Citi Trends Inc (CTRN) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Citi Trends fourth-quarter 2014 conference call. (Operator Instructions) As a reminder, this conference is being recorded Friday, March 13, 2015.

I would now like to turn the conference over to Pat Watson. Please go ahead, sir.

Thank you, Amanda, and I wanted to let everyone know that 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's 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 you should not place undue reliance on these statements. 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. Please go ahead, Bruce.

Thanks, Pat. Good morning, everybody, and thank you for joining us today. Also on the call are Ed Anderson and Jason Mazzola. First I will provide you with details related to the fourth-quarter and full-year 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 fourth quarter increased more than 15% to $181 million, with comparable store sales increasing nearly 14%. The higher comp-store sales reflected an increase of 13% in the number of transactions and a 1% increase in the average unit sale, while the average number of items per transaction was flat.

By merchandise category, sales in the fourth quarter in comparable stores were as follows. Accessories were up 20% on top of a 12% increase in last year's fourth quarter. The ladies' division was up 16% this year, after being down 15% last year. Men's sales were up 13% in the fourth quarter this year, while they were down 6% in the fourth quarter of 2013.

The home division was up 13% this year and up 9% last year. And children's sales were up 11% in this year's fourth quarter after being down 6% last year. The most encouraging part of these category trends was that all five divisions were up double-digits in the fourth quarter.

Sales of nationally recognized brands represented 27% of total sales in the quarter, compared with 31% in the fourth quarter of 2013. Total sales for the full year increased almost 8% to $671 million, compared with $622 million in 2013.

Comparable-store sales increased 7.5% in 2014, as reflected in a 9% increase in customer transactions and a negligible increase in the average number of items per transaction, partially offset by an average unit sale that was lower by almost 2%. We were very pleased to see traffic drive this growth, particularly since it was on top of an increase in transactions in the previous year that exceeded 3%.

Cost of goods sold as a percentage of sales improved 60 basis points in the fourth quarter, and improved 100 basis points for the full year due to the strong sellthrough of merchandise and our improved inventory planning efforts. As a percentage of sales, fourth-quarter SG&A expenses decreased to 31.8% from 31.9% in the fourth quarter of 2013.

As mentioned on the last call, an unexpected sales decline in last year's fourth quarter caused incentive compensation expense to be negative when we reversed a portion of this expense that had been accrued earlier in 2013. In this year's fourth quarter, the opposite occurred: a strong increase in sales drove significant improvement in profits, resulting in a higher level of incentive compensation expense.

The increase in this expense item from a credit last year to a charge this year totaled approximately $4 million for the fourth quarter. For the full year, SG&A expenses declined as a percent of sales to 32.9% from 33.1% last year.

Depreciation expense declined $400,000 from last year's fourth quarter as a result of opening fewer stores than in the past. Impairment expense was $300,000 lower due to the Company's improved operating performance, which has reduced the need for writing off fixed asset balances in underperforming stores.

As for income tax expense, our fourth-quarter effective tax rate was unusually low due to the benefit from work opportunity tax credits for the entire year being recorded fully in just the fourth quarter. None of the benefit had been recorded earlier in the year because the extension of the credits for 2014 was not approved by the federal government until December.

The government extension of this benefit was done only for 2014, so we will once again be in a situation in 2015 where we don't know whether the tax credits will be extended. And we cannot record the related benefit until the benefits are formally extended.

In 2014's fourth quarter, net income increased to $4.7 million or $0.31 per share, from $1.5 million or $0.10 per share in last year's fourth quarter. For the full year net income was $9 million or $0.60 per share, compared to $460,000 or $0.03 per share in 2013.

Now I will turn the call over to Ed.

Good morning, everyone. We are very happy to report another strong quarter as well as a very solid 2014 full year. The highlight for the fourth quarter clearly was the 13.9% comparable-store sales increase. That is the best quarterly sales increase in over eight years. Importantly, we had solid comparable-store sales increases all four quarters, and the comparable-store sales increase for the full year was a strong 7.5%.

I should add a little color to the fourth-quarter sales. As reported previously, we did benefit from earlier tax refund-driven sales of about $3 million at the very end of the quarter; and that had a positive impact of about 2% on the fourth-quarter comps. And the comparisons to last year were relatively easy, as last year's comps were a negative 3.5%.

But even without those benefits, our comps were still very strong and up significantly across all merchandise divisions. Accessories, including shoes, continued to be the leading category, with a 20% comp increase. And our ladies' business continued its rebound with a 16% comp for the quarter. Sales of cold weather product were much better this year, as we had made this an area of emphasis.

We were able to leverage SG&A expenses in the quarter against a very difficult comparison. So we delivered on all fronts: very strong sales, good gross margin improvement, good control of expenses, all of which resulted in a very solid and profitable fourth quarter.

Now I will provide an update on sales to date for the first quarter of 2015. Sales for the first weeks of 2015 in comparable stores have decreased 3%. We believe that our underlying businesses are healthy and the sales decrease for the first five weeks can be explained.

First, as I mentioned earlier, there were $3 million of tax refund-driven sales recorded in January that would have been recorded in February had the tax refund calendar not changed. This impact in the first five weeks of February was about 3%, or all of the decrease.

Second, unseasonably cold weather has effectively postponed a lot of spring shopping in most of our markets. February of 2015 was the coldest February in the last 55 years.

Our warm weather stores, those stores located in the southernmost part of our territory, have performed well. These stores, which represent 11 of our 50 store districts, had sales increases in the first five weeks. So we believe our spring sales have been largely postponed and believe that our sales will improve as the weather warms up.

Looking forward into 2015, our goal is to continue to increase comparable-store sales. We believe that all of our businesses are now strong enough for us to expect to deliver consistent comp-store sales increases.

Additionally, from a real estate perspective we successfully opened two new stores in the first quarter. For all of 2015 we expect to open 10 to 15 new stores, remodel 20 to 25 stores, and expand or relocate seven to 10 stores.

Now I will address the leadership changes we announced earlier today. As we disclosed earlier today in a press release, I am retiring as CEO and Jason Mazzola is being promoted to CEO. Additionally, Bruce Smith, who is currently CFO, is being promoted to Chief Operating Officer while retaining the CFO role.

I will move over to an Executive Chairman role. To help ensure a smooth transition, I will still chair the Real Estate Committee and I will oversee operations for the Board. I will offer counsel and advice to both Jason and Bruce. And Jason as CEO will report directly to me.

Now is a good time for me to retire as CEO. The Company is again on sound financial footing and is poised to continue to grow sales and profits.

There are many accomplishments by our team that I am very proud of, but first and foremost is that I leave in place an outstanding management team. Not just Jason and Bruce, but throughout the organization the Company is very strong. The Company is in good hands.

And now, operator, we will take any questions.

(Operator Instructions) Thomas Filandro, SIG.

Congratulations on a tremendous turnaround. As well, Jason and Bruce, on the promotions.

And Ed, best of luck, man. Best of luck. You are a good guy.

A couple of questions. The first question I want to have is: can you guys talk about the port issues? Obviously that has an impact on other retailers. Help us understand if the port issues have impacted you guys anyway? And more importantly, are you potentially going to be a beneficiary of the port issues?

Then my second question is: I hear accessories being a big driver to the business. This is a question for Jason. With the merchandising adjustments that you have made in the business, are you beginning to see any change in the profile of the shopper you are seeing in the stores?

And then I had one more follow-up.

Okay, let me address the port issue first. During the fourth quarter and throughout the first we did not see any meaningful negative impact on our flow of merchandise due to the West Coast port slowdown.

On the contrary, to your follow-up question, we have actually seen some nice opportunities in the market as a result of late deliveries. As the spring unfolds, we think we will continue to see new deals as a result of port delays.

Even though it has been resolved, it's still slow and there's still a bit of a backup there. But I think we are going to see some more deals as a result of that.

To move on to your second question, which regarded shoes and accessories and probably even home, and have we seen a difference in the profile of the customer, I would say we haven't specifically seen anything different. I think the customer is really responding to the breadth of product.

And the fact that we have a lot of repeat customers -- customers often shop our stores three times a month -- and so having a more robust and a nice breadth of offering gives them something new to buy every time they walk into the store. So we really like where we are going with shoes, accessories, and home.

Thank you. One final one. Can you guys just update us on what you are seeing in terms of the new e-comm initiative? And how should we think about the e-comm going forward? Any kind of performance highlights would be great.

Sure. Right now the e-comm -- we are very happy with it, but we are still very much in the test phase. We are building the capability and seeing what the customer is liking.

We do see growth in the product classifications that we're going to offer in 2015. We really want to understand and create some engagement with the customer and understand what they want to buy.

I would tell you highlight right this minute is really high-fashion ladies apparel. That's what they're responding to the most. But really we are still in the test phases.

Congratulations again and best of luck to all of you.

Quintiliano, SunTrust.

Thanks so much and congratulations on the great quarter. Congratulations as well, Jason and Bruce. And yes, you will certainly be missed with your insights, Ed.

So, had a few questions for you guys. First off, can you just talk about the health of your consumer and how you think they are feeling right now with the recent macro trends and gas prices, and if there's any benefit from that?

And then second, just you broke out the branded component. But can you give it to us for men's, women's, and kids' and just where the evolution has been versus last year? And then I have a few follow-ups.

Okay, Pam, I will take the first question on basically the macro environment for our customer and just the general health of our customer. We get this question a lot.

I'm actually happy to report today a different answer than I probably have given for the last several quarters. And that is, I think things are better, finally. I believe the macro environment for our customers is now at least slightly positive.

And I do believe that because of some things that have been in place and then some other things that had not been in place. Clearly unemployment trends have been improving for African-Americans, and they are now the best they have been in some time.

Also very importantly, low-income employment is up. And one of the biggest drivers has been, of course, gas prices; and gas prices were down more, still are down, and that's been a big help.

Now the second question you ask is you want -- we report overall brands penetration, and you asked us to give you brands penetration by division. Do we have that -- those numbers in front of us?

Well, women's is really down to virtually zero, and so --

I can give you some ballpark color. Like Bruce said, we are really purchasing no traditional urban brands in ladies; They are fundamentally not even made anymore. We still purchase some branded product, but really it's a very small amount.

And we are only up against last year's first quarter 6%, whereas in 2013 it was actually 28% penetration. If you look, I would tell you girls followed the same path as ladies.

I think really where we are maintaining that 25%, 27% as a Company is coming from boys predominantly, because we still a healthy boys' branded business. And actually men's -- we are seeing some uptick in some new brands that are happening in the men's area that we are excited about. I hope that gives a little bit of color.

Just I would add to that the infants and toddler business is still a fairly significant branded business.

Yes, that's true. Yes.

If you look at the infants and toddler business being at about 50% branded, with the boys being about 50% branded, mens somewhat less, and ladies zero, that's how you get to the 25% overall number.

Great. Just wanted to make sure my assumptions absolutely -- just wanted to make sure the assumptions were correct on the womens side of the business. Then just two other questions.

The first one: any light you could shed just on women's, and what really has been working that's accounting for that dramatic swing? Either from a fashion perspective, or if you are working with some new vendors, or just anything at all.

Then lastly, historically you guys have tended to be more of a two-season business just given your regional exposure. With the slow start to February, is it still safe to assume that your product tends to have a longer shelf life, so you don't necessarily have to have the same type of knee-jerk markdown reaction that others may need to do with the weather not cooperating?

Yes.

Pam, I can tackle those. Actually we are real happy with the progress we have made in ladies, especially in the fourth quarter delivering a 16% comp-store sales increase. I would tell you there overall we did a much better job on our cold weather offering than last year. I would tell you both from a fashion and a value point of view, the cold weather mix resonated very nicely with our customer in both offering a great value and the fashion that she wanted.

And we are optimistic about our ladies business as we head into 2015. We think we are also well positioned in spring, and we are ready to drive business as things warm up. And just talking about the warm-up, again our stores are located in the South, and so hopefully that South is going to get warm a little bit sooner.

But we think our inventory is in terrific shape. We have a lot of liquidity to take advantage of deals for the second quarter. During the second quarter we are more deal-based and chasing what is working and trying to find those deals.

So I think we are -- the inventory is poised to drive sales in the future.

Great. Best of luck and congratulations again to all of you.

Patrick McKeever, MKM Partners.

Thank you. Good morning, guys. Congrats to both of you.

Can you just run through the incentive comp impact again? Bruce, you said it was a $4 million swing factor versus last year, which is huge on an operating profit base of just over $5 million.

That's correct. Last we actually had negative incentive compensation expense in the fourth quarter due to the decline in profits related to the sales decreases. And I mentioned that this year the exact opposite occurred.

We had a really good fourth quarter, and with that increase in profits the incentive compensation was much higher. And comparing to a negative, that you had this $4 million gap between the fourth quarter of this year and the fourth quarter of last year.

Got it. I'm not saying it's not well deserved, by the way.

The other question is just on the categories. Footwear has been very strong. You have expanded the category quite a bit. My question is how much more opportunity is there in that area of the business?

Then just my last question is on some of the impulse merchandising that you have been doing at the front-end, just wondering if you could give us an update on types of products you are selling and customer response and so on.

Yes, sure, I can give you some color on both of those. As far as the shoes and accessories businesses and those businesses growing, we do feel very good about those in shoes. We have penetrated the store nicely. So we see some of those double-digit comps tapering off a bit, but we still have some runway there.

In addition to that, on the accessory piece we are still underpenetrated in some of those accessories. And as we add new ones or find ones that we really weren't penetrated well -- and the customer is responding well. So we do continue to see growth in both shoes and accessories moving forward.

As far as the Queue Line goes, we are very happy there. The Queue Line has been -- what we have tried to do is add new products to the stores that they haven't seen before. Like for example, some of the beauty products in lip care or eye care or even some functional home product.

We are testing and trying lots of different things. I would tell you beauty has been the best success. The customer has responded very well to that product.

We see those classifications growing, and we are very happy about the results there too. So we see continued growth there.

Great, thank you very much.

Evren Kopelman, Wells Fargo.

Good morning. Congratulations to everyone on your new roles. A question along those lines. Jason, as you are going to spend a little more time in other areas of the business as the CEO, is someone else on the merchants team taking on a bigger leadership role? You guys didn't announce a new Chief Merchant, but -- to take on some of the responsibility?

Evren, this is Ed. I'm going to answer organizationally what it's going to look like, and then I will flip that merchandising question, people question back to Jason.

But organizationally, the idea is that Jason is still going to spend the vast, vast majority of his time overseeing merchandising and marketing for the Company. That's what he has been doing; he's very skilled in those areas, and we really don't want to dilute much at all his efforts in those areas.

But he is going to become the CEO of the Company and has responsibility for everything.

Now Bruce Smith is being promoted to Chief Operating Officer and Bruce -- his responsibilities already include finance and information systems as well as store operations. So Bruce will be picking up the HR function and the legal and admin options as well.

So Bruce will be running sort of the Savannah-based functions and Jason the New York-based merchandising and marketing functions. Again, our idea is to promote these guys, who well deserve these promotions, and have the capability to do these new jobs. But the idea is not to dilute our merchandising efforts with Jason. But Jason, do you want to add some color to that?

Yes. One of the real nice things that has happened over the last three years -- as Ed said at the very beginning in 2012 that really what we had is a merchandising problem and a sales problem; the rest of the store was working pretty well.

And I still think that's the case. The rest of the store is working well, and really what we want to do is continue to offer exciting value to our customer through the products that we buy.

Over the last three years, we have built an incredibly strong merchandising team in New York and in LA. So I have a very, very strong team of skilled merchants that have really developed nicely over the last three years.

In addition to that, we also a very strong planning and allocation team that we've developed over the last three years, that is very capable in helping us get the right product to the right stores at the right time. So I think at this point I have a lot more tools at my disposal right now, and I'm real happy with that. So I think we're in very good shape as we move forward.

But to answer your question more specifically, the organization merchandising-wise, the four merchandise managers will continue to report directly to Jason. And that's a conscious move there.

Got it. Okay, that helps. The other question is, as I look at what the opportunity is here from an earnings power perspective, what are your views on where you can get that back to, in terms of sales per square foot and operating margin? Like, what do you think is a sustainable level?

Evren, as far as operating margin goes, we had a number of years in a row there were we were right around 5% to 5.5%. And so that is clearly the more immediate goal.

Now at that time our gross margin was a little bit higher; we were running the gross margin somewhere between 38% and 38.5%. This year we were at 37.6%. So we are hoping that we have little bit of upside there.

But most of the rest of the recovery back to that 5% to 5.5% range would likely need to come from operating expense leverage. And of course that comes from comp-store sale increases. So that's the goal in the near term, is to get back to that historical level.

Mr. Anderson, there are no further questions at this time. I will now turn the call back to you.

Okay, great, operator; thank you. Thank you, everyone, for joining the call today and everybody have a great day. Thanks again.

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. Thank you and have a good day.