Citi Trends Inc (CTRN) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Citi Trends fourth-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 Friday, March 9, 2012. 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 AM 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. 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 & 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 statement.

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 Ed Anderson, our Chairman and Chief Executive Officer.

First, I will provide you with details related to the fourth-quarter and the full-year results. Then Ed will further discuss the results and our business outlook, after which we will address any questions you may have.

Total sales in the fourth quarter increased 3.7% to $178 million. Comparable store sales declined 6.2%, which was reflected almost entirely in a lower average ticket as customer transactions were down only 1% compared with last year. In fact, customer transactions were up during the last two months of the quarter after being down 8% in the first 10 months of the year.

In analyzing the average ticket for the quarter, the decline was attributable entirely to a lower average unit sale as the items per transaction were up slightly.

By merchandise category, sales in the fourth quarter in comparable stores were as follows. Home was up 28% after being down 3% in 2010's fourth quarter. The accessories division was up 6% in this year's fourth quarter and up 2% last year. Children sales were down 10% this year and down 12% last year. Women's was down 12% this year after being down 16% in last year's fourth quarter, and the men's department was down 12% this year and down 13% last year.

Sales of nationally recognized urban brands represented 43% of total sales in the quarter compared with 47% last year. And for the full year, total sales were up 3% to $641 million, while comparable store sales were down 8%.

Gross margin in the quarter was down significantly, 30% this year versus 39% last year. Most of the decline was due to much higher clearance markdowns, necessitated by the negative comp store sales and by our efforts to reduce our ownership of branded merchandise as we rebalanced our branded versus non-branded mix.

In addition, gross margin was impacted by a reduction in price points on a number of key items to be more price competitive. For the year, gross margin was down 4 percentage points to 34.4% compared with 38.4% in 2010. SG&A expenses increased 10.8% over last year's fourth quarter on an increase in selling square footage of 12%. Approximately half of the year-over-year increase in SG&A cost during the quarter was due to a large bonus expense credit in the fourth quarter of 2010 to reverse amounts that had been accrued earlier in that year. For the full year, SG&A expenses as a percent of sales increased to 32.3% from 30.1% of sales, due primarily to the deleverage on expenses as a percent of sales that occurs when comp store sales decline 8%.

Depreciation expense increased in the fourth quarter to $6.6 million from $5.7 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 $4.2 million in the quarter, of which $2.8 million related to nine underperforming stores whose book value of property and equipment exceeded their projected future cash flows.

In addition, we fully impaired the $1.4 million goodwill asset balance that had previously been on the books. For the full year, we recorded $6.5 million of impairment expense compared with just $200,000 last year.

In 2011's fourth quarter, we had a net loss of $5.3 million or $0.36 per share compared to net income of $9.4 million or $0.64 per share last year. And for the full year, the net loss was $10 million or $0.69 per share versus net income of $21 million or $1.44 in 2010.

In reviewing the balance sheet, inventory increased 8% due to the growth in new stores since last year. Cash and investments at the end of the quarter totaled $62 million, and we continue to have no debt under the $50 million credit facility that was executed in October 2011.

Now I'll turn the call over to Ed.

Good morning, everyone. 2011 was a very challenging year for Citi Trends, and we are very disappointed in the financial results. However, we have learned from the mistakes we made, and we've made a lot of progress toward getting the Company back on track.

The good news about Citi Trends is we had and still have to some extent just one problem. Our problem is sales. We believe that all the other parts of our business are just fine. We run good stores with reasonable labor productivity and good shrinkage results, our DCs are well run and very productive, and we have a dedicated staff of hard-working, loyal employees.

But, as we all know, nothing really works in a retail company if sales are not working.

There are many external factors that have affected our sales. Clearly the economy has been and continues to be the most challenging most of us have ever seen. Competition is as strong as it's ever been. And we are in a fashion cycle where many of the brands that have been big parts of our business just don't resonate with our customers as they once did.

Despite all the external factors, the biggest contributor to our core sales and, therefore, core operating results was our own performance. We did not react to this much more challenging retail environment as well as we could have. Today, because of the economy and due to current fashion preferences, our customers demand value stronger than they ever have.

To drive sales in 2012, we must offer stronger values than we did in 2011. We have made a lot of progress in that regard. First, we reduced prices to improve the price to value relationship very aggressively in the fourth quarter. We rebalanced our inventory to a better mix of fashion to brand merchandise, and we reduced the levels of inventory to better match sales and to reduce markdown exposure. And, very importantly, we hired an outstanding Chief Merchandising Officer, Jason Mazzola. We believe Jason has the knowledge and experience to take our merchandising to a very high level.

2012 will be all about delivering great values to our customers. So how are we going to do that? First, we will continue to be very aggressive with our pricing versus our competition. We will be vigilant with our "we will not be undersold" philosophy.

Second and very importantly, to deliver great values, we must buy great values. Too much of our buying in 2011 was upfront buying. We are shifting much more of our buying back to off-price and closeout buying, back to our roots.

These very basic challenges in our approach we are confident will deliver better value to our customers, and we believe that when we deliver better values, our sales will improve.

Now I'll discuss sales so far in 2012. Our sales for the first quarter are very front-end loaded, driven significantly by tax refunds. As we reported earlier, sales for the last two days of January were very negatively impacted by later tax refunds. We estimated this negative impact on January to be about $3 million with a corresponding positive impact on February.

However, we have no way of knowing what the total amount of tax refunds for our customers were in February. Our sense is the total amount was a little smaller than last year.

Sales so far in 2012 have been pretty good from a total dollars perspective, but have not yet translated into positive comparable store sales. Through the first five weeks of the 13-week first quarter of 2012, sales have totaled $101 million, about 3.5% over last year and about a 6.5% comp store decrease.

I mentioned it in total dollars because the beginning of the year is so strong for us. About half of the first-quarter sales are generated in the first five weeks of the quarter. We were up against the big numbers from last year and the year before, and we again delivered big numbers. Not quite what we would've liked, but still big numbers.

As Bruce mentioned, our AUS, or average unit sale, decreased about 6% in the fourth quarter. This tells us that our customers are shopping harder than ever for value. Very importantly, the number of units and the number of customer transactions both increased in comparable stores in December and January. So our customers are still shopping us, in fact, buying more items more frequently. This lower average unit sale but higher number of transactions has continued into the first quarter of 2012. We view this as very positive. We still have our customers.

A lower average unit sale is not something that we strive for. It puts pressure on the stores and DC productivity. We believe that as we continually deliver strong value to our customers, our average unit sale will move back to historical levels or higher.

We've made much progress in our goal of delivering stronger values to our customers. We have much work left to do, but we know what we have to do and we have started. We look forward to a better 2012.

Operator, we will now take any questions.

(Operator Instructions). Evren Kopelman, Wells Fargo.

Good morning. It's [Marianne Casper] in for Evren. I just wanted to quickly ask if you could elaborate on some of the price reductions and maybe give some examples. I know from previous calls you've mentioned jeans going to $9.99 from $12.99. Maybe if you can give an update on that, how that's working out, and any other examples you could share would be great.

Thank you for the question. What I understand is you wanted some examples of price reductions, and in particular, you wanted to know how the price reductions in jeans or denim had worked out?

Yes. What are some examples and how are they working for you so far?

Well, the price reductions really were pretty much across all categories. There were items in many categories across the store where we felt that our price at the time wasn't as competitive as it ought to be and we rolled back the prices. Some of the biggest price reductions that we made were in our branded merchandise. We felt like our branded merchandise wasn't selling, and one of the reasons it wasn't selling was it was priced too high, and its price to value relationship just wasn't right. And so we lowered prices on a lot of our branded merchandise one or two price points.

Additionally, as a matter of emphasis, we took a strong position on all of our denim categories in 2011, in the fall of 2011, and had a $9.99 price point across all genders, and lowered other price points as well. That worked out extraordinarily well. We had very nice increases throughout the fall in all of our denim fashion categories. Our branded data did not show increases across the fall, but our fashion categories where we reduced these prices, including to the $9.99 price point, worked out very well.

Great and then one more question is, could you help us think about inventory and how you're planning inventory through the first half of the year and how you're looking at that going through even 2012?

As we look out through the year, I think generally you could expect inventory to kind of track square footage growth year over year. And if you think about how our stores opened in 2011, as we go through the year, the increases on a quarterly basis are the square footage will be up around 10% in Q1 over Q1 of last year. And then Q2 will be about 6%, Q3 will be 3%, and Q4 will effectively be flat because we expect to have about the same number of stores in the fourth quarter as we had in 2011.

Great. That's very helpful.

Ike Boruchow, JPMorgan.

Good morning. I guess my question is on what's going on with the inventory and strategy to drive sales. Taking AURs down, is that really just on the existing product that you guys have kind of had in your stores for the last 12 months? I mean is there not a bigger problem? Is it not more the current brands within the store that aren't working? I mean is taking AURs down on the existing brands that don't seem to have as much cachet as they used to, is that -- how do we think about that strategy kind of going forward?

Well, clearly the AURs and average unit sales out the door are less than last year. As you pointed out in the fourth quarter, I guess it was down 6%, and so far in the first quarter this year, it was down actually slightly more than that.

And this is definitely affected by two things, in our view. One is clearly by -- they are lowering retail prices on the same prices on the same items as we carried before. We pushed the AUR down. And the other reason is that our Company is offering better values on our lower-priced merchandise than we are on our higher priced merchandise.

And so our intent is not just to drive AURs down, but the customer is obviously voting to the lower-priced merchandise. As I mentioned in my comments, we really want to move our Company back to more off-price and closeout buying, and we think by doing that, we can offer more compelling value price value relationships than we can by buying other people's lines.

We think we can offer better price value relationships on a lower-priced merchandise and higher-priced merchandise. There are many items in our stores today that are selling for well above the Company's average unit sale and getting great sellthroughs.

So our customer is not saying they won't pay our higher price, the customer is saying they want strong value at whatever the price. Does that make sense to you?

I appreciate the color. One quick follow-up. I guess for Bruce, if the topline and the comp trends remain kind of slow as they have been the past couple of quarters, are there opportunities on the expense line to cut some costs here and there? How should we think about SG&A as we move throughout the year?

Well, we really started that process in 2011, and we will continue to be very vigilant. As you remember, we did the reduction in force back in September, and that has an annualized benefit of $3.5 million. So we got four months of that benefit in 2011, the last four months of the year. The other eight months of that will come in the first eight months of 2012. But, in addition to that, we will be very conservative with both cash and our expenses.

Thanks. Good luck, guys.

Adam Engebretson, Piper Jaffray.

Great. Thank you for taking my question. Maybe looking at the merchandise, you talked about how the mix of national urban brands fell from 47% to 43%. Wondering if over the longer term if there's a target percentage that you're looking for.

Thanks for the question. Yes, the percentage has dropped, and I guess it dropped all the way through 2011 and maybe even a little bit before then.

There is no target that we have in the Company. I remember going back 10 to 12 years ago in our Company, the percentage of urban brands to the total was in the 30s as a percent to the total. And then, of course, over time, it grew from 30% to 40% to at one point 50%.

We really are not -- we don't have a target because for two reasons. We want to sell when the customer asks us to sell them, and the other thing is that the gross margin typically, it wasn't in this past year, but typically the gross margin on our branded product is fairly close to the gross margin on our nonbranded product.

So from a Company profitably perspective, we are indifferent on our probability. We just want to buy and sell where the customer asks us to do. But it's very possible that this number as we go through 2011 could drop down even lower to the quarters and maybe even high 30s, and that's something that will be okay with us.

That's helpful. Maybe my second question would be, can you talk a little bit about the results from the layaway program in Q4? One, if you're going to keep some of those changes and what you're expected impact would be for 2012?

Some of the changes that we've made in the fourth quarter were that we reduced the amount the customer has to pay upfront from 20% to 10%, and we also waived the $2.00 layaway fee for a period of time. One other thing we did that seemed to have a very good impact was that we also added clearance merchandise to the layaway program so that the customer could put anything in the store on layaway.

Once we got out of the Christmas season, we went back to our original $2.00 layaway fee, as well as the 20% down, but we continue to have clearance merchandise on layaway or at least allow that for our customers. And what we saw in the fourth quarter was that whereas in the prior year layaway sales have been about 7% of sales during the quarter, they were actually 9% of sales during the fourth quarter this year. So we did see a big bump from that, and it's a tool that we could possibly use again, depending on circumstances. But at least for now -- and originally we treated it as a promotion, too -- we didn't say that this was a permanent change. We said it would be for a specific period of time, and once that period of time was over, we went back to our original policy. And but it's out there for us if we decide to use it again.

Great. Thank you.

Patrick McKeever, MKM Partners.

Thanks. Just a question on the -- I just wanted to clarify the current trend, the first five weeks of the first quarter of comp trend. Did you say that same-store sales were down 6.5%?

That's right, Patrick. In my comments I said that sales for the first five weeks were $101 million. They were up about 3.5% in total sales and down about 6.5% in comp sales. Those numbers compared to last year's first five weeks of being down about 2%. So if you look at this year's first five weeks, we are down 6.5% last -- it is against a negative last year of around 2%. You may remember that last year's first quarter was down about 7% overall for the quarter.

So the part that we are comparing against here at the beginning was actually the best part of last year's first quarter.

I also added that it was important to look at the dollars because the significance of the dollars is $101 million is a big number period for us, but it's also a big number as it relates to the first quarter. If you look backwards into December, our Company's December month, - we did about $100 million in December in five weeks. And then January drops down to about $32 million over four weeks. Then we bounced back in the first five weeks of next year to $101 million.

So my point is that is pretty significant to move those numbers around like that, but it's also a good start to the year.

So, in the fourth-quarter sales release back in early February, you talked about -- and absent the final two days of January, which were down I think you said more than 40% -- you talked about an improving sequential trend in the business from November to December to January. I mean how do you view the sequential trend given what you've seen so far in the first quarter, understanding that they are big total dollar numbers for you, but given the fact that the comp is -- it is a little bit worse than it was for the fourth quarter overall through the first five weeks of the year? I mean do you feel like things are getting better? Do you feel like you took a little step back and some of that is because the tax refunds are not -- maybe they are smaller amounts than they were a year ago?

I want to make sure we are clear on our point of view on how sales have been. First of all, the short answer to that question is we clearly feel like our sales are getting better. And if we look at the sequential trends through the fourth quarter, we did have, I guess, negative 6% for the quarter -- does that sound right, Bruce -- for the fourth quarter against a negative 11% in the prior year. As we were going through December -- and December was a better month, and then January was popped at the end by the tax refunds. And that is definitely the case. Those $3 million of tax refunds on a very small volume month, like January, made huge change in that month's comp sales. But it also positively helped February.

If you look at February for the first five weeks, you add $2 million for the last two days of January, they clearly helped the first few days of February in our view, and we saw as we came through February after we got into the first week of February, our sales from the tax refunds really started flowing, popped significantly in week one of February and even more significantly in week two of February. But about week three of February, they started -- they dropped off pretty consequentially in total dollars. And as we came through the end of February, our sales have actually firmed up since then.

So there has been kind of an up-and-down for us. But, yes, the negative 6.5% is a bigger negative than we saw at the end of Q4. It was negative 6.5% against a negative 2% versus negative 6% against a negative 11%. So I guess I am torching the numbers a little bit, but I think the sales are firming up. And, again, it's very important that we did big numbers. And arguably to me, the most difficult comparisons for 2012 are these first five weeks. Because there were big numbers that we had to go up against, and while we didn't do all we wanted to do, we did pretty good in my view. As you know, the comparisons as we move our way through 2012 are consequentially easier as we move through the year.

Okay. Got it. And then just I guess thinking about the new Chief Merchant, I was wondering if you could maybe give us -- he is not on the call?

He is not on the call, Patrick. We decided that we would not put him on this first call. He has been with the Company I think this is the end of his fourth week with the Company, and this is a market week in New York. But he will be obviously available for future calls. But obviously Jason and I have spent a lot of time together during the recruiting process after we hired him and clearly after he has come to work.

What was your question?

Well, just maybe you could share with us just in your conversations with him, maybe what he sees, the biggest things that need -- I know you've talked about what you're planning from a pricing standpoint and on the branded side of the business and all. But just opportunities, untapped opportunities maybe, what he sees happening with the urban apparel business in general? Just any kind of big picture thoughts on what needs to be done, how quickly it can be done, when the impact on the business might be seen, that sort of thing.

As you might imagine, Patrick, a new merchant comes on board, he sees big opportunities in our Company, as I would expect him to. But let's talk a little bit about the big picture things that you mentioned and talk a little bit about philosophy as Jason and I have spent a great deal of time together talking about philosophy and clearly had some understandings about that before we hired him.

The first big thing -- and you sort of heard some of it in my prepared comments when I talk about value and I talk about the shift from upfront buying to off-price and closeout buying. That's a big initiative of Jason's. As you know, he comes to us from T.J. Maxx, from a very large off-pricer in our world, and he is a big believer in the way to drive outstanding, high quality, jaw-dropping value to customers is with great off-price and great closeout buys.

And he thinks -- so you heard some of that theme in my comments as a way of us driving value harder is shifting our merchandise buying from -- we went too far forward to buying upfront buying and making long-term forward commitments to vendors versus staying closer in more liquid and taking advantages of deals in the marketplace through off-price buying or through closeout buying. So a key initiative that you may or may not have heard from my comments is that shift to more off-price and closeout buying. That is a pretty big deal, and we think that makes a lot of sense. It really gets us back to our roots.

The Company -- way back again 10 or 12 years ago, we were much more off-price than we were upfront, and then we move more to upfront, and then we, frankly, went too far, and then we are pulling back and getting back to where we were before. So that's probably the biggest initiative.

As far as brands goes, we still are a believer in urban fashions. Our customers will tell us which brands they like the best and which brands they'll pay for. We are a believer. We are testing a number of new brands, and frankly, we've made some inroads into some brands that we didn't have access to before that are consequential and offer great excitement for us really over the next two or three months.

As far as categories -- and this is something that's really a continuation of really a theme that we've had around here four or five years -- is while we really are in the hanging apparel business, a big opportunity for us continues to be in the accessories business. As you know, the accessory business has been the most positive for our Company for the last really several years. In 2011 accessories and footwear were very positive. We think we have big opportunities remaining in further developing a footwear business where our footwear business is 4% or 5% of our total. The opportunity there is very consequential. We think we have an underdeveloped handbag business. So those are kind of key themes.

Patrick, does that help?

It does, Ed, very much. Thank you.

(Operator Instructions). Jonathon Grassi, Longbow Research.

Good morning. Thanks for taking my questions. Could you guys give us an idea of what percentage of your buys in 2011, 2010 were upfront versus closeout, and I guess to what degree you guys expect that to change in 2012?

Jonathan, that's a really good question given the comments I just made about moving. We really don't know the exact answers. It's something over half of our buys were upfront buys, but I don't know if it was 55% or 70%, but it's something over half for sure. And just directionally we want that to reverse. We want to be able to do a lot more off-price buying and closeout buying.

As far as to what degree, you can't really specify that right now?

I can't say. All I can say directionally is we will move from buying more than half of our merchandise upfront to buying more than half of our merchandise off-price at closeouts.

And on the SG&A line, I know you guys touched on this, but assuming that comps remain challenged here, should we expect SG&A growth to mirror store growth?

We think it will be below store growth. I gave you earlier the percentages by which square footage grows quarter over quarter, and we think that we can keep the SG&A growth below those rates in each quarter.

Thanks for that. And then can you talk I guess regionally or any city that experienced any significant strength or weakness relative to the overall comp?

Really another good question, but there hasn't been a particular region. The hot weather zones and the cold weather zones, the North and South, East and the West have been really pretty comparable.

And just finally, how many Citi Trends Light remodels do you plan for 2012?

As you may know, we've pulled back our expansion, essentially stopped our expansion. We are only putting four or five new stores this year, and we are only expanding and remodeling just two or three stores. So basically at this point in 2012, we are seeing that's going to be it.

Thank you.

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

Thank you, sir. We appreciate all your questions and you all joining the phone call today. Have a good 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, everyone.