Citi Trends Inc (CTRN) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends fourth-quarter and year-end 2015 conference call. (Operator Instructions) As a reminder, this conference is being recorded Friday, March 11, 2016.

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'd 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 fourth quarter and the full-year 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 fourth quarter decreased 2.8% to $176 million, while comparable-store sales declined 5%. The lower comp-store sales reflected a decrease of 5% in the number of customer transactions, while a 1% decline in the average unit sale was offset by an increase in the average number of items per transaction.

By merchandise category, sales in the fourth quarter in comparable stores were as follows. Home was up 10%, on top of a 13% increase in 2014's fourth quarter. Accessories including footwear were down 2% this year after being up 20% last year.

The men's division decreased 7%, following a 13% increase in last year's fourth quarter. Ladies' sales decreased 8%, after being up 16% last year. And children's sales were down 8% in this year's fourth quarter compared with an 11% increase in 2014.

Sales of nationally recognized brands represented 26% of total sales in the quarter, compared with 27% a year ago.

Total sales for the full year increased 1.9%, while comparable-store sales were down 0.1%. The average number of items per transaction and the number of transactions in comparable stores were both up approximately 0.5% for the year. However, they were more than offset by a decline in the average unit sale of just over 1%.

Cost of goods sold as a percentage of sales improved 110 basis points in the fourth quarter, due partly to an increase in initial markup associated with a higher level of next-season buying merchandise purchased earlier in the year. In addition, markdowns were lower, reflecting strong inventory control measures taken by our merchandising group, including the benefits related to a new merchandise planning and allocation system. For the full year, cost of goods sold as a percent of sales improved 140 basis points due to the same reasons as noted for the fourth quarter.

SG&A expenses decreased $400,000 in the fourth quarter, due to the large incentive compensation expense in 2014's fourth quarter when EBITDA increased significantly. For the quarter, SG&A expenses as a percent of sales increased 60 basis points to 32.4%, due primarily to the deleverage caused by the decline in comp-store sales.

For the full year we were able to leverage expenses by 10 basis points despite a slightly negative comp-store sales result. Depreciation expense declined $300,000 during the quarter as a result of opening fewer stores than in previous periods.

Fourth-quarter pretax income increased 15% to $6 million from $5.2 million last year. As for income tax expense, the effective tax rate was unusually low in 2014's fourth quarter due to a greater benefit from work opportunity and other tax credits.

For the full year the effective tax rate was higher in 2015, primarily because tax credits were much lower as a percentage of pretax income than in the previous year. This was due to pretax income increasing by more than 100% for the full year at the same time that tax credits declined.

Net income in the fourth quarter was $3.5 million or $0.24 per share, compared with $4.7 million or $0.31 per share last year. For the full-year, net income was $15.5 million or $1.03 per share, compared with $9 million or $0.60 per share last year.

During the fourth quarter we paid our second quarterly dividend of $0.06 per share and repurchased the remaining $7.7 million available under the Board of Directors' $15 million repurchase authorization. Now I'll turn the call over to Jason.

Thank you, Bruce, and good morning, everyone. We are pleased that we achieved a full-year earnings increase of 72%, delivering $1.03 per share versus $0.60 per share last year. In addition, our gross margin improved 140 basis points in 2015 and ended the year at a record 39%.

While the full-year comp-store sales decrease of 0.1%, versus a 7.5% increase last year, was below our expectations, there were number of positives in 2015. Total sales were up 1.9%; we implemented a new planning and allocation system to all merchandising divisions; we successfully opened 13 new stores. We introduced a dividend; we bought $15 million worth of our stock. We successfully tested e-commerce, and we continue to make progress on improved profitability.

The fourth-quarter comp-store sales decrease of 5% versus a 14% increase last year fell short of our expectations. There were several factors that affected our sales results.

First, the warm weather in November and December diminished winter product demand, especially in the South. Second, the delay in tax refund flow in January depressed sales further. The last two days of fiscal 2015 comp-store sales decreased 45% or $3.5 million, versus the extremely strong final days of fiscal 2014 that were driven largely by the receipt of refund checks by our customers.

Third, our summer-to-fall transition strategy, in which we transition quicker to fall inventories while reducing short-sleeve inventories, negatively impacted sales in the fourth quarter.

The home division was the standout division of the quarter, delivering a 10% comp-store sales increase on top of a 13% increase last year. It was our 14th consecutive quarter of comp-store sales increases in home. Functional home, toys, and beauty all performed well.

In 2016, we see home as the strongest growth vehicle once again. This product allows for more breadth in our merchandise assortment and provides a hedge to the weather-driven demand of apparel. We have recently added buyers to this division and plan to expand its presence in stores.

In addition, we continue to see growth opportunity in the expansion of shoes and accessories across all genders and age categories.

Now I will provide an update on sales to date for the first quarter. Sales for the first five weeks of 2016 in comparable stores have decreased about 3%. We attribute much of the decrease to a significant tax refund flow delay in the first 10 days of the first quarter.

Sales through the first 10 days of the quarter were down 35% on a comparable basis, continuing the effects we saw for the last couple of days of fiscal 2015. Once meaningful tax refund dollars began to flow on February 10, sales improved immediately, and we have had positive comp-store sales increases since then. We are hopeful that the recent positive sales trends continue and we are able to deliver a flat quarter.

Spring sales have been favorable with the mild weather, and we have seen a very nice response to our offering in dresses, sandals, and shorts. In addition, home continues to deliver strong results.

For the balance of 2016 we continue to strive for consistent positive comp-store sales increases in each quarter. Our inventories are in good shape heading into the first quarter. Comp-store inventory finished the fourth quarter of 2015 at up 1%, while total inventories, which include new stores and next-season buys, were up 4.5%.

Due to the warmer weather in November and December we were able to capitalize on extremely compelling next-season buys for fall-winter 2016. This should help us execute and improve second half this year.

We see inventories for the year up 4% to 7%. We intend to keep comp-store inventory flat to slightly up while funding new store growth and next-season buys.

We successfully opened five new stores in the first five weeks of the quarter: Windsor, Connecticut; Forest Park Georgia; Douglas, Georgia; Apopka, Florida; and Philadelphia. In addition we relocated or expanded five stores.

As of today we operate 526 stores in 31 states. During 2016 we plan to open between 15 to 20 new stores, relocate or expand 10 to 15, and remodel about 20.

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

(Operator Instructions) Pam Quintiliano, SunTrust.

This is actually Nick Hyatt on for Pam. First I just wanted to ask you a little about the health of your consumer and if there's any meaningful change in sentiment, I guess, excluding the tax refund delays. If you can just talk about the other factors out there, such as gas prices and anything else you're seeing.

Sure. No, thanks, Nick; I'll take that question. Similar to what I've said on the past few calls, the macro environment for our customers seems to actually be favorable. Both African-American unemployment as well as low-income unemployment are low. Additionally, gas prices continue to be low.

Both of these trends are good for our customers. In theory, all of this should be good for the macro environment, and actually we see our customers pretty healthy.

Great. I guess next, can you talk about weather? I know you mentioned warm weather especially in November and December. Could you just maybe go a little further on that and maybe what categories it impacted specifically?

Also could you talk about the winter storms, and if those had any impact? Such as Winter Storm Jonas in January.

Yes, sure, I can give you a little bit of color on that. Certainly in November and December what we saw was dampened demand in our fall-winter classifications. That would be things like coats and jackets and sweaters and long-sleeve product.

Really you could see it by weather zone. Our sales were stronger in our colder weather zones in the North and were weakest in the warmer weather zones and the hot zones. So you could really see it by classification.

In addition to that, as I mentioned, we transitioned earlier. We had less short-sleeved product in some of those warmer zones, so that also dampened sales as well.

The winter storms, we obviously did see some of that and sales were affected by that. But I would tell you that was smaller in comparison to really the effects of November and December. January is not a real big month for us except when you get to the end of January; but I'd say November and December were significant.

Got you; thank you. Just our last question is we've started to hear about some new trends on the women's side. Are you seeing anything there?

Sure, I can give you a little update on trends or what we're seeing. Actually, with the favorable weather pattern actually over the first five weeks, we have seen spring-related classes pick up nicely, like dresses, sandals, and shorts. In ladies in particular we seem to be moving back into a fashion top cycle, with woven tops being very strong; we were more in a knit cycle.

Specifically, plaid and denim tops which were very strong in the fall are continuing to be very strong in short-sleeve and sleeveless versions. Also that means that bottoms have shifted more into solids, as fashion tops have become stronger and there's more of an emphasis on the top. That means that bottoms will become a little bit more solid and core in nature versus fashion.

Got you; perfect. Well, thank you very much for taking our questions and good luck on the quarter.

Okay, thanks. You bet.

(Operator Instructions) Patrick McKeever, MKM Partners.

On the national brands, the penetration, do you think it's going to continue to stabilize in the -- I think you said 23%, 24% area in the fourth quarter? Or have there been any changes within the different departments, men's and women's and kids, in terms of any new brands that are coming on that might change that positively? Or could it trend lower?

I would say overall that 20% to 25% area, we see it stabilizing right there. There are no major shifts or changes that we see.

Our men's and our boys' area has the strongest brand penetration, whereas ladies and girls has the smaller brand penetration. But I see that pretty much stabilizing right around there.

I'd tell you, in the second quarter it normally does dip down as the second quarter is usually more of a real aggressive value-driven quarter, whereas the first quarter is a little bit more branded. But I see those trends pretty much stabilizing. I think we're going to live somewhere between that 20% and 25% range for the most part.

Okay. Then on the tax refund dynamic, Jason, you talked about how business picked up pretty significantly. I think, did you say February 10?

Yes.

Okay. So the question is, I think in years past when there's been this -- we had this issue where tax refund dollars have been distributed late, doesn't it elevate the risk that those refund -- that money will get claimed, so to speak, by other things? Like bills, overdue bills, or bill paying and that kind of thing.

I seem to recall that that has been the dynamic in the past, where there was an expectation that the later dollars would benefit business and then it didn't necessarily materialize. But I could be wrong.

No, Patrick, I think you're exactly on point and I think you saw it in our sales. We originally -- we were very hopeful that that $3.5 million that we didn't get in January is going to just shift right nicely down into the first week of February. We were very hopeful that that would happen, and we didn't.

When tax refunds were delayed an additional 10 days we just kept getting further and further behind. Those 10 days last year were very powerful days, and they've proven difficult to make up.

We don't know why, but I think you alluded to it. Later tax refunds at Citi Trends are definitely -- they are less robust than earlier tax refunds, and that's why you didn't see the catch-up.

We've definitely done some catching up, because like I said we were down 35% in those 10 days and have made up a lot of ground. But that's why I'm being very conservative with the outlook for the quarter, because I don't think we're going to see a lot of that, those dollars, come back to us.

I think it's kind of in those numbers right now, just as you alluded to. Later tax refunds aren't great for us.

I mean, in general and overall, though, we feel very good about our merchandise mix, our values, the quality of our inventory, and the fundamental health of our business. So we're happy about where we are; we're certainly disappointed that the taxes showed up late. But now we just have to move forward and capture what we can from here.

Okay, got it. Then just one last one on the home business, which is probably, what, about 5% of the total of annual sales now?

Yes, 4%; soon to be going to 5%.

How big do you think that business can get over time? And how do the margins stack up versus your hanging apparel business?

You know what? We don't have a specific growth plan in place to say -- hey, let's get to this number. We're at about 4% right now. I see a lot of runway in this business.

I would tell you in 2016 we are going to push this business very, very hard. Actually the margins in the home area are as good, if not maybe a tick better, than some of the apparel margins. And right now we are getting faster turns in home; so again, we can push that business, get faster turns, and improve margin as well.

Just to give you an idea, home at Citi Trends covers a broad area of different things. What we count in that is beauty, electronics, books and media, decorative home furnishings, functional home for the bedroom, bathroom, and kitchen, as well as auto and the queue line. Many of those classifications, Patrick, we just started buying in 2014 and 2015 for the very first time. We actually think, in addition to quicker turns and margin, that these classifications help to weatherize our business and provide breadth of assortment to our customers.

And we think that's a real positive as well. So we're excited about really getting after this in 2016.

Thanks very much.

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

Okay. Thank you very much everyone for your time, 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.