Citi Trends Inc (CTRN) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends second-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, August 15, 2012. I would now like to turn the conference over to Tripp Sullivan, of Corporate Communications.

Thank you. Earnings release was sent out at 7.00 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 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. 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 second-quarter and year-to-date 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 second quarter increased 1.6% to $132 million, including a 4% decline in comparable store sales. The lower comp store sales were reflected entirely in a lower average ticket as customer transactions were up 1% from last year. The decrease in the average ticket was comprised of an average unit retail that was 6% lower, partially offset by a 1% increase in the average number of items per transaction. By merchandise category, sales in the second quarter and comparable stores were as follows. Accessories were up 8% after being down 5% in 2011 second quarter. Men's sales were up for the first time in nine quarters, increasing 3% after decreasing 14% in the second quarter of last year. Children's sales were down 3% this year and down 11% last year. The home division was down 7% after being down 2% in the second quarter of 2011. And the women's division was down 13% this year and down 11% in last year's second quarter.

Sales of nationally recognized urban brands represented 36% of total sales in the quarter compared with 37% last year. Comparable store sales by month in the second quarter were down 2% in May, down 10% in June, and then up 3% in July, with much of the volatility between June and July due to a shift in the first of the month business. As we've entered August, comp store sales have been down 4% for the first two weeks. For the year to date through the second quarter, total sales are up 3.3% and comparable store sales are down 4.6%.

Gross margin in the quarter was up 20 basis points from last year's second quarter, 33.6% this year and 33.4% last year. While the margin was up slightly, we had expected it to be higher. We anticipated that the initial mark up would be lower this year due to our sharper pricing strategies. However, we did not achieve the degree of markdown improvement that we had expected due to the de-leveraging effect that negative comp store sales has on markdowns as a percent of sales. For the year to date, gross margin is 36.1% compared with 37.1% in 2011's first half, with all of the decline occurring in the first quarter as we improved our price competitiveness in relation to last year. SG&A expenses were well controlled in the quarter, with expenses as a percent of sales declining 40 basis points to 38.5% from 38.9% in the second quarter last year. The 4% 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 tight expense controls, including the reduction in force implemented last September.

Year-to-date, SG&A expenses as a percent of sales have declined 50 basis points to 31.4% from 31.9%. Depreciation expense in the quarter decreased slightly to $6 million from $6.4 million last year. And last year's second quarter included a charge for impairment expense totaling $1.6 million, which resulted in an adverse impact of $0.07 on last year's loss per share. No asset impairment was needed in the first half of 2012. The second-quarter net loss in 2012 was $7.9 million or $0.54 per share, compared to a loss of $10 million or $0.69 per share last year. Year to date, the Company has net income of $2.2 million or $0.15 per share, versus $2.1 million or $0.14 per share in last year's first half.

Our balance sheet position remains strong. Cash, together with short-term and long-term investment securities totaled $71 million at the end of the quarter, and we continue to have no debt. Inventory was up 9% over last year's second quarter, due entirely to a shift in the timing of receipts to late July this year from early August last year. Since this merchandise was in transit to the Company or had just recently been received in the distribution centers at quarter end, it had not yet been paid for, resulting in a 17% increase in accounts payable. In comparable stores, inventory was down 4% year over year at the end of the second quarter. Now I will turn the call over to Ed.

Thank you, Bruce. We are making very good progress in our turnaround at Citi Trends. However, we expected better sales in the second quarter. We had pretty good results in the first quarter and the comparisons were much easier in the second quarter. But in retrospect, we are making a large number of changes to complete this turnaround. Everything we have tried has not worked 100%, but we are seeing a lot of progress. I am confident that we have the right strategy and the changes we are making in merchandising will result in comp store sales increases and increased profitability.

As I've said before, sales really are our only problem. Our business is sound is in all other respects. In sales we've made very good progress across most areas of business. As Bruce pointed out the men's division, which represents about 19% of our business had a comp store sales increase in the second quarter. Big men's has been running up double digits most of the year after we refocused on this business. Our regular size men's area has improved steadily through this year. Our children's business, which accounts for 28% of our business, has also improved steadily through the year. Our best business, accessories, which includes footwear and accounts for 18% of our business continues to comp positively. We are expanding the floor space allocated to footwear. Additionally in the second quarter, we significantly expanded our accessories merchandise offerings for men's, boys, and girls. We believe we have great additional opportunities in accessories. Our home business representing 3% of our business has suffered somewhat as we worked our way through a staffing change, but the business is back on track and is actually up in August.

Finally, our poorest performing areas is the women's division, which accounts for 32% of our business. Importantly, some parts of the women's division, including dresses, scrubs, swim, and uniforms, have performed very well and had very nice comp increases in the second quarter, but junior and plus branded sportswear have not yet shown improvement. Junior and plus branded sportswear accounts for about 10% of our total business and those areas continue to run double-digit sales decreases. We're all working with some of the owners and manufacturers of women's urban brands to improve the fashion and quality that our customers expect. We're also continuing to test other brands and we're improving the fashion and value of our nonbranded merchandise to provide our customers with good alternatives at our stores. We believe that our men's, children's, home, and accessories areas can be strong enough to drive positive comp store sales even without good results from women's urban brands.

Expense control was again excellent in the second quarter as Bruce said. We delivered expense leverage with negative comp store sales. And on the balance sheet, our total cash position is now actually larger than at the same time last year. So we are seeing some signs of progressing in our turnaround efforts but much work is left to do. Now we'll answer your questions.

(Operator Instructions)

James Fonda, Sidoti & Company.

Could I just get your general thoughts on, I guess, the overall economy and how it might be playing out in the third quarter for you guys?

Thanks, James. As you know from hearing us talk on earlier calls, we don't like to talk a lot about the economy's impact on our business because there's not a lot we can do about it. But as I said last quarter, I think the economy is no longer getting worse, but frankly I don't see a lot of signs of it getting a lot better either, so I think we still have a very sluggish economy that we're working through right now.

Okay. In terms of the new store, do you think you'll be slowing down going forward? Are there going to be any new store openings for the rest of the year?

As we reported, I think, maybe a quarter or two ago, we did pull back our new store growth. We essential stopped it for 2012. We have opened four stores that we had commitments on in 2012. Those four stores are already opened. And for 2013 yet, we haven't made any decisions yet about what the rate of growth would be in 2013.

Thanks, guys. Appreciate it.

(Operator Instructions)

Evren Kopelman, Wells Fargo.

So the first two weeks of August you mentioned down 4%. Maybe talk a little bit about that. How is that relative to your expectations? Are there differences by region? Anything to call out? And do you expect that type of trend for the rest of Q3? I think September, October compares a bit easier. Maybe tell us how you expect Q3 to unfold from here.

Evren, we'll be careful not to give you sort of I guess, specific forecast on sales because we haven't given guidance for any quarters or for this year. Our sales trend for the last several months has been minus 4%, 5%, or 6%. We did expect as I suggested in my comments, that maybe the second quarter would have been better because the comparisons were easier than they were in the first quarter, but we delivered essentially the same kind of negative comp. That negative comp is the same number as we move our way into August.

A little bit more about the first two weeks of August. The first week of August is the biggest week of the third quarter, and we had a big week, first week of August, but unfortunately it was again a negative comp. As we work our way through August there actually has been one positive, and that is one of the states we operate in significantly, Georgia, came back with its tax-free holidays, I guess last weekend, so we did get a little bit of a positive pop there. That probably has been offset to some extent by continued later school openings in our world. So as far as expectations go for us, obviously we're still working our way hard toward that positive comp number, but I think it's too early to start suggesting that at this point. Does that help you?

Yes, that's very helpful. And then on the gross margin in the second quarter it was below -- actually, top line was in line with my expectations but the gross margin was a little bit below. Do you -- and I think on the last quarter's call you suggested maybe reaching 37%, maybe 38% gross margin for the full year. Where do you stand on that, now that Q2 is behind us?

I think in Bruce's comments he said that we were expecting somewhat higher gross margin in Q2 as well. Maybe for different reasons than you were. But as I have said on the call last time, we think an annualized normalized gross margin of 37% to 38% is still about right for us. I probably should add that presumes zero to positive comp sales. If comp sales are negative, we probably will struggle on the bottom side of that range. If comp sales are positive, I would expect our annualized gross margin to push more towards the 38% number. So as long as -- does that help you as far as expectations for this year?

Yes, it does. Thank you. And I have one more.

The key there is the sales -- the key in the movement away from the number are sales. That's the point I was trying to make for you there.

That makes sense. So then on that, I have one final question on that women's business, that junior plus branded you talked about. Do you think of more maybe drastic reduction is warranted in terms of -- as a percent of the assortment given dresses have been doing better?

So women, they're buying, but they're buying something else. And I know you are increasing -- you have been increasing dresses and other things that are working, but I'm just curious if you think a maybe more drastic reduction is warranted in those categories in sportswear.

We really believe in letting our businesses sort of find their own level, but I think dove tailing on to your point is that our women's junior and plus branded businesses are finding their own level, and it's lower. Our business was higher -- I called out that our junior plus branded business is 10% of our business. It was much higher than that two or three years ago, and it's decreased down to about 10% of our business. Still a big chunk of our business, but I can tell that you directionally that business is going to be even smaller as we go forward into the next several months and quarters.

So I think one of the keys is, I pointed out that we are working with the brands to try to improve the quality and fashion of the brands, but I think the key, and I think you alluded to this key is, what are we doing to offset it and how are we changing, I will ask Jason to address that piece of it.

Sure. It's a great question. And we really have three strategies for offsetting the weakness in junior and plus urban brands. First, we are shifting dollars to our nonbranded ladies fashion department. We have strong merchants at Citi Trends and we believe we can deliver compelling fashion offering that will excite our customer. Second, we are moving money to underpenetrated parts of the ladies business, predominantly dresses. We believe dresses are a significant opportunity and we will carry them year round when we previously only carried them in the spring.

Third, we are shifting dollars from high fashion ladies into high-fashion ladies areas with dynamic growth, and that would include shoes, handbags, and other ladies accessories. We believe that the combination of these three strategies will really offset some of the weakness that we're feeling in ladies brands currently.

Thanks a lot.

(Operator Instructions)

Travis Williams, Stephens.

Maybe Ed or Jason, I was wondering if maybe you could give us an update on some of the work you're doing with new brands, some of the new brands that have flowed into the stores, we've been out and seen things like K-Swiss in the stores. We've seen Ashley Stewart, some of these other brands that you historically haven't seep in Citi Trends. Then maybe talk about any emerging urban brands that may be coming along.

And then my second question relates to what we've seen in some Ross stores, one of your competitors, more recently with getting a little more aggressive on pricing with like-for-like product. Just wondered if you noticed that or what your thoughts are there?

I will take that question. I think the buyers are making great progress at opening new brands across the men's, ladies, kids, accessories, shoes, and home. They've done a terrific job there. We have had some brands that are resonating quite nicely with our customers, and others that were not as strong as we actually hoped they would be. But across the board, she is responding to great value and new and exciting products is showing up in the stores every single week. I think we are training her that if she comes in every week she is going to find something new, something exciting, and something that will resonate with her. So far I'm very happy with the progress that the merchants are making in that regard.

To shift over to one of the other questions you asked about some of the macro level things that are going on in urban, we actually feel that men's urban brands in some of the emergence of some of the new brands there is in a pretty healthy spot. I think ladies urban brands are really struggling right now. And Ed has mentioned that, and I have mentioned a little bit about that as well. This probably trickles down into boys and girls, with boys being a bit more healthy and girls being a little less so. So in those cases specifically with ladies we are working with some of those brands to reengineer their fashion and quality and see if we can get that jump started in the right direction, because our customer definitely still responds to those brands.

I think the last question that you posed was about Ross getting very aggressive with that price value comparison. We are absolutely on top of that, and I think as we talked about in the first quarter and in this quarter as well, we had some issues with our price/value, very specifically that was one of the main problems with our merchandise mix. And we are working very, very hard, all of the merchants to get that price value equation down so that we really drive excitement. We're seeing what's going on in DD's, in Ross, in Gabriel Brothers, and a lot of the other strong off-price competitors. When we talk about our strategy, the cornerstone of the strategies that we've implemented with the new merchandising team, is that number one, we will not be undersold. So that includes getting into the competition and ensuring that we have the best prices on like-for-like product.

That's helpful. Ed, maybe if you could comment on this, I know it's a ways off, and you guys are working on the turnaround, but as you think about areas to use cash going forward, particularly you're looking into next year and beyond. Can you maybe update us on where your thoughts are on the Citi Lights format for the stores? I know that there was some talk earlier this year about maybe looking at cost reengineering that new store prototypes, that the returns would be better. I don't know, it seems to me that the few that did you had positive comps, a nice lift. I don't know if you could provide a little update there maybe.

Okay. Travis, I think I heard two questions. One was what are our plans for cash. Then two, could I talk a little bit more or give you an update on our perspective on Citi Lights. First of all, on cash, we, as you know, several quarters ago, we decided it was best for us to be very conservative with our cash and to pull back on our uses of cash, particularly with new store openings and other expenditures and we've done that. And that's worked. As I called out in my notes on the call. Actually our cash is now pulled back even with last year, so we're in a very good place to be from a balance sheet perspective. We do not expect to embark on another aggressive expansion or remodeling program in the foreseeable future. We will do some of both, but again, we are still in, as you can see from the results, very much in the throes of this turn around, and we have more work left to do.

Now second, moving back to the Citi Lights prototype idea, as I have said before, we like a lot of the Citi Lights prototype, particularly the new looks, the fresh, new, updated look and the fixturing and all, and our customers have responded to it. But we really don't have any evidence that the Citi Lights concept in and of its self drives more business. So there's no compelling reason for us to go out and convert all of our stores to Citi Lights. As we remodel stores and as we open stores we will use the Citi Lights concept, that's our plan, and I think I told you earlier that we were going back in and modifying certain pieces of it to reduce the cost, and we've actually done that.

Okay. Great. I appreciate it. Thanks for taking my questions, guys.

Thank you, Mr. Anderson. There are no further questions at this time. I will turn the call back over to you for any closing remarks.

We appreciate all of you all joining the call today. Thank you very much 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 all lines.