Citi Trends Inc (CTRN) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends fourth-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 Friday, March 14, 2014. I would now like to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you, Jasmine. Our earnings release was sent out this morning at 6:45 AM Eastern. If you 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 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. 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 fourth-quarter and full-year results. Then, Ed will discuss further the results and our business outlook. After which, we will address any questions you may have.

Total sales in this year's 13-week fourth quarter were $157 million, compared with $176 million in last year's 14-week fourth quarter, with the extra week providing a sales benefit of $12 million in 2012's fourth quarter. Comparable store sales on a 13-week versus 13-week basis declined 3.5% as reflected in a 2% decrease in the average unit sale, together with slight reductions in the number of transactions and the average number of items per transaction.

By merchandise category, sales in the fourth quarter in comparable stores were as follows. Accessories were up 12% on top of a 12% increase in last year's fourth quarter. The home division was up 9% this year and up 6% last year. Children's sales were down 6% this year and down 12% in the fourth quarter of 2012. The men's department was down 6% this year after being down 16% last year. Women's was down 15% this year and down 24% last year.

Sales of nationally recognized urban brands represented 31% of total sales in the quarter, compared with 42% in the fourth quarter of 2012. Total sales in this year's 52-week fiscal year were $622 million, compared with $655 million in last year's 53-week year, with the extra week at the beginning of FY12 contributing approximately $21 million to total sales.

Comparable store sales were down 1.6% on a 52-week versus 52-week basis. The decline in comp-store sales was reflected in an average unit sale that was lower by 7%, partially offset by an increase in customer transactions of about 3.5%, and a 2% increase in the average number of items per transaction.

Cost of goods sold as a percentage of sales improved 400 basis points in the fourth quarter due to significantly fewer clearance markdowns compared with a year ago, as we entered and exited the fourth quarter with much lower inventory levels than the prior year. For the year, cost of goods sold as a percentage of sales improved 180 basis points due primarily to strong inventory control measures taken by our merchandising organization.

SG&A expenses decreased $2.5 million in this year's fourth quarter as last year's extra week included approximately $3 million of expense. For the full year, expenses declined $1.3 million, once again reflecting an extra week in 2012. As a percentage of sales, SG&A expenses increased to 33.1% in 2013, from 31.7% last year, due to the deleveraging effect from a decline in comparable store sales together with a loss of the extra week, which had $21 million of sales and only $3 million of expense.

Depreciation expense decreased $500,000 in this year's fourth quarter, and was down $2 million for the year, due to the Company's pullback in store growth. Regarding income taxes, note that we had an income tax benefit in Fiscal 2013 despite having a $290,000 pretax loss. This income tax benefit was a result of work opportunity and other tax credits received, as in prior years. Such tax benefits were more than enough to offset the pretax loss resulting in net income for the year.

In 2013's fourth quarter, we had net income of $1.5 million or $0.10 per share, compared with a loss of $700,000 or $0.05 per share last year. For the full year, net income was $460,000 or $0.03 per share, while 2012 reflected a net loss of $2.2 million or $0.15 per share.

Our balance sheet position remains strong. Inventory was down 10.6%. Cash, together with short-term and long-term investment securities, totaled $85 million at year end. We continue to have no debt.

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

Good morning. We continue to make progress in the turnaround of Citi Trends. The fourth-quarter results, while not as good as we had hoped they would be, nevertheless reflect the progress we're making. Sales overall were disappointing at a negative 3.5% comp, but our accessories business, including footwear in particular, continued to be very good.

We have managed our inventories well and have reduced our investment there. More importantly, the reduced inventory levels have allowed for significantly fewer clearance markdowns and improved gross margin. We managed expenses well in a difficult sales quarter.

The fourth quarter marks the end of 2013 and also the end of year two of our turnaround efforts. This turnaround is taking longer than I thought it would, but we've had significant work to do. Most of our problems have been merchandise related. We had a value problem; our prices were not as compelling as they had been. We resolved that issue.

As recently as 2011, almost 50% of our merchandise sales were traditional urban brands. Those brands were effectively our proxy for fashion. Those brands don't even exist in ladies any more and are less important in the other apparel areas, and so we moved to non-branded fashion and apparel. That strategy, while not yet producing consistent results, is proving to be the right move.

In addition, we are expanding the businesses that are working. We have dramatically increased our accessories business. Footwear has been a huge success for us. We've increased, substantially, the men's and children's accessories businesses. We have successfully expanded our home business to include new categories.

Now, I'll provide an update on current sales trends. Total sales for the first five weeks of 2014 were $91.3 million, compared to $87.5 million last year. Sales in comp stores are up 5% compared to last year.

As you probably remember, we tend to generate high sales during this five-week period due to the amount of business we do with customers that have received their tax refunds. Therefore, we're pleased to see that our customers have responded to our merchandise assortments.

From a growth perspective, 2014 will be another conservative year. We plan to remodel 20 to 25 stores, expand or relocate 5 to 10 stores, and open 5 to 10 new stores. We're all very excited about our prospects for 2014. We have some sales momentum. Our strategies are working. We have a strong balance sheet and a team of associates dedicated to success at Citi Trends.

Thank you. Operator, we'll now take any questions.

(Operator Instructions)

Anna Andreeva, Oppenheimer.

This is actually Steven Zaccone on for Anna. Thanks for taking my question. First, impressive gross margin there in the fourth quarter, despite the heavily promotional environment. Can you just talk a little bit about, like, what drove the strength in particular? Do you see opportunity to expand gross margins further in 2014?

Sure. I can speak to a little bit of that. We do see continued opportunity in gross margin as we look to continually improve our inventory position. Further, as we move some classification away from brands and into fashion, we see margin opportunity there. So I think it's going to be a combination of those two things.

Okay. Great. And then shifting with apparel and talking about the mix of urban versus fashion, where do you expect to be at the end of 2014 for the mix?

Currently, I think the year to date -- and Bruce, double check my numbers here. I think for the year we ended at approximately 31%?

33%.

33% in urban brands. I see that number coming down a little bit in 2014, as really we're exiting the ladies urban branded business.

We still are looking for emerging brands. We have been able to find brands that resonate very nicely with our customer in mens and kids, but ladies is really a fashion-oriented business right now. So like I said, I see that number coming down.

Okay. Great. And then just lastly, good work on the inventories. Where do you guys expect to end the first quarter?

As we look out into 2014, and also think about where we came from, we've now cycled through four consecutive quarters where we had significant decreases in inventory, ranging anywhere from 6% to 16%, depending on the quarter that you looked at in 2013. So we have cycled through four quarters of it and, therefore, we think that any improvements would be incremental from here forward. We expect, for the most part, inventory to be flattish this year versus last year, with maybe some changes depending on which way --- which direction sales go. So we might have some movement in inventory that moves in tandem with sales. But other than that, it's pretty much going to be flattish.

Okay. Great. Thanks very much, and good luck.

Thank you.

(Operator Instructions)

Pam Quintiliano, SunTrust Robinson Humphrey.

This is Nick Hiatt. I'm on for Pam. Thanks for taking our questions.

First off, can you just give us an indication of how weather impacted your customer? Are you seeing that that has normalized at all?

Secondly, we heard you mention a bump from early tax returns received. Is that similar to years past?

Lastly, are you seeing an impact from the Affordable Care Act on your customers, and any impact from heightened heating bills?

Okay. Affordable Care and heating bills -- all right. (multiple speakers)

Sorry, I can repeat.

No, I think I got them. You asked about weather. You asked about the impact of tax refunds, and the timing of them. And you asked about the Affordable Care Act and heating cost. I'll take them one at a time here.

Weather: Wel, the good news is, is we had sales increase for the first five weeks of the year. We had a 5% comp. Actually, this is actually despite some fairly poor weather.

The weather was markedly cooler and messier in January than previously. The same thing was true in February. We had much more -- I guess we set a record, a 25-year record for the coldest February. And I guess we had a lot more storms than we had in the past. So we had a lot more store closings, and early and late openings and things like that, this year than last.

But as far as the impact on our Business, it was a negative impact, but I would say it was not a material negative impact on our Business. But it was definitely a weight on our Business in the first five weeks of the year. So weather was a negative, but the good news is we had positive sales despite the weather.

Great.

As far as tax refunds go, tax refunds this year were in a similar cadence to last year. The tax refunds started about a week later than last year. So that tax refund-driven selling was captured in essentially the same weeks as last year.

The third impact, the impact on our customers of the Affordable Care Act and our customers over increased heating bills, I'd say I don't really have a great answer for that. We have not seen or measured any impact of those two things.

The economy continues to weigh on our customer. We believe that the economy continues to weigh on the lower-end customer more than the top-end. And so things like changes in cutbacks in food stamps that occurred back in November, December continue to weigh on our customer. The employment situation continues to weigh on our customer.

Fortunately, we've anniversaried last year's 2% payroll tax, which I think was a pretty big hit. Food prices and gas prices, actually, I think are probably going in the other direction. So that's our take on the economy and our customer.

Does that help you with your questions there, Nick?

Yes. Yes, it definitely does. All very good information. Thanks a lot. Good luck on the quarter.

Sure thing. Thank you.

Mr. Anderson, there are no further -- actually there is another question that just came up. It is from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

So my question is just on the -- first of all, the macro environment for your core customer -- what are you seeing? What are you thinking there? Has there been any meaningful change?

Then, the competitive environment -- anything going on there that's worth noting? There have been a few -- I know these are not direct competitors, but there have been some bankruptcies, retailers going away -- that are going away -- I guess I'm thinking of Dots.

Right. Right.

Do you see any potential benefit there? I know you have some stores that are in the strip centers close to the closing Dots stores, for example.

Okay. Thanks for your questions, Patrick.

On the macro environment for our customers, I was sort of answering that question with the previous caller. I think the answer is: It's still tough for our customer. I don't think it's consequentially worse than it was before, but I also don't think it's much better either. I think, while unemployment for our customers is slightly better, the employment -- those numbers aren't great. There is a little bit of relief, I think, in gas prices; maybe food prices have been okay for our customer.

I mentioned earlier that last year's big negative was the payroll tax increase. Then, this year's big negative coming from November forward has been the cutback in food stamps. But I would say it's still very difficult for our customer. I think it is better, but it is a sliver better than I would say three or four years ago.

Now, moving to competition, you're right, there have been a number of bankruptcies in specialty apparel retail this, I guess, January, February. The one you called out was Dots. There have been probably three or four other ones, perhaps a bit smaller.

On the Dots front, we do compete with Dots. We have stores in centers with them, but there's not that many. I would say across our 500-store chain, there might be 20 or 30 locations that may overlap with the Dots. So we could have a slight negative impact as the stores are closed out and liquidated.

But after that, it all depends on the strength of who comes back, right? There could be another competitor to come back into that space that could be as good or better than they were before. But I don't expect -- on the competitive landscape, the short answer to the question is: There's not significant changes going on right this moment.

Then, just on the current trends, the up 5% same-store sales through the first five weeks of the first quarter of 2014. Were you saying, Ed, that you don't think that that is related to higher tax-refund distributions this time versus a year ago, or today versus a year ago? Because I think you said the cadence was about the same there? Or are you thinking there is some kind of a tie-in with the distribution of tax refunds?

Well, I wasn't addressing the size of the refunds. I think you may have mentioned it in one of your articles on another retailer that you read that or knew that the tax refunds are actually higher this year. I wasn't aware of that.

What I am aware of is when refunds started this year. It was about a week later than last year. We watched -- and so, what I was saying is: The tax refund money came to our customers. What I meant by cadence was the timing is about the same. The timing was about a week later than last year.

When the tax refund money came, I think our Company was better situated this year than last. I think we had not turned to Spring as well as we -- last year as well as we could have. This year we did, and so we returned nicely to Spring.

You may remember: I called out earlier that our fourth-quarter sales were not as good in Fall and Winter. So the good news -- the bad news was we've missed some fourth-quarter sales by being light in Fall and Winter. The good news is, is we were able to transition much quicker to Spring. I think that's helped us.

I think we had healthier, better Spring go-forward inventories when the taxes showed up. I think we're better on point fashion-wise in some of our fashion categories. And so I think it's helping us. And so we won't get too far ahead of ourselves, because it is five weeks. But this is nice to have a nice, positive trend.

And then is there anything -- I know you don't give guidance, but you've got the 5% current quarter trend. You're up against negative 4.1% comparison. Easter is three weeks later this year. That tends to be a positive, right? So is there anything we should think about as we look through the remainder of the first quarter that would perhaps help you build on that 5%, or might bring that number down?

We don't give guidance, and the best thing we could tell you is what we've done so far. I would point out to you that the sales pace of the first quarter -- I did give you the sales numbers for the first five weeks. You know that those numbers are much higher per weekly average than the rest of the quarter will be. So we're past the biggest part of the quarter, because the tax refund-driven selling is bigger, frankly, than Spring selling in general, and bigger than Easter selling for us.

For the later Easter, while it's important, it will be a bump. It does move to April 20. I don't see that as a huge positive, frankly.

But -- so I can't tell you we're going to have the same sales increases for the rest of the quarter. Obviously, it's good momentum at the beginning. We're optimistic about the rest of the quarter. But I don't see a big lift coming from Easter, as you suggest it might occur for us.

Okay. Good stuff. All right, thank you very much.

Great. Thank you, Patrick.

Evren Kopelman, Wells Fargo.

I wanted to talk about the women's business a little bit. I think, when you had released sales, you had mentioned in the fourth quarter some of the negative of maybe not having enough cold-weather outerwear apparel. So could you address that a little bit more -- flush it out -- the fourth quarter, the women's trend? Then, maybe these first five weeks, what have you seen? Have you seen an improvement in women's that I guess you would expect to see from the merchandising initiatives?

Sure. I can address that question for you. While we were disappointed with our ladies' business in the fourth quarter, the pivot to fashion and away from traditional urban brands is absolutely the right strategy. Our fashion business continues to improve each and every week. It is still not at the level where it can cover the drop in traditional urban brands, but we are making very good progress there.

In the fourth quarter, we were too conservative in our cold-weather purchases. That would be along the lines of sweaters and long-sleeved product, as well as outerwear, based on past years' results. We definitely left sales on the table. We were able to make significant gross margin improvements in ladies in the fourth quarter, but we should have been able to deliver both sales and margin.

Our Spring merchandising mix, right now, in ladies is off to a strong start this year. We're looking for positive comps in ladies as we move throughout 2014.

If you think about the branded penetration in ladies' sportswear, this quarter was 14% versus 34% last year at this time. As we move through 2014, we're up against a 28% penetration in the first quarter. But then, in the remaining quarters of 2013, that urban ladies' penetration fluctuates between 14% and 15%. So the hurdle to get over gets a little bit lower. So we are optimistic about our ladies' business moving forward, and we see some nice positive trends in the Spring business.

Okay. That's very helpful. Okay, so past the Q1, compares a little different.

The other question I had is on the accessories. You have so much momentum. Part of me worries that the compares are getting tough. Maybe talk about -- do you expect the momentum to continue there? Where is accessories maybe now as a percent of sales?

Bruce, help me on the accessories as a percent of sales, please.

Yes. For the full year, accessories was 26%. In the fourth quarter, it was 28%.

Okay. We actually do see some very, very nice momentum in these areas. Shoes were really the driver of the accessories comp-store sales increases. I think we are offering great fashion at extreme values. We feel we are on point with the merchandise mix there.

The customer is responding well to the merchandise offering across all genders: ladies, mens and kids. It's not just one gender driving that business. We actually still feel we are underpenetrated in the shoe department, and see strong growth for 2014.

Also, in overall accessories in ladies', men's and kids' accessories, all those are performing nicely as well. Like shoes, we felt as if we were underpenetrated in many of those areas, and we also see continued growth in that area in 2014. So we feel, overall, very good about that business, and the customer's responding to these fashion businesses.

Got it. Okay. Very helpful.

Then, accessories -- so, for the year is 26%. Bruce, you said 28% for the fourth quarter. Where is women's now? Has accessories outpaced women's at this point?

For the full year, ladies was also 26%; and for the quarter, it was 22%.

Okay. Right. Okay.

Then, I wanted to ask about SG&A. Obviously, you've been super disciplined with some of the top-line pressures. But you mentioned some remodels this year, new stores, some expansions, relocations. I guess how -- should we expect SG&A -- I guess there's going to be some increase related to these initiatives, but the maybe corporate overhead and that kind of portion of SG&A, can we expect that to be, I don't know, flattish, up a little bit? Like maybe you can talk about some of the SG&A expectations?

Yes, there's always a little bit of inflation in expenses -- low-single digits. You mentioned the re-lo's and expansions and remodels and so forth. We had a similar number of remodels in 2013. So it's not like we're going up against a number that had no activity and, therefore, no expense related to remodels.

And so I think when you look out into 2014, you have the slight amount of inflation that you would expect. Other than that, I think the expenses -- they're going to tend to have some variability, based on which direction the sales go. But overall, there's really nothing unusual to expect in the expense line.

Okay. What do you expect CapEx and D&A to be for 2014?

CapEx in a range of $13 million to $15 million; and D&A, $21 million.

$21 million. Okay.

Maybe lastly, I'll ask about, of course, the nice cash balance. Any updated thoughts on, I guess, what to do with that?

Nothing's really changed from our viewpoint, as far as that goes. We believe we're still in the midst of the turnaround. We've obviously made quite a bit of improvement from the large loss year that we had in 2011. But we still had slight pre-tax losses in 2012 and 2013. So there's still work to do, and so, at this point we're going to still be conservative with our cash.

Okay. Great. Well, thank you very much.

Thank you.

(Operator Instructions)

Anna Andreeva, Oppenheimer.

Thanks for the follow-up. Just shifting to -- if you could elaborate on the deceleration in mens and kids in the fourth quarter? Then, what do you see as the dynamics in that assortment, and maybe some areas of opportunity in 2014? Thanks very much.

Sure. Mens and kids was really similar to ladies. We did not have the fourth quarter like we should have had, in my opinion, on sales. The major miss was the degree to which we underplayed cold-weather classifications.

While the brands in mens and kids are not as explosive as they were several years ago, there are new brands emerging that resonate well with our customer and that are getting good traction. Actually, some of the traditional urban brands still perform very well in both mens and kids because the roots of a lot of these brands centered -- were driven in the men's business, and ladies was almost like an add-on. So, both in mens and kids, some of these brands still resonate very well.

We did have nice margin improvement in both mens and kids in the fourth quarter, but we definitely left sales on that table by not being positioned properly in cold-weather classes. We're seeing some nice trends as we move forward into the Spring. We're happy with our Spring mixes right now.

Okay. Thank you.

Mr. Anderson, there appears to be no further questions over the phone lines at this time. I will turn the call back to you to continue with your presentation or any closing remarks.

Okay. Well, thank you all for joining the call today. Hope everyone has a great day. Thanks.

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.