Citi Trends Inc (CTRN) 2013 Q2 法說會逐字稿

Welcome to the Citi Trends second quarter 2013 conference call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Wednesday, August 21, 2013.

I would now like to turn the conference over to Tripp Sullivan of Corporate Comm. Please go ahead, Sir.

Our earnings release was sent out this morning at 6.45 AM Eastern Time. If have not received a copy of the release, it's 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'd now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce, please go ahead.

Thanks, Tripp. 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 second quarter and year-to-date results, and 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 second quarter increased 4% to $138 million, including a 1.7% increase in comparable store sales on a comparable weeks basis. The higher comp store sales reflected a 6% increase in the number of customer transactions, and a 1% increase in the average number of items per transaction, partially offset by an average unit sale that was 5% lower. Comparable store sales by month in the second quarter were up 0.3% in May, up 2.1% in June, and up 2.6% in July. As we have entered August, comp store sales have been up 2% for the first two weeks.

By merchandise category, sales in the second quarter in comp stores were as follows. Accessories were up 17% on top of an 8% increase in 2012's second-quarter. The Home division was up 9% after being down 7% last year. Kid's sales were up 1% this year, and down 3% last year. Men's sales were down 5% after increasing 3% in the second quarter of last year. And the Ladies' division was down 7% this year, and down 13% in the second quarter of 2012.

Sales of nationally-recognized brands represented 29% of total sales in the quarter, compared with 36% last year. For the year-to-date through the second quarter, total sales are down 3% and comparable store sales are down 1.7%. Gross margin in the quarter was up 230 basis points from last year's second quarter, 35.9% this year and 33.6% last year. With the improvement primarily attributable to fewer mark-downs being needed due to the improved sales performance and strong inventory control. The year-to-date gross margin is up to 36.6%, from 36.1% in 2012's first half.

SG&A expenses were well-controlled in the quarter, with expenses as a percent of sales declining 80 basis points, to 37.7% from 38.5% in the second quarter last year. The improvement in our expense ratio was due to leverage on the fixed portion of our expenses from the 4% sales increase, together with our continued efforts to conservatively manage costs. For the quarter, expense dollars increased 1.9% to $52 million from $51 million last year, while for the year-to-date, expense dollars increased 0.2% to $104 million.

Year-to-date SG&A expenses as a percent of sales have increased to 32.5% from 31.4% as a result of the deleveraging effect on the expense ratio related to the 3% decrease in total sales. The second-quarter net loss in 2013 was $5.5 million or $0.37 per share, compared to a loss of $7.9 million, or $0.54 per share last year. Year-to-date, the Company has net income of $700,000, or $0.05 per share, versus $2.2 million, or $0.15 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 $85 million at the end of the quarter, a $14 million increase from the same time last year. Inventory was down 10% from the end of last year's second quarter, and we continue to have no debt.

Now I will turn the call over to Ed.

Thank you, Bruce, and good morning, everyone.

The second-quarter results reflect a good, now consistent progress we're making in the turnaround of Citi Trends. The positive sales, gross margin improvement, well-controlled expenses, better-managed inventory, and a stronger cash position are all strong indications that our strategy is working. We are all encouraged by the positive comparable store sales in the second quarter. Each of the months in the quarter had sales increases, and we've now had positive comps for four months in a row. We've also had started Q3 with positive comp store sales.

The Ladies' business improved in the second quarter, decreasing just 7% after several quarters of double-digit decreases. Sales of our non-branded Ladies' Fashion business increased nicely, but it's still not enough to offset the large losses in urban brands. The pivot to non-branded fashion is working, and we believe we are on the way to positive comps in the Ladies' division. The best performer in merchandise has been the accessories area, footwear in particular. This was the fourth straight quarter of double-digit comps in accessories, again, with footwear being the driver.

Importantly, we reset the sales floors of all of our stores in the second quarter. We added footwear fixtures to the floor, and moved footwear and handbags closer to the front of our stores. To accommodate the moves, we've decreased slightly the selling square footage allocated to the Ladies' division. We believe the additional fixtures and better visibility will help drive additional sales of both footwear and handbags.

As I reported less quarter, we believe we can deliver positive comps and improved gross margin with lower levels of inventory. We plan to own somewhat less inventory than last year in the third and fourth quarters. During this turnaround, we've been very conservative with expenses and capital. We've opened just 1 store this year and remodeled about 20 stores. We expect to open a few more stores in 2014, but we will stay conservative with capital until we see more positive results. Our turnaround is showing slow but steady positive results. We believe that we have the right strategy, and are confident that this turnaround is going to be successful.

Now, operator, we will take any questions.

(Operator Instructions)

James Fronda, Sidoti & Company.

Are there any specific areas of the country you can talk about where there might be some store openings in 2014?

We haven't identified any particular areas of new expansion. Our first choice is to go to places where we have stores already or we see markets where we like to add new stores. The Upper Midwest has been a very successful area for us, and we would like to add some stores there, for sure. We are also looking at the West Coast, at the Los Angeles area, for potential. And other parts of the country, too. But generally speaking, going to places where we already have stores will be first.

Okay. All right. How does the fashion-oriented apparel work, exactly, with the type of consumer you have? I guess it's all just based on the price, as long as it's fair?

It's not just -- this is Jason -- I don't think it's just the price. It's a combination of the fashion and the value that it represents, and price is a component of that value equation. I think what we are trying to do is put the fashion on the floor that really resonates with our customer, that follows the trends that are happening in the market right now. So we pay very close to the trends that are happening in the Junior market, and we translate that into, also, the plus. And we do the same thing in men's and children's, and our accessories and shoe department, as well.

Okay. Just on the ladies segment. Do think that's just a one-time thing during the quarter? Or do you think it might be longer-term that's -- things were down?

Our ladies business has been difficult for a number of quarters, and so we are actually happy to see a single-digit decrease, which is improvement, still not a positive. But -- no, we see our ladies business continuing to improve. Jason, you want to add to that?

Sure. I don't see us driving a positive comp store sales in the ladies area for the balance of 2013. I think we are going to make significant progress there. I see us moving towards smaller comp store sales decreases throughout the balance of the year, and I'm really looking for 2014 for the positive comp store sales increases in ladies.

Okay. Long-term, do you guys eventually see yourself completely getting away from the branded apparel? Or do you think there will always be that branded apparel there?

We don't see ourselves getting away from brands. Brands come and go, and there have always been brands that have been important to trends they just change. These Urban brands, were very, very important as we note, for the last several years. And they are less important. But other brands are starting to take their place. And so brands will be important, perhaps not as much so as more recently.

Okay.

Evren Kopelman, Wells Fargo.

Congratulations. Wanted to ask first, about -- for back to school and early fall. You had talked about some of the merchandising initiatives, I remember. You have talked about knit bottoms. Can you give us a little bit more color on if some of the choices you made in terms of the merchandising, if those have been trending well? Obviously, we know you mentioned the comp August to-date, that looks great. But if you can give us a little bit more color on, if some of those areas are working, what's maybe not working? That would be great.

Sure. On the non-branded fashion side, we've seen a lot of success across the Company. I would say the number one trend out there is camo, from a fashion point of view. And camo has been strong at Citi Trends across men's, ladies, kids, accessories and shoes. So we are very happy about that trend in general and in our positioning there. And specifically to ladies, as you just talked about, definitely, we are in more of a non-denim bottom cycle. Making that move into skirts and non-denim bottoms, be it Millennium Fabrications or Moleton, have been terrific.

So we have been happy about our non-branded positioning, and those things continue to trend well. And in ladies, as we have discussed, brands continue to take a backseat to the non-branded fashion. Our penetration in ladies sportswear was 15% this quarter versus 32% last year, and we keep moving those dollars to fund the non-branded fashion, as we have continued success there.

Evren, I would add to what Jason just said about the fashion, things that are working for us. That we're talking about back-to-school, and back-to-school, the last week of July, I think, these first two weeks of August, I believe, are the biggest weeks until we get to Christmas, for the Company. So these are pretty big weeks. One of the things I would add to you is, this is not a great fashion time of the year. This is really back-to-school. And so it's a lot -- there are a lot of basics and school uniform-oriented products. And the Company has done just a very, very nice job in optimizing those businesses across kids and men's and women's. So, our business has been driven by fashion as well as being just very, very good at back-to-school-oriented product.

Okay. That makes sense. In women's, I'm not sure where it is as a percent of sales today. Maybe if you could talk about that? And where do you think it stabilizes? Where would you like to see it, as the accessories continue to grow?

Let's see -- I believe -- Bruce, help me with the number, exactly. But the ladies business now as a percentage of total is in the low 30%s. What's the number?

A little bit lower, high 20%s.

High 20%s. Okay. Even lower than low 30%s, say 28%, 29% of total. That number has drifted down in the last three or four, five years, from probably the mid 30%s, Bruce, to high 30%s, all the way down to just about 30%, maybe even slightly under 30%. Clearly, we would like to see the ladies business be a stronger driver of our business than it has been. We don't have a particular right target for the ladies business in total. A healthy number, probably, is about where it's at. Somewhere in the high 20%s is probably a good, healthy number for us.

One of the things that we have seen happen is that our accessories business has been so good, again, as I called out earlier, driven by footwear. I think penetration-wise, the accessory business in this quarter was 25% of our business. And last year second quarter, it was 20% of the business. So we like the accessory business, because it's a good add-on product, and we have some higher unit retails in things like handbags and footwear. But, long answer to your question, probably about where it's at, but not a lot less as a percentage of the total.

Great. That's very helpful. Maybe a similar question on the accessories side. That continues to comp double-digits. Do you keep going? It sounds like you re-did the sales floor and is that going to be the next step to accelerating that business. You did mention that. But do you have some number in mind? Or that continues to grow and we will see where it goes kind of thought?

Again, as far as a specific number in mind, we didn't expect it to get this big this quickly. And we are actually happy that it has, because we think it does make our store more balanced, having a healthier kids business, a healthy men's business, the ladies business, and a very healthy accessories business. We like this. We did reset the sales floor to drive even more accessory business. The result of the floor set of putting handbags at the very front, and pushing footwear closer to the front, gives these two high unit retails, in addition to jewelry, which is a very fashionable category for us, up front and center space, and more space. So we do intend to drive more -- we like, obviously, categories that double-digit comping for us, and we want to see more -- and we like the unit retails.

And so we are going to give more space -- we have given in more space, and are giving more inventory. And we expect to see our accessories -- these two -- all the accessory areas, but in particular handbags and footwear, to continue to grow. We are not going to put a limit on them. I don't think we are going to let them become 50% of the store. But I think I'd be comfortable with them becoming 30% of the store, for sure.

Okay. That's great. Lastly for me, a little more color on footwear. Can you remind us where you are in terms of what's your footwear merchandise, men's, women's, mix? I know it's more dress, I think, but would you increase the athletic? Seems like there's some good trends on that side. If you could share some thoughts there, that would be great.

Sure. We have three very strong businesses, as you've just mentioned. We have a strong ladies business. And that consists of a dress business, a boot business. We also have a very nice casual business. That would be like a ladies Oxford, a ballet, a slip-on shoe. So very nice casual businesses going on there. Also in the second quarter, we will have a strong sandal business.

As you look to men's and kids, we also have those similar businesses in men's. So in men's, we have -- we have a strong athletic business in ladies. But in men's, it's a very strong athletic business. We've just added a dress and casual piece. That's where a lot of the new growth is coming from right now. And sandals, were very strong in the second quarter, as well.

And then, as you move over to kids, we do similar things in kids, strong athletic business. We have a dress and casual, as well as a back-to-school uniform shoe business. And then we're actually, even, doing very nicely in scrub shoes. So overall, the shoe business is very strong, and we see continued growth in all of these areas. Did that help?

(Operator Instructions)

Pam Quintiliano, SunTrust.

This is David filling for Pam. Could you talk about where you are now, in terms of upfront versus in-season buys? And could you provide an update on next season's buys as well?

Sure. We would -- I would tell you that, from a closeout perspective, we are over 60% in buying [close to need], over 50%. I wouldn't want to get more specific than that. But we have a very healthy business, between taking advantage of in-season opportunities and positioning the store with the correct product that we know is specific to our customer. We are also continuing our next-season buys, where we look for terrific opportunities, where we can hold them until the next season. And we don't really have a cap on that. We flow with that based on the opportunities that arise at the time.

Could you also provide an update on the West Coast buying office, in terms of what type of deals you are seeing, and the impact of women's products?

Sure. We very much like how the West Coast buying office is progressing. Since the opening of the West Coast office earlier this year, we have opened over 60 non-branded fashion resources, and many of those look like they're going to be very strong in the future for Citi Trends. They offer the best on-point fashion that's being delivered in the fashion market in the US. And they also -- many of these resources produce domestically, so we can get very quick turnarounds. So we are very pleased with that. Each day, I think we get a little bit smarter in refining our strategy and finding new vendors that can help us drive sales.

Great. How do you think about advancing the vendor base going forward, as you continue to shift to more non-branded approach on women's as well as footwear and accessories?

Could you repeat that question for me? Just so I make sure I get it right?

Going forward, how do you think about the buying team and vendor base as you continue to shift to more non-branded product on women?

Great. Yes, I will talk about the buying team. I am very happy with our merchant team right now. We have a very, very strong merchant team in ladies, both on the East Coast and the West Coast. They're working very well together as a team, as we look at the new fashion landscape. They are doing a great job shopping competitors and understanding what the market is, and shopping the vendor base, and understanding who is strong, where the best fashion is coming from, what vendors, what price points are working. And so we are further refining that every single day.

And we are adding new vendors to the mix every single day to really find that right combination that delivers positive comp store sales. So I feel very good about the direction that we're going, the team that we have in place, and the vendor market that's available to us on the non-branded side in ladies.

Okay. Great.

Patrick McKeever, MKM Partners.

Hate to be the one that asks the weather question, but it was a very cool -- or it has been a cooler than last year summer in many of your markets, much wetter than last year. So I was just wondering -- and you mentioned that same store sales were positive each month of the quarter. So I was wondering if you could just talk through the weather impact, if there was one? Or how you viewed the weather during the quarter, that sort of thing?

This is an easy question, fortunately, for us. We don't believe the weather had a consequential impact on our second quarter. I called out on the first quarter call that we had seen, finally, some warm weather at the end of the first quarter. But our point of view, for us, at Citi Trends, is that the weather impacts are generally at the beginning of the season. At the beginning of the spring, summer, and then at the beginning of fall, winter. And once we are into the season, yes, we read the same things. Obviously, we've seen the rain, particular the southeastern part of the country. It's been a very, very wet summer. But no, we don't have any call-outs at all in weather in our second quarter.

How about the overall environment for your core customer? How are you feeling about that, these days?

I'd say, Patrick, it's the same. I think we -- I appreciate you bringing it up, because it is an overlay. It is something that, when you are thinking about retail business and retail sales, and trying to drive sales in any environment, and trying to drive sales in a turnaround environment, looking at the overall macros is definitely a big piece of it. I think things are about the same. I think things are kind of sloppy, and to an extent that they are better, it's only very, very slightly incrementally better. So, I think things are better, but in slivers, not materially.

Okay. Last one. Just looking out to the holiday season and the fourth quarter, when you are up against close to a negative 12% same-store sales comparison, I know you're not giving any guidance, but any general thoughts on this year versus last year? What you might do differently in the fourth quarter? What -- it doesn't seem like we will have the fiscal cliff -- the overhang, there. (laughter) So maybe things are better just from that standpoint? But just any thoughts on the fourth quarter would be appreciated.

Okay. The first -- fourth quarter was 12%, and a lot of that 12% happened at the end, with taxes -- tax money moving away from us. It looked like -- actually, into oblivion, eventually. Last year, just talk back to weather again. Probably one comment that people would have about the fourth quarter, as you look at it, is it was the second warm -- last year was the second year in a row of a very warm fall and winter. We are obviously hopeful that it's not as warm as last year as we work our way through fall and winter. It would be nice to have some cool weather. That would help everybody's business, including our business. But we are not counting on it being materially better.

We are managing our business expecting it to be about the same as last year. We are hopeful to have sales increases in the fourth quarter. That's what we are planning for. We are planning for this quarter and we hope for next quarter. And we hope to have some slight sales increases in the fourth quarter. Again, we don't give guidance. As far as environmentally for us, weather could have an impact. We'd like to think it would be a positive impact. We are going to run with less inventory than we owned last year, to some extent, like we called out before. We think that, that actually is a healthy move, not a negative move.

And as you point out, we can't believe that the environment for tax refunds and all that at the very end of the fourth quarter, which could affect the end of January and certainly the beginning of February, we can't believe it would be any worse. We believe that everything has been settled in that regard. And things should be normalized. So hopefully things should be healthy for the fourth quarter. That's our perspective.

Got it. Okay, great.

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

Thank you everyone for joining the call today, and have a nice 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 line.