Citi Trends Inc (CTRN) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Citi Trends first-quarter 2012 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Wednesday, May 16, 2012.

I would now like to turn the conference over to Dru Anderson of Corporate Communications. Please go ahead, ma'am.

Thank you. Our earnings release was sent out at 6.45 AM Eastern time today. If you've not received a copy of this press 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 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? Please go ahead.

Thanks, Dru. Good morning, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and CEO, and Jason Mazzola, Executive Vice President and Chief Merchandising Officer. First, I will provide you with details related to the first-quarter results, and then Ed will discuss further the results and our business outlook, after which we will address any questions you may have.

Total sales in the first quarter increased 4.5% to $198 million, including a 5% decline in comparable store sales. This decline in comp store sales was reflected entirely in a lower average ticket, as customer transactions were flat with last year. The decrease in the average ticket was comprised of an average unit retail that was 9% lower, partially offset by a 4% increase in the average number of items per transaction. By merchandise category, sales in the first quarter and comparable stores were as follows. Accessories were up 2% on top of a 2% increase in 2011's first quarter.

The home division was down 2% after being down 4% last year. Children's sales were down 4% this year and down 6% in last year's first quarter. Men's sales were down 4% after being down 12% last year. And the women's division was down 11% this year and down 8% in last year's first quarter.

Sales of nationally recognized urban brands represented 43% of total sales in the quarter, compared with 46% last year. Comparable store sales by month in the first quarter were down 6% in February, down 1% in March, and down 10% in April. With Easter moving up two weeks this year, there was some shift of sales from April to late March. Looking at those two months combined, comp store sales were down 4.5%. As we've entered May, comp store sales have been flat for the first two weeks, likely benefiting by four or five percentage points from a shift in the first of May around the fiscal quarter end.

Gross margin in the quarter was down 190 basis points from last year's first quarter, 37.8% this year and 39.7% last year. While this year's first quarter margin was lower than last year, it does represent a fairly significant improvement over the final three quarters of 2011. SG&A expenses were well controlled in the quarter, with expenses as a percent of sales declining 40 basis points to 26.6% from 27% last year. The 5% decline in comp store sales did pressure our ability to leverage the fixed portion of our expenses. However, we were able to more than offset this impact through expense reductions, including the reduction in force implemented last September and other tight expense controls.

Depreciation expense increased to $6.1 million from $5.6 million, due primarily to new stores that opened after the first quarter of last year. Additionally, the new Roland distribution center was not operational until late in 2011's first quarter, and therefore did not have a full quarter of depreciation last year. First quarter net income in 2012 was $10.1 million or $0.69 per share, compared to $12.1 million or $0.83 per share last year. Our balance sheet position remains strong. Cash together with short-term and long-term investment securities totaled $84 million at the end of the quarter, and we continue to have no debt. Inventory was up only 1% over last year's first quarter, as we tightly controlled our merchandise purchases in this challenging sales environment.

Now, I'll turn the call over to Ed.

Good morning. I'm very pleased with the progress we're making in our turnaround efforts here at Citi Trends, and I am encouraged by the first-quarter results. As I said last quarter, sales are really our only problem. All the other parts of our business are performing reasonably well.

While comp store sales in the first quarter were still not positive at minus 5%, the total sales dollars were pretty good, increasing 4.5% to $198 million. I mentioned the total dollars because of the importance of the first quarter to the Company's year. The first quarter is the highest sales and profit quarter of the year for our Company. So while we're not satisfied with the negative comp store sales, we are happy to see total sales performance in an important quarter and the resulting impact on the profit results. Sales for our Company are showing signs of improvement, although not at a pace we would like. Comparable store sales decreased 6% in the fourth quarter, versus an 11% decrease in the prior year. And the first quarter 2012 comp sales decreased 5%, versus a 6% decrease in the prior year.

I believe that the improvements we're making in merchandise have begun to head us in the right direction. To drive better sales, we have to improve our fashion offerings, but more importantly, improve the price to value relationship of our merchandise. In the fourth quarter, we aggressively reduced prices and rebalanced our inventory to a better mix of fashion to brand to merchandise. In the first quarter, we've kept the inventory properly balanced and aggressively priced, and we've ensured that new purchases reflect strong price/value relationships. Very importantly, our new Chief Merchant, Jason Mazzola, came on board the second week of February and has completed his first 90 days with the Company. He brings strong off-price experience and a great understanding of our customers and how to drive the price/value relationship. Under his direction, we're moving to a much larger percentage of off-price and close-out buying versus upfront buying. Progress is being made, and we're beginning to see small victories.

Overall, the financial results for the first quarter were good. As I mentioned earlier, comparable store sales were still not positive at minus 5% for the quarter, but total sales were up 4.5% to $198 million, making this quarter the largest sales volume quarter ever for the Company. Gross margin firmed up nicely to almost 38%, though still less than last year. Expense control was outstanding in the first quarter. The relatively high volume of sales, combined with excellent expense performance, delivered the relatively strong profit results.

In conclusion, I believe we're making very good progress in our turnaround efforts. I feel like we have an excellent merchandising executive in Jason Mazzola, and I believe he's already begun to make an impact on our business. As I said last quarter, we know what we have to do, and we have started. We have seen some progress, but we have much work left to do.

Thank you, and we'll now take your questions.

(Operator Instructions). And our first question comes from the line of Evren Kopelman with Wells Fargo. Please go ahead.

Thank you. Good morning, guys.

Good morning.

Good morning.

So, the comp. The AUR component that was 9% clearly is the biggest pressure, and can you talk about, one, how much of that is being driven by the -- your planned price reductions or better price/value relationship? And when do you think we begin to lap some of these? Is it in the second or third quarter? If you can talk about how you see the AUR playing out.

Okay. Evren, thanks for the question. The AUR, as you know was down, I guess, 6% plus in the fourth quarter and down around 9% or so as we went through the first quarter. We don't really have a planned specific AUR number. We obviously -- we're pricing our merchandise at the prices we think are appropriate, fully expecting the AUR to be pressured some.

This lower AUR is probably two things. That's lowering prices, but also the fact that the Company has been offering better values on less expensive merchandise. We think if we offer strong values across the whole price spectrum that at some point, our AURs will start to move back to norm. But there's no -- we're not taking any specific actions, other than offering stronger values across all of our price points to move AUR. There's actually a possibility that AUR could decrease some from where we are as we walk through the summer months, which is typically a lower AUR time frame for us. But we expect over time our AUR to move back toward normal.

Okay. And then, you said May, so far flat for the first two weeks, but you estimated four to five point shift. So then, the underlying trend of the Business is still a negative mid-single-digit comp at this point. How do you think about the compares? I think each month is a pretty similar compare when we think about Q2. Is that fair to say, the underlying trend is still a mid-single-digit comp decline?

I think that's right. I pointed out in my comments that I think that we were incrementally better in the fourth quarter. It was a negative 6, versus a year ago it was a negative 11, so on a two-year basis that's negative 17. As we came through Q1 here, negative 5 against a negative 6 or 7. That's a negative 5 on a two-year basis of a negative 11 or 12. We clearly are going into Q2 here with -- I guess last year's negatives were negative 12 or so? Comps are looking somewhat easier as we go through Q2, maybe even easier as we go to Q3. I think it's fair to say that we're still down in the 5 or 6 neighborhood.

Okay. And then, can you talk a little bit about fashion? You mentioned it, one, in the context of there seems to be a broader industry-wide trend around color. Do you think that's a broad trend to drive apparel purchases in general and for you and your customer? And then, the woman's comp did lag the men's and kids pretty significantly. Can you talk about that, as well? Thank you.

Thanks, Evren. What I'll do is I'll ask Jason to sort of talk a little bit about what's going on with current fashion trends and then sort of turn his attention to what's really going on in brands, because that's really where we've had the biggest misses in ladies.

Right. There are definitely exciting trends that we're seeing in the marketplace with regard to color, and it's actually across all genders and tops and bottoms. We're actually seeing neons as some of our strongest colors out there. Also, we are seeing shorts across the board, all genders performing very nicely. In men's, our short sleeve knits are selling very well, especially stripes. And then, ladies' knits are stronger than wovens, particularly lace and crochet. Dresses are also very important, as she's still responding to the maxi dress. In non-apparel, shoes and jewelry continue to excel for us.

I will talk a little bit about brands, and ladies in particular, and where I'll focus on is a little bit of the decline of the cache in urban brands from their height several years ago. However, much of Citi Trends' issues with these brands have been self-inflicted. We forced a certain level of brand penetration, specifically in ladies', in stores without the corresponding demand for the merchandise, and we were off on the value equation. Right now, we are getting back to a healthy position with each of these brands and finding the optimum balance of upfront purchasing and close-out buying that excites and delights our customer.

In addition to getting back in line with existing brands, we are opening new brands. Each merchant is tasked this year with opening at least 25 new brands this year. To date, we have found many new resources that strongly resonate with our customer, and we are aggressively pursuing these new brands and looking for more every day.

Great. Thank you.

You're welcome.

(Operator Instructions). And we do have a question from the line of Patrick McKeever with MKM Partners. Please go ahead.

Thanks. Good morning, guys.

Good morning, Patrick.

Just wondering if you might give us some updated thoughts on the macro environment for your core customer. I mean, there has been a little bit of a downward trend in the African-American unemployment rate. And the outlook for teen unemployment this summer, I think, is a little bit better than it was a year ago. And gas prices have come down and -- so it would seem to be that there's a more positive backdrop for your business. But just wondering what you're seeing and thinking.

Well, clearly the macro matters to us, but we, as you may know now, as we have discussed, Patrick, we've really kind of hedged down focusing on our business and kind of, to some extent ignoring the macro environment, even though we can't ignore it totally. So, we're really very focused on our turnaround efforts here.

But from a macro perspective, I would sort of echo what you said. Our sense is that things are better. Unemployment, clearly we've been seeing the same numbers you've been seeing. Gas prices have been up and down, and more down lately, which is fortunate for us. And so, we do think that we and other retailers are getting a little bit of help from the macro environment. And we think that's good for us, prospectively.

How about -- you mentioned the first of the month shift and the impact to May sales month to date. I mean, maybe you can talk a little bit about just the week-to-week, even day-to-day volatility that you have seen in your business. Is it becoming any less pronounced? Are you seeing any more consistency there? I'm thinking of things like the tax refund impact, the first of the month impact, those kind of things. Or is it still very choppy, I guess?

Well, well, I guess it's -- I guess you could describe it, Patrick, as choppy or a little bit unusual for retailing. Our calendar and our business fluctuations are -- I've called them sort of manic. They're very, very pronounced, as you were sort of suggesting. I called out earlier that the first quarter is the highest sales volume quarter of the year, and it is the highest profit quarter of the year. That's a little different from most retailers. The fact that we -- I called out on the last phone call that we did $100 million of sales in the first five weeks of the year, first four weeks of February and the first week of March. That's at a higher rate of sales, frankly, on a per-week basis than we do during the month of December.

So, what we've seen is that our customers have followed fairly similar purchasing patterns than they have historically, just unfortunately at a somewhat lower rate for us, even though, as I said earlier, we see things beginning to firm up some. Clearly, around holiday, a big selling season for us. Tax refund season in the month of February, the first of March is very huge for us. Easter is still very big for us. And the first of the month is a bit of a driver.

Clearly, Bruce called out that May is -- at this point in May, I guess, 14, 16 days into May, we're flat. But we did get the advantage in our fiscal May of the entire calendar moving to the first of the month. The opposite, of course, it was a bit of a slight drag on the end of the first quarter. But yes, we're seeing things fairly consistent to what we have over time, yes.

Okay. Thanks.

Sure thing.

And our next question comes from the line of Adam Engebretson with Piper Jaffray. Please go ahead.

Good morning. Thanks for taking my question. Thanks again for the earlier commentary on what you're seeing on the fashion front. Maybe other than the shift from brands to more fashion merchandise, are there any categories maybe that Jason identified as holes that can be added to the stores or anything that you're thinking about getting rid of?

Yes, Jason, why don't you just kind of -- as you know, Jason's only been here for 90 days. And so, obviously, he's fairly new to a lot of things about Citi Trends, but you can talk a little bit about the opportunities you're seeing and call out specific categories that you may have seen.

Definitely, the opportunities that we're seeing right now are in shoes and accessories. There is a lot of room to grow. Our comps are strong in those areas. It has a high element of fashion, and we truly believe that we can blow up our accessories area, our shoe area, and actually, even our home area. Those areas also will help minimize some of those big manic shifts in our customers' response that Ed was just speaking to a minute ago.

Does that help?

That does. Thank you. And then, maybe, given kind of the sequential improvement that we're seeing in comp trends, is there any thought to changing your real estate strategy, whether remodels or new stores? Or will the focus remain on really improving the trends in your existing stores?

The short answer to that question is, is that 2012 is going to continue to be a working on the turnaround efforts here and improving the profitability of the Company. We haven't completely stopped all of our real estate efforts. I think we're opening four stores this year. And we've actually added a couple of other stores to our remodeling expansion program. This is going to be a fix our Business and get our profitability back year, and we'll return to growth in new stores and remodels and expansions in 2013.

Got it. Last question real quick will be, any updates to your thoughts on the cash position?

Yes. Let me just give you, I guess, some idea on what we expect in terms of cash flows for the rest of the year. As you know, we're not giving earnings guidance right now, and that's obviously the biggest piece of cash flow. But I will give you some insight into the other elements of cash flow. We think depreciation will be about $25 million for the year. CapEx will be about $5 million, and then working capital really shouldn't change that much year-over-year by the time we get to year-end, because we'll have virtually the same store count as we had last year. The only exception to that is that we would expect to get that income tax receivable that was $11 million at the beginning of the year, we would expect to receive that during the year. So, income tax receivable should go down. And knowing that we started the year with $62 million of cash and investments, I think you can plug in your own earnings assumption and come up where you think the cash would be at year-end.

Great. Thank you.

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

Good morning, guys.

Good morning.

On the gross margin compression, obviously eased pretty significantly from -- compared to the fourth quarter. What were the key drivers in there? Was that just primarily reduced clearance activity? And then, looking at the second quarter, I know you guys don't provide earnings guidance right now, but very easy comparison, could we look for an improvement in the gross margin in the second quarter, potentially?

Okay. Well, thanks for the question. About gross margin, and we'll talk about it sort of three ways, the move from Q4 to Q1, what we view Q1 versus is last year, and what the expectation for Q2 might be. The first answer is, yes, the move from, I guess, in the low 30s gross margin for the fourth quarter to 37.8%, almost 38% in Q1. Yes, the -- most of that improvement was less markdowns. We reported to you that in the fourth quarter, we had marked down goods, repriced goods, reduced prices of goods, and cleaned up inventory that was out of balance in the fourth quarter. And all that resulted in much higher markdowns in the fourth quarter.

As we move into the first quarter, the margin in the first quarter versus last year is about 200 basis points less than last year. We don't normally talk about the components of gross margin, but in the first quarter of this year versus last year, virtually all of that decrease, that almost two full percentage point decrease, is lower initial markup, which really is a pure reflection of us reducing prices.

As we go forward, again, we're not giving guidance on earnings or components of earnings, and I would point out that we're still a work in process here, for sure. And we don't know exactly where the gross margin is going to be, but somewhere in that 37%, 37.5% to 38% number is probably where we'll be on annualized basis, so pretty close on annual basis to where it was before, the first quarter, plus or minus.

Now, as we move out of the first quarter into the second quarter, which is a lower volume quarter, and a somewhat higher markdown as a percent to sales quarter, the margin will be depressed a little bit in the second quarter from where it was the first quarter and maybe to a somewhat dissimilar extent in the third quarter. And then with a higher volume fourth quarter, the margin will move back up again. And those are sort of what are expectations to date are.

Does that help?

That is helpful. Thank you.

And then you noted that the initiatives implemented in September and some other expenses helped you guys lever SG&A. What were the other expenses that were -- that allowed you to have such good SG&A control in the quarter?

Well, our biggest expense is store payroll, and we continue to watch that very closely in relation to sales. And we also had some good results in distribution center payroll, did a very good job of managing that.

So those were the two biggies.

Okay. Great. Thank you.

And we do have a follow-up question from the line of Evren Kopelman with Wells Fargo. Please go ahead.

Thank you. My follow up -- you were just talking about all the decrease was in the lower initial markup. When you are talking to the brands, and for your future purchases, are you able to get lower costs to be able to offer the product at a lower price point so that you're keeping your margin? Or is this just going to be a lower margin business on the branded side?

Evren, the answer to that is yes. Again, I want to point out that the gross margin is a bit of a work in process. We're trying to find -- we're trying to do two things. We're trying to price our current merchandise and our current inflows of merchandise at the correct price to sell it and make it a compelling value to our customers.

And then secondly, we're trying to buy better so we can sell lower and make a better margin. So, some of the decreased markup in the first quarter is probably due to us decreasing prices on merchandise already purchased. Prospectively, we want to stay with very aggressive pricing, but I think we'll able to buy better. But again, that will be over a period of time. Does that help?

Very much so, yes. That makes sense. The other one is, you've talked in the past about introducing some new brands to this store. And I know -- maybe you don't want to share which brands there are, but can you talk about is that pace continuing? Are you introducing new brands that weren't in the store before? And what kind of reception are you seeing to that?

Absolutely. We are, I am holding each buyer accountable to open 25 new brands per buyer, so roughly, that's going to be over 400 new brands into the store. And some of those are tests, and once those tests get results, then we're going to actively pursue making that brand bigger and driving that value equation with that brand. We're also much more deal oriented in the marketplace. So, we're constantly on the hunt for new brands, for new opportunities, which we weren't doing prior.

I would add to what Jason just said that we've had -- without calling out specific brands, we've had -- we've added some brands, and I think we may have suggested some of them last fall, even in conference calls, that have resonated well. And frankly, in the last probably three months, we've gotten a couple of exclusives on brands that are very compelling brands. Again, we can't call them out, but if you visit our stores and look at the brand racks, you'll see some brands in Citi Trends today that weren't there before that are awfully exciting.

And the customer is responding very well to them.

And when you're looking for new brands, is your core customer maybe branching out more? Kind of what types of brands are you looking for? Is there any color you can give on that? Or -- I understand if it's sensitive information.

No. I think at the overall level, I think our customer loves great value across a pretty wide spectrum of brands, probably wider than you would think. But she loves value first and foremost. And the second thing is, she loves fashion. So, if we can combine great fashion with great value, we're really in the right neighborhood. And I really think that the value equation has been off, and we're being very diligent about getting that value equation on point and giving her great fashion to go with that value.

And you talked about the shoes and accessory opportunity. Can you share, maybe put some numbers around kind of what percent of the store is in those categories? Are you expanding the floor space for them? If there's any numbers you can share about that initiative, that would be great.

We don't normally call out the actual percentages of our store, but in footwear, I guess the percentage of store is in the 4% neighborhood or so. We think there's a consequential capability of increase. We're not going to tell you what the goal is, but we think there's a consequential increase capable for us in footwear. What was the other category you asked about?

Accessories.

Accessories are going to be 0.5, 1 or 2 percentage point of the store. We've built that business consequentially over the last three years, and we think we have a fair amount of room in front us. But we're not going to call out the specific goals, other than pretty consequential growth in both of those areas.

Okay. And last one, the store openings. I think you had told us you planned for five openings this year. You did two, and I believe I heard you say you're going to open four this year. If that's right, is that all in Q2?

Let's see, I think at some point we did tell you five, Evren. One of the stores fell out for some reason. I'm not sure what the reason was. And so, we're just staying with the four. The timed openings for the four, Bruce, help us with that.

We'll open one next week, and then we'll open the fourth one in September.

So, we've opened two already, and we have one next week that was in Q2, right? And then we have a --

One in --

September opening.

Perfect. Great. Thank you very much.

Thank you.

Thank you.

Mr. Anderson, there are no further question at this time. I will now turn the call back to you. Please continue with your closing remarks.

Okay. Thank you all for joining the call today, and have a good day.

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.