Citi Trends Inc (CTRN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends first-quarter 2013 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 22, 2013.

I will now turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you. Our earnings release was sent out this morning at 6.45 AM Eastern Time. 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 can cause actual results to differ materially from those described in the forward-looking statements.

I would now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce, please go ahead.

Thanks, Tripp. Good morning, everybody, and thanks 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 quarterly 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 decreased 8% to $182 million, including a 4% decline in comparable store sales on a comparable weeks basis. This decline in comp store sales was reflected in an average unit sale that was 13% lower, partially offset by a 6% increase in the average number of items per transaction, and a 3% increase in the number of customer transactions.

By merchandise categories, sales in the first-quarter and comparable stores were as follows. The home division was up 20%, after being down 2% in last year's first-quarter. Accessories were up 14% on top of a 2% increase last year. Children's sales were down 3% this year, and down 4% in last year's first-quarter. Men's sales were down 7%, after being down 4% last year. And the ladies division was down 16% this year, and down 11% in last year's first-quarter.

Sales of nationally-recognized urban brands represented 38% of total sales in the quarter, compared with 43% last year. Comparable store sales by month in the first-quarter were down 7% in February and down 8% in March, before increasing 9% in April. As we have entered May, comp store sales are up 2% in the first two weeks. There was a shift this year in the timing of Easter Sunday, which is a day our stores are closed. The shift hurt March's comparable store sales by two percentage points and helped April's by three points.

Gross margin in the quarter was 37%, down 80 basis points from last year's first-quarter. The decline in the margin was spread fairly evenly between the core merchandise margin, freight expense and shrinkage. SG&A expenses decreased $800,000 or 1.4% from last year's first-quarter, as we continue to tightly manage costs in this challenging sales environment. The 8% decrease in total sales pressured our ability to leverage the fixed portion of our expenses, as evidenced by expenses as a percent of sales increasing to 28.5% from 26.6% last year. Depreciation expense was lower by $550,000 due to our pullback in new store growth.

First-quarter net income in 2013 was $6.2 million or $0.42 per share, compared to $10.1 million or $0.69 per share last year. Our balance sheet position remains strong. Cash, together with short-term and long-term investment securities, totaled $82 million at quarter-end. Inventory was down almost 6% from the end of last year's first-quarter, and we continue to have no debt.

Now I will turn the call over to Ed.

Good morning, everyone. We continue to make good progress in the turnaround of Citi Trends. The earnings for the first-quarter were not as good as we had hoped for, but we ended the quarter on a strong note and have begun the second quarter in a positive manner as well. As Bruce said comparable store sales in April increased 9%, and for the first two weeks of May comparable store sales were up 2%. The big positive news is that we are seeing improvements in our ladies business. While not yet positive, the sales decreases for the last six weeks in the ladies business are in single digits. This is a large improvement over the double-digit decreases of the last several quarters.

Our unbranded fashion merchandise is clearly resonating with our customers. We have started the pivot to a much more fashion versus branded approach late in the fourth quarter, and we are now seeing the results of the change. We still are fairly early in this transition, but the results for the last six weeks or so clearly support the move that we have made. Additionally, we have reduced inventory levels, as we enter the second quarter. Total inventory was $109 million, versus $115 million a year ago. We believe we owned too much inventory last year in the lower selling second and third quarters. We believe we can deliver positive comparable store sales with somewhat less inventory.

From a real estate and store growth perspective, we are staying very conservative in 2013. We have opened just one store so far. We have budgeted for five new stores, but at this point we have no other new store deals in place for this year. We have completed 24 minor store remodels, which is the number we had planned for the year. We also will expand or relocate about five stores in the year. Additionally, we have closed six stores in the first-quarter, and two others after the end of the quarter. Two were due to lease issues, and the others were underperforming stores. We have another five or six stores that we are watching very closely as potential closings.

In conclusion, we are starting to feel better about our sales prospects. The ladies business is starting to improve, and that feels very good. We are making good steady progress in our turnaround. Our strategy to improve sales and profitability is starting to work. We have a team of dedicated employees and the financial resources to complete this turnaround.

And now, operator, we will take any questions.

Thank you.

(Operator Instructions)

And our first question comes from the line of Tom Filandro with SIG. Please proceed with your question.

Hi this is Rushil Gupta in for Tom Filandro. I have three questions for you. Are any urban brands trending positively? What impact if any has the West Coast office had on the business? And are you adjusting your buying in light of recent run-up in cotton, and how should we think about IMU for second quarter and the balance of the year?

Please, I think I got the first two questions regarding urban brands comping positively, and the impact of our new West Coast buying office. And the third question had to do with cotton I think and markup. I didn't hear what -- would you repeat it, please?

Yes. Are you adjusting your buying in light of the recent run-up in cotton? And how should we think about IMU for second quarter and the balance of the year?

Okay. All right. I am going to ask our Chief Merchant, Jason Mazzola, to address the question. I have four questions here. The first one is, Jason, regarding urban brands, are you seeing any positive sales in urban brands? And then the second one on the West Coast buying office.

Sure. Overall the landscape for ladies urban brands is poor, while the landscape for men's urban brands is actually healthy. This flowed directly into the children's area as well. Urban brands in boys are much stronger than urban brands in girls. Value and fashion is the key to driving sales in urban brands for both genders. In ladies, we are really building our fashion competency to rely less on these brands, and I will speak to the CDO in a minute. We have made a similar shift in the girls business, as the girls brands have ebbed off as well. Men's and boys brands are in a much healthier position and are resonating well with our customers, and we have several brands that are performing very well. That being said, we are also building our fashion competency in men's and boys.

We have seen a dramatic impact from the California buying office. We now have a full team out on the West Coast, and a full team out on the East Coast, and we are really building our fashion competency. As Ed mentioned, we are still at the beginning of this shift from brands to fashion, but we very much like what we are seeing so far.

The third question he had asked was, have we done -- have we adjusted any of our purchasing in response to the most recent increase in cotton prices?

I would say overall, our business model lends itself well to handle this, because we are negotiating every deal on a deal by deal basis. So -- and really assessing the right value to the product. So by the way that we buy, which is close to need and more deal-based versus not nine months in advance, we don't rely necessarily on the price of cotton to negotiate the IMU. So I don't see that as a major obstacle for us in the future.

Okay. The last question that you asked, had to do was, what are our prospects for IMU for the rest of the year? I am going to answer that question sort of in a broader basis, from the perspective of gross margin. IMU is just one component of gross margin, and we will talk about gross margins, and our prospects for gross margin. As we have said in the past, we believe that we can eventually return our gross margin on an annual basis to around 37% to 38%. That presumes that we are running positive comparable store sales in that timeframe. Last year's gross margin in 2012 for the year was just over 34%. We clearly expect to improve upon that in 2013, and we will move toward that 37% to 38% gross margin rate on an annual basis this year. But I don't think we will quite get there. But I expect us to improve over last year, for sure. Does that answer your questions?

Yes, it does. Thank you.

Thank you very much.

And our next question comes from the line of James Fronda with Sidoti & Company. Please proceed with your question.

Hi, how are you?

Good morning, good.

I guess, the sales growth that you saw towards the end of the quarter, do you think that is all tied into weather, or is that more related to a different product mix? Or is it just the different types of income for your customers? I guess, could you elaborate on that a little bit?

Sure. I believe that the business definitely turned as it walked out of March into April, for two reasons. One, I absolutely believe there was a weather component. As we have reported to you earlier, the weather was very good last year in the spring, March being the warmest March on record, and this year was markedly colder. And we didn't really great warm weather this year until -- really we got into April, but the warm weather definitely helped our business. But also very, very importantly, as we have seen a nice turn in our ladies business. I mentioned that in my comments earlier. And I am going to ask Jason to sort of expand on what we are seeing in our ladies business currently.

Sure. As you remember on our last call, we talked about making that major strategic shift from brands to fashion. And as I just mentioned we opened that West Coast buying office, so we could drive great fashion buys on both the East and West Coasts. This decision is definitely working. As Ed mentioned, the ladies comp sales decreases over the last six weeks have been in the single digits. Our increases in fashion this quarter were not enough to overcome the decreases in brands for the quarter, but we have made very nice progress in that direction. So we are real happy with our ladies business, and our ladies fashion content moving forward.

Okay. And I guess, are there any uses of the cash that you have? I know you are not going to expand stores, but have you thought of a dividend or anything?

Bruce, why don't you take that question, please?

Sure. That is something that we discuss regularly with the Board, not just dividends, but also stock repurchases and other uses of cash.

Okay.

But as long as we are in a turnaround phase, we are going to be -- continue to be conservative with our cash. And we will be that way until we consistently deliver predictable positive sales results.

All right. And I guess lastly, the underperforming stores, is that basically just primarily based on location? Or is there anything else going on, that compares to the ones that are doing well?

These eight stores we closed as I mentioned in the comments, two of them were lease issues. In other words, and in one case the city took over the location, and we had no choice but to leave there. And the other location, the landlord just asked for a rent that we were not willing to pay for, a fairly marginal store. And the other six instances of closings, five of them were actually the very smallest volume stores in the Company.

Okay.

These were very low volume stores that we have a difficult time making money in. And the last one was a store that has been marginal for the last five or six years. So the commonality were -- of these stores, other than the two lease issues, were really smaller volume stores that haven't been profitable for a while, and we didn't really see any prospects of turning them around. The point I would add is, I think we have mentioned this in previous calls is, is that we have had probably on the order of 20 plus or minus stores that we have on sort of a watch list.

Right.

We have closed eight of them. We have another four or five that we are looking at very closely for possible closings this year. But the key point here, is we do not have a large number of stores that we need to close.

Okay. All right. That's all I have. Thanks.

Thank you.

(Operator Instructions)

Our next question comes from the line of Patrick McKeever with MKM Partners. Please proceed.

Thanks, good morning.

Good morning, Pat.

Question on the whole tax refund dynamic, just wondering how you think that played out in the quarter if that -- and you had a tough February, you had a tough March. I know the weather was a big factor during those months. But how do you think -- I mean, do you think that a lot of those refund dollars just went to other things and not to apparel? And as you look into next year, I mean how do you plan around tax refund season, just given its volatility? Thanks.

Well, we talked a little bit about this on the last call, because we were pretty far into the season. And really, my points of view on that issue are similar to what they were then. I believe that there was a number of issues that really resulted in our customers spending less money on apparel this spring than in the past. Clearly, the later tax refunds allowed people to spend money on other things perhaps than clothing -- the -- just the general nature of the economy is still tough, after American unemployment being high, the 2% payroll tax increase. And at the time by the way, back earlier in the quarter I guess, prices were much higher. I think all those things played into the fact that our customers, and all customers were spending less money, and in particular, less money on apparel. I think all those things caused people to postpone purchases, or maybe even cancel purchases. I think that is how I kind of get there.

Okay. And then a question for Jason. You have been with the Company now for more than a year, and you have spent some time with TJX before joining Citi Trends. So, and I am just -- I am wondering about your view of -- I know it has been a difficult year plus, but you are now seeing some change in the very important ladies category, and a better trend over the past six weeks and whatnot. More of a level playing field I guess, as well versus last year, at least from a merchandise mix standpoint. So the question is really, what do you think of the longer-term opportunity for the Company, especially in light of your experience with TJX and knowing that A.J. Wright has been closed down?

Yes. I think the longer-term opportunity at Citi Trends is very good. I am very much encouraged by the fashion working in ladies that we are seeing right now, and really making that pivot from brands to fashion. I think as we have done that, we have really touched our ladies customer, and she is the heart and soul of our Company. And as we continue to build our competency in that regard, I see hopefully good things happening at Citi Trends. We still have a healthy men's and boys branded business, and we will continue to watch that as we build up our fashion competencies there as well. But I am very much encouraged with our strategy and our future prospects here.

Okay. Thank you.

Thanks, Pat.

Our next question comes from the line of Evren Kopelman with Wells Fargo. Please proceed with your question.

Thank you, good morning.

Good morning.

On the shift to unbranded fashion in the woman's business, where are you in that shift? Meaning, that if you look at the percent of your purchases in women's it -- that currently in branded versus -- or unbranded versus urban brands, do you feel like you are in only the first or second inning? Will it continue to shift, or you have already made a pretty drastic shift? Can you talk about that?

Sure. I think we are really in probably the second inning of that shift, and really the second inning of getting the team fully up to speed, and understanding the direction that they are going. Right now, our ladies penetration of urban brands is 28%, versus last year approximately 42%. And I see that continuing to decline, as we build our fashion competency. And as the team gets up and running, and the West Coast office gets up and running, because we only opened that office I believe in January. And so, that team is really starting to feel good about the sales results that they are seeing, and the East Coast and West Coast merchants are working very well together. So I would say we are in about the second inning, with some terrific innings to come.

Yes, that is great to hear. Another question, the other part of the business that is working, the accessories, footwear, now where are we, in terms of the percent of sales in those businesses? And maybe talk about what is working in there? Is it certain brands? Is it more of a fashion that is driving that strong accessories comp? And also what is in the home? That had a good comp too.

Bruce, would you answer the question regarding the numbers, what percentage of businesses are in accessories and home in the most recent quarter?

Yes. For the quarter, accessories are actually 25% of sales, compared to 23% last year. And if you go back as far as 2009, accessories were only 14% of the business. So they have grown quite a bit in the past few years.

But the big driver in accessories -- the biggest driver in accessories has been the big expansion of our footwear business. So Jason, would you talk about kind of where we are, versus where we have been in the accessories and home businesses, and where we are headed?

Sure. We see continued growth in all of these areas. Shoes, accessories and home represents strong fashion mixes that are resonating well with our customer. And if I was to give you one word of what is working across these three areas, it is fashion. Our customer is a fashion shopper, and she is very excited about what we are delivering in these areas. So we actually have realigned our floor space to highlight these areas, and give them room for continued growth. So we see continued growth there.

If you were to ask me in home, what is the strongest pieces of that business? I would tell you that our beauty area, which is predominantly fragrance, has been very strong. We see electronics as a very strong and growing area in that regard. In addition to that, the home decor that we are bringing in is very specific to our customer. It is unique, it offers terrific value, so we see opportunities there as well. And as Ed just mentioned, our shoes and our handbag areas are the strongest areas, really as you look in accessories -- and that is really dominated by fashion. We have also beefed up our muscle in our men's and our kids accessories departments, and we are seeing continued growth in those areas as well. So we are excited about that.

Great. Then a question for Bruce. Now when I look at the difference between the comp and the sales declines in Q1 of 4 points, is that entirely or almost entirely the shift of the calendar? And what should we expect the calendar impact to be in Q2? I believe it is positive, but can you put a little more color around that?

Yes. With respect to your first question, that is exactly right. As we talked about on the last call, because every quarter this year is starting a week later than it did last year, there is a mismatch of sales, because last year had that 53rd week in it. And as it relates to the second quarter, you are right, it is a positive benefit of about $5 million. The third quarter has a drag of $3 million. And then, of course, once we get out to the fourth quarter, last year actually had 14 weeks versus 13 this year. So that is somewhere around a $13 million negative impact this year.

Great. Okay. And now my last question is on the average unit sale, and the transactions component in Q1. What were the drivers behind -- was it mostly markdowns on the average unit sale decline? And what should we expect going forward, now that your inventories are in good shape, and the ladies business is beginning to show some good signs?

As Bruce pointed out in his comments, Evren, we did have a big decrease in AUS again in the first-quarter. But we were very happy to see continued increases in both units sold, as well as customer transactions as we had all during 2012. Jason will address the -- sort of the status and prospects for AUS.

Our AUS has declined from the first-quarter of 2012 to 2013, and there are two primary reasons for the continued decline in AUS. First, we are buying less branded product in the Company especially in ladies, and the fashion product does have a lower AUS. Second, we did have a value issue in the Company. We have solved the value issue, and we now offer exceptional value on the brands and fashion we carry. And we are very competitive with all of the folks we compete against, both in the off-price arena certainly, as well as in the fashion area. As we move through 2013, we will begin to anniversary our revised values, and our AUS should begin to stabilize. And I think one other question you asked, was it a result of additional markdowns? It was not. The two reasons that I highlighted were the real reasons for the decline in AUS. It was really not a markdown issue.

Okay. That is all great to hear. Thank you very much. Good luck.

Thank you.

Thank you.

There appears to be no further questions at this time. Mr. Anderson, I will turn it back to you for any closing remarks.

Okay. Thank you all for joining the call this morning, and have a good day. Thanks.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today, and we thank you for your participation and ask that you please disconnect your lines.