. And those are brands that we are working out of our offering. We reduced prices and we will be eliminating those brands.

And then we have this group of new brands that we are testing. And that, again, is true in virtually every merchandise division. And when I say new, in most cases, these brands are new for us. They are brands that may have been around a while, they are brands that may have been around just a few years, but they are brands that other retailers have had success with, and they are brands that our customers today show a lot of interest in. So we have begun to add those brands to our mix. In some cases, those are brands we might not have had access to in the past. In other cases, they are brands that we didn't recognize our customers' desire for that brand until now. But again, we are having some success in -- quite a bit of success in testing of new brands.

If I could follow up just with adding that to the mix, my next question was regarding just the product availability and when you think about -- I know you've discussed in the past department store is not necessarily taking a full commitment and that being a benefit to you with some of the brands -- just the availability that is out there. And in terms of the brands that in the past maybe didn't want to go into Citi Trends, are a lot approaching you now, given the environment, or how are those relationships working?

Kind of a combination of things. We certainly have brands approaching us. We have other brands that as we recognize our customers' desire for them, then we will go after the brand hard to build that relationship. So I would say it works both ways.

In some cases, we, through communication that we continually get from our stores and our customers, will say here are brands we really need to go after, and we will pursue them aggressively. In other cases, we are having brands approach us, and then we'll test them and decide whether to expand them or not.

Just the last question, regarding taking the pricing down, are the flows that are currently in the store, were those bought reflecting the new pricing structure?

We have both. We have product that was bought originally, planned to sell, for example, at $12.99 that we are now selling at $9.99. We have more recent receipts over the last few weeks that were purchased -- at the time of purchase, we anticipated we would sell at $9.99 or various other lower prices.

So when does that become more fully reflected in the assortments, with the prices you were planning on (multiple speakers)?

I would say we are moving in that direction. Really the last six weeks or so, I would say most of what we are buying now reflects our pricing decisions.

So by the -- would you say by the end of the quarter it should be fully reflected?

I think it's an accurate statement.

Great. Thanks so much. Best of luck.

Adam Engebretson, Piper Jaffray.

Thanks, good morning. Wondered if you could provide an update maybe on how you think about the competitive landscape. I know on the past calls we've talked about how the -- or the impact of the AJ Wright closures. Maybe just what you're seeing with those and how you are looking about the competitive landscape right now.

You know, the biggest things that we are focused on right now are our own execution. In terms of competitive landscape, you're right, AJ has left. But our biggest focus is on how do we get the right mix of brand versus fashion in each department, how do we get the right prices in each department, how do we improve our brand quality?

When we are looking at our business, we are really much more focused on where is our customer today, what are their needs, how do we take a customer who doesn't really have much access to credit and enable them to buy, through things like our layaway, and how do we get our brands and our prices and our fashion product right so that we are first choice in our customers?

I don't think there has been -- there is not that much change in the competitive landscape. Constantly, we are seeing new people carry our product and other people cease to carry our product. But our focus is much more internal than external right now.

Got it. Then maybe one more. Sorry if I missed this earlier. Did you say how the Citi Lights remodels are performing relative to the chain average?

I don't think we mentioned that yet, Adam. Year-to-date, they are performing, on a comp store basis, at about 12 percentage points better than the chain average.

Got it. Thank you.

Carter Newbold, Rutabaga Capital.

Good morning. I wondered if you could say a bit more about the timing on your search for a new Chief Merchant. And then once that person is in place, given the dynamics of your supply chain, how long would you anticipate it to take for the strategy that they bring to the table to be seen in the stores?

Well, our search for a Chief Merchant, we are about three to four weeks into it. We've hired a leading retail search firm, who is conducting the search. We feel very confident we are going to find the right person for this job.

But I would also say that this position is so critical to our success that it's certainly not a search we are going to rush. So I expect it to take a few months for us to fill that position.

In terms of amount of time to have impact, you know, we have a very, very capable executive who is overseeing merchandising right now. We have four good divisional merchandise managers in merchandising. So I think we are making progress even now, I think we are making good progress now.

In terms of that person coming in and sort of having their impact on things, I would certainly think that would take a few months. But on the other hand, I think they may have an impact from day one. We have -- for example, we have a new divisional merchandise manager in men's who I think is having an impact in that area. She joined us maybe 60 to 90 days ago, and has very, very good knowledge of the urban men's market, and knows a lot of the urban brands and other brands that are sort of a little more mainstream that she has opened a lot of doors for us.

So kind of the way I see the next few months is Ed Anderson, our Chairman, is a very competent executive, has a very good knowledge of merchandising, and has put a lot of the right steps and structure in place in merchandising. I think he is capitalizing on the talent we have over there. I think we will continue to make progress.

And then I would envision maybe February or March as having a new Chief Merchandising Officer in place. And as they come in and begin to reflect their style and their priorities and their ideas, I think then we will continue to improve.

Good. I have two sort of philosophical questions related to just the turnaround process. I wonder if first you could talk about how you think about store closings and/or lease renewals as you go through this tougher period for store traffic and some gross margin pressure. I guess if you could just talk about -- since we know you are not adding square footage now, how closely will you be looking at opportunities to maybe take some stores out of the fleet over the next 12 months or so?

I don't see us closing a lot of stores. We are typically closing two or three stores a year. And while we have some stores we've impaired, I really think most of that is much more related to the current environment than the ability for those stores to succeed long term. So we are certainly not looking for a lot of opportunities to close stores.

Two or three a year is what we would typically do, and I don't really see that changing. And in fact, even though we are not planning to open many stores or convert or relocate many stores, I still have our real estate department looking at all opportunities. We still have a target list, so if we become aware of an expansion opportunity, a relocation opportunity, a new store opportunity in locations that we have tried for long periods of time to do something from a real estate standpoint, those are still things I am looking at.

So I don't see any type of a significant reduction in the number of stores. We are just sort of scaling back for a period of time to make sure that we build cash. So that's really where we are. It's not really a significant change in philosophy from a real estate standpoint.

Okay. That's a nice segue to my other question, which was about liquidity and cash. As you go through the turnaround process, could you just talk about how you think about the levers that you guys control in terms of your sort of baseline cash and liquidity?

I mean, obviously, how you handle your inventory buy and your store development and remodeling plans plays a big role. You guys can generate a fair amount of cash even if you are not making GAAP profits. Is there sort of a -- is there an absolute stake in the ground sort of structural cash level that you don't want to go below? And to the extent that there is cash above and beyond that, are you all likely to try and use that excess cash in any opportunistic ways related to either share repurchase or other activities? Or are you mostly about trying to add cash to the balance sheet right now?

Well, I'm going to answer that based on the last couple of words you said, which was right now. Right now, our view is that we really don't know where the economy is headed, and we believe it is prudent to hold onto our cash. If you go back a year or two, we certainly didn't foresee this economy becoming this difficult for this long. We didn't foresee our customers' unemployment rates becoming this high for this long.

So right now, we think it is prudent to build cash, which is why we've talked about scaling back new store growth. When we talk about 2012 capital expenditures, you are going to see we are being really very conservative in capital expenditures for 2012. When we begin to see sustained improvement in the economy and in our business, then the idea of being more opportunistic with our cash is certainly something that we would discuss. Right now, we think we need to be very conservative in terms of our cash.

Okay. And I guess just lastly, as you go into 2012 and you think about store traffic, which is going to be a pretty big driver on everything else across the business, I mean, are you willing to say what your expectations are? Or will you -- I mean, I think that will say a lot about how you guys manage inventory in the upcoming year. Do you think there is a reasonable hope of flat traffic? -- I guess is the question I would ask.

You know, Carter, we really haven't even given guidance as it relates to the fourth quarter at this point. And so I think it is too early to be talking about next year. We really couldn't give guidance on that at this point.

Okay. Thanks, guys.

Jonathan Grassi, Longbow Research.

Good morning, guys. Thanks for taking my questions. You had talked about a few of the adjustments that you had made regarding the -- bringing in more brands, and then -- which sounds like it is off to a pretty decent start -- and then (inaudible) terms in the layaway program.

Can you talk about your adjustments as far as broadening the number of denim styles that you carry, having longer hours within the store and more price signage? What kind of impact have you seen from that, and is there any way you could take that further?

Well, from a signage standpoint, we've done several things to clean up our stores. One of the things that we decided is there's really too much clutter in our stores from a signage standpoint, and therefore the messages we really wanted to drive weren't getting across.

So we sort of de-cluttered our stores, removed a lot of signs that we thought were not impactful, rethought the messages we really want to deliver, which really resonate around brand and price, and have made a number of adjustments to our sign packages. And we believe that those were very positive adjustments. We've also heard that from our store management team, store associates and even from our customers.

In terms of other things being done with the store, the long denim program, again, we had historically had entry price points anywhere from $9.99 in men's to $12.99 in almost every other category -- or almost every other merchandising division. Today, every merchandising division, we have entry price points at $9.99, and then we typically have three steps above that in fashion denim. So a typical step-up might be $9.99, $12.99, $16.99 and $19.99. So the customer has several choices, and as you go up, obviously you may see better washes, you may see more embellishments, you may see other features that make the denim more compelling. But we do have an opening price point at $9.99, so a customer who is operating on a very tight budget still has an opportunity to acquire some very nice, new fashion denim.

And we've done that in a lot of other areas of the store. We've thought on the fashion side about what price points really resonate with our customers, and then we've looked at the branded side and evaluated where we need to be pricewise on our branded product, and have lowered a lot of branded prices. So I would say those are all significant things that have been done already.

And the increased store hours, have you seen a --?

What we've done is we have increased our store hours predominately on Friday and Saturday nights. We've done that in about 160 stores. And the stores that we've done it in, we've evaluated it from a payback standpoint, and I would say that we are certainly seeing sales in those extended hours that we are pleased with and have justified us continuing to do that. And then we will obviously extend hours as we get past Thanksgiving and move towards Christmas.

Okay, thank you. And then just one other. Obviously, you guys had to make some pretty difficult decisions on eliminating some overhead. Do you view that now that as being completely optimized or is there still opportunity there to reduce some operating expenses?

Well, I would answer it this way. There is opportunity to reduce operating expenses, but in terms of the payroll reductions, we believe we have done what needs to be done.

We've gone through our budgets -- as we look to 2012, gone through our budgets very aggressively from an other expense standpoint and have identified a number of areas to save. And we've already taken some of those steps to save money. But from a payroll reduction standpoint, the reduction in force, we did what needed to be done in September.

Okay. Thank you, guys. Good luck.

Mr. Alexander, there are no further questions at this time.

All right. Thank you. Well, thank you, everyone, for participating in our call today. And we hope that you and your families have a wonderful Thanksgiving. 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.