Citi Trends Inc (CTRN) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends second-quarter 2015 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, August 19, 2015.

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

Thank you, Susie. 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, Chief Operating Officer and Chief Financial Officer. Please go ahead, Bruce.

Thanks, Pat. Good morning, everybody, and thank you for joining us today. Also on the call is Jason Mazzola, President and Chief Executive Officer.

First, I will provide you with details related to the second-quarter and year-to-date results, and then Jason 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 6.1% to $154 million with comparable store sales increasing 3.9%. The higher comp store sales were reflected entirely in an increase in the number of transactions as the average number of items per transaction and the average unit selling price were virtually unchanged. Comparable-store sales by month in the second quarter were up 6% in May, up 8% in June and down 3% in July. As we have entered August, comp store sales have been up 6% for the first two weeks on top of a 5% increase in the same two weeks last year. As expected, some sales moved from the end of July into August as the result of a shift in the tax-free holiday in states were 40% of our stores are located.

By merchandise category, sales in the second quarter in comparable stores were as follows. Home was up 17% on top of a 28% increase in 2014's second quarter. Ladies sales were up 7% this year after being down 4% last year. Accessories, including footwear, were up 6% in this year's second quarter and up 24% last year. The men's division was down 1% this year after being up 1% in the second quarter of 2014, and children's sales were down 1% in the second quarter of both years.

Sales of nationally recognized brands represented 21% of total sales in the quarter compared with 24% last year. For the first half of the year, total sales were up 4.7%, and comparable store sales were up 2.7%. Cost of goods sold as a percentage of sales improved 250 basis points in the second quarter. This was due to fewer markdowns, reflecting the benefits of a new inventory planning and allocation system that began last year.

For the year-to-date, cost of sales as a percent of sales has improved 160 basis points. SG&A expenses were well-controlled in the quarter with expenses as a percent of sales declining 50 basis points to 36.2% on a comp store sales increase of 3.9%. For the year-to-date, SG&A expenses as a percent of sales have decreased 20 basis points to 32% on a 2.7% comp sales increase. Depreciation expense declined $500,000 during the quarter as a result of opening fewer stores than in the past.

Net income in the second quarter was $200,000 or $0.01 per share compared with a loss of $2.6 billion or $0.17 per share last year. Year-to-date the Company has net income of $11.4 million or $0.75 per share compared with $6.5 million or $0.43 per share earned in last year's first half.

Now I will turn the call over to Jason.

Thank you, Bruce, and good morning, everyone. We are pleased to report a profitable second quarter for the first time since 2008 and first-half earnings that were 76% higher than last year.

Additionally, we delivered a 3.9% comp store sales increase for the second quarter of 2015. This marks our sixth consecutive positive comp quarter, and it is on top of a 5.3% comp increase delivered in the second quarter last year.

Also, we are very excited to initiate our first cash dividend and share repurchase program. The $0.24 dividend on an annualized basis and the $15 million share repurchase are a reflection of both our strong balance sheet and our confidence in the business. At the same time, we remain committed to growing our store base in the future.

A highlight of the quarter was the strength in the ladies business. The ladies area delivered a 7% comp store sales increase for the quarter. This is the fourth quarter in a row that ladies has delivered positive comp store sales. The ladies team continues to offer great urban fashion with compelling value.

We drilled nice sales in the home area, delivering a 17% increase on top of a 28% increase last year. We still see nice runway in the home business as we move throughout the balance of 2015. The growth in accessories, which includes footwear, continued with a 6% increase. This is encouraging, given that we were up against a 24% increase from the last year and a 17% increase from 2013. Accessories have now increased for 16 consecutive quarters, 10 of which were double-digit increases.

As Bruce mentioned, we had a nice start to the third quarter. This is important because the first two weeks in August represents the two biggest weeks of the quarter from a dollar perspective. We think we have transitioned better from spring to fall than we have in the past and that we are positioned to deliver positive comp store sales increases in the third and fourth quarter.

The gross margin for the quarter at 39.4% and for the first half of the year at 39.6% was very strong. The new planning and allocation system allows us to better align our inventory with sales and reduce markdown risks throughout the Company. Based on these benefits, we now believe that a gross margin of 39% on an annual basis is sustainable.

We successfully opened five new stores in the quarter. That brings the total of new stores open in 2015 to 29 stores. We are happy with the performance of the nine stores to date. Since one store closed during the quarter, we operate 518 stores in 31 states. In 2015 we plan to open 13 new stores, remodel 20 to 25 stores, expand or relocate 13 stores and close three.

Our balance sheet remains very strong. Our inventories are in great shape, and all of our businesses are delivering solid results. We're pleased to report another positive comp quarter accompanied by strong earnings growth, a cash dividend and a share repurchase program.

Thank you all for your time. Operator, we will now take any questions.

(Operator Instructions) Pam Quintiliano, SunTrust.

Wow! Congratulations! That's really amazing in this environment. So a few things -- just was wondering if you could talk a little bit about the health of your consumer and just the general health of your consumer, and then I have a few follow-ups from there.

Sure. Thanks, Pam. Overall, we believe the macro environment for our customer does seem better than last year at this time. African-American unemployment is down to 9.1%, which is the lowest it has been in quite some time. In addition, gas prices should remain low as the price of oil has fallen lately. Both of these trends are good for our customers. Therefore, we think the macro environment for the customer is actually better.

Great. And then in terms of that commentary regarding expecting positive comps for 3Q and 4Q, can you provide just any type of brackets or granularity on that, or is it too early?

Pam, I don't generally want to give out guidance per se, except to say that we believe and we are confident that we can deliver positive comps as we do move into the third and fourth quarter. I think one of the big drivers of that is the better transition from spring to fall. So I'll leave it at that, and I feel very good about the direction that we are going.

And if I could just squeeze in a few more. I don't know if you will answer this one, either, but fashion trends. Jason, given in your DNA, are there any callouts on the women's nonbranded products that she really has been responding to?

I'll give you some color there. I would tell you probably the very strongest trend for back to school has been, really, fashion denim. That is denim with rips and tears, novelty washes, prints. That has been just terrific for us. We've talked about that before, and we're seeing that materialize, which we are thrilled about.

Also, for denim, the price point of denim is selling very well. So at both ends, both high fashion and core, denim is well.

In addition to that, actually joggers have been terrific, not actually just in ladies but in men's, ladies and kids. I would tell you the strongest are in prints and patterns. But those are some of the nice things that we're seeing from back to school right this minute.

And then my very last one -- just the performance of some of those locations in the New England area, is there any update on how those stores are doing?

Yes. We continue to be very pleased with what is going on in Brockton and Hartford. The team and I are actually looking for other sites up in that area because we have been very, very happy with the results. We are excited about our first two stores in the Northeast, and I am hopeful of more to come there.

Excellent. Well, congratulations, again, on the really great quarter and best of luck.

(Operator Instructions) Thomas Filandro, Susquehanna Financial Group.

Let me add my congratulations. Amazing performance, guys! Jason, can you expand a little bit maybe on the mass Hartford comments? What are you seeing, what have you learned from those stores, and then does that change your fleet profile going forward?

And then if I could also ask a question, you noted that the planning and allocation can support I think you said a sustainable 30% gross margin. You obviously achieved that this quarter. Does that give you confidence that you can continue to achieve that in the second half of this year and well into 2016? And then I have one more follow-up, please.

Sure. I'll start with the Northeast stores. Certainly my background is I am a Northeast guy, and where I came from, I have a slight bias to the Northeast. So I was thrilled to actually see the performance, but it's also encouraging. These were terrific markets in a past life. And so far the Citi Trends customer is responding very well to these markets.

So we have definitely -- we are spending a lot of good time in the Northeast looking at stores. So we are encouraged by that. And maybe, Bruce, I'll turn it over to you for a little bit of commentary on gross margin.

Yes. Thanks for your question, Tom. We did mention earlier that we expect on an annualized basis that we can maintain a 39% gross margin, which would be the highest that we have ever had. And what we were really trying to say in our earlier comments was that the improvement in our capability of controlling inventory has substantially reduced our need for markdowns. Therefore, we think that we have the opportunity to pass our historical peak in gross margin.

Tom, I will say individual quarters will vary up or down from that, as you saw in the first two quarters. But we think, on an annualized basis, the 39% is a reasonable expectation.

Thank you, Bruce. And just one follow-up and just a general question. Did the port slowdown that had, obviously, negative impact on a lot of other retailers with deliveries coming much later, did you guys benefit -- do you benefit meaningfully from that, Jason?

Yes, we actually did. In the last call, I mentioned that the inventories were going to be up 4% to 6%, and we fell right in that range. And quite frankly, the majority of that came from overly compelling NSB buys, and a lot of those terrific NSB deals that we found in the market came from the port delay.

So when the port opened back up, we were able to take advantage of a lot of those deals because a lot of the vendors didn't have room in their warehouse or they needed to turn that product into cash. So it was a nice benefit for us.

Congratulations and best of continued success there.

And just for clarification, NSB, in our vernacular, is next season buy. So sometimes I am using the acronym there. So NSB means next season buy, so buys we pack away.

Thank you.

Patrick McKeever, MKM Partners.

Thanks. Good morning, everyone. Just wondering what is new and different, if anything, on the marketing front? Particularly as it relates to social media and digital, the online business, wondering if you might give us some update in those areas?

Sure, Patrick. I'll give you two updates there, one on marketing, and that I will comment on e-commerce. So I will tell there has been one significant change that we've made in marketing in that we have shifted some of our dollars from actual radial spend into what I would consider mobile advertising and social media. We definitely feel that we can create brand awareness and drive people to our stores because that is our main goal of marketing is drive people to the stores, and we feel we can do that better with mobile advertising and social media versus radio.

So during 2015, we have made that shift. So I'd tell you that has been our main shift.

As far as e-commerce goes, we continue to view 2015 as really like a test pilot year. We are learning about what our customer wants to see on the site, how it works. So far it has been very good. We haven't spent a lot of money there. We have done it strategically and intelligently, and we look at 2016 for growth based on the learnings of 2015.

So we've added a lot of classifications. It's still in the learning process, but we are hopeful. We see actually our e-com site as a pretty good marketing tool to present what's in the stores and the great value that we have.

And on e-commerce, as you look geographically at where the orders are coming from, is there any kind of a pattern there? You are not in that many states, you are not a national retailer. Are you getting orders from states where you don't have stores?

Right. We are getting some orders where we don't have stores right now. We're in 31 states, and what you are seeing when you do the heat map of the states, you are seeing good reaction in places where we are strong like Florida and Georgia and Texas, of course. But you are seeing a little bit of traction in some of the other states.

And so I would tell you, though, it's more in line with our stores than not, but we like what we are seeing so far with the limited offering that we have. And I think as we expand the breadth, I think we will get more traction there, too.

And then just the last question from me. Just on the dividend and the share buyback, in talking about just capital allocation and use of cash and some of these other things with the board, just wondering how reaccelerating or accelerating the store growth factored into the conversations and what you might be thinking for next year and beyond as it relates to new store growth?

Sure. I can give you that. We strongly believe in delivering shareholder value and think that the dividend and the share repurchase programs support that belief. We also believe that the dividend and the share repurchase program will not impact our store growth prospects. We are committed to store growth in the future and think we have a nice runway ahead of us. Based on our strong balance sheet, I think we can do all three effectively.

And then just to give you a little bit of color on where we see growth in the future right this minute, as I mentioned, we definitely feel very good about 13 new stores in 2015. In 2016 we think we can open between 15 and 20 new stores, and that number could increase as we move through 2015. We still believe there can be 800 stores in the US. However, the next 300 will be slightly more difficult to open than the first 500 were. And for this reason, we are being selective and strategic, as we always have been in our new store growth. But overall we are very committed to store growth in the future.

Great. All sounds good. Thank you very much.

Mr. Mazzola, 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 very much from everybody, and that concludes the call. Thanks and have a great day.

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.