Citi Trends Inc (CTRN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends' Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, November 21, 2017.

I would now like to turn the conference over to Tom Filandro at ICR. Please go ahead.

Thank you, Chris, and good morning, everyone.

Our earnings release was sent out this morning at 6:45 a.m. Eastern time. If you have not received the 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 this 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 form -- report on Form 10-K and other subsequent filings 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 will now turn the call over to Bruce Smith, Acting Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Bruce?

Thanks, Tom. Good morning, everybody, and thank you for joining us today. Also on the call to participate in the question-and-answer session are our 2 general merchandise managers, Christina Short and Brian Lattman.

There are a number of positives to report for the third quarter, starting with sales, which were up 10% in total and up 7.4% in comparable stores. The comp store increases were consistent throughout the quarter with growth of 7% in August and 8% in both September and October. The positive comp store sales in the third quarter reflected 4% more customer transactions, 2% more items per transaction and a 1% increase in the average unit sale.

Importantly, the average unit sale increased for the first time in 10 quarters. In fact, going back 25 quarters, we had only 1 increase in the average unit sale until this year's third quarter. Also, with 3 quarters completed for fiscal 2017, we expect that this will be the sixth consecutive year in which we've registered growth in both the number of customer transactions and units per transaction.

In looking at comp store sales for the various merchandise categories, the Home area continued to be the strongest performer, up 29% on top of the strong 34% increase in 2016's third quarter. This was the 17th consecutive quarter of double-digit growth in our Home business.

Men's sales were up 8% this year after being down 1% in last year's third quarter. Accessories, including footwear, were up 7% after being flat last year and have now increased in 23 of the past 25 quarters.

The Ladies division was up 6% this year and down 2% last year, and Children's sales were up 4% in this year's third quarter after being down 7% in the third quarter of 2016.

The combination of all 5 major merchandise categories being up at least 4%, together with higher transaction counts, units per transaction and averaging unit sale is confirmation that our merchandising strategy is working across all of our businesses. In the first 3 quarters of the year, total sales were up 6.6%, while comparable store sales were up 4%.

Cost of goods sold as a percent of sales improved 30 basis points in the third quarter as a result of a higher core merchandise margin related to the strong sales, partially offset by an increase in freight costs. For the year-to-date, cost of goods sold as a percent of sales had increased 10 basis points due primarily to higher freight costs.

SG&A expenses as a percent of sales declined favorably by 140 basis points in this year's third quarter, with the leverage coming primarily from the 7% growth in comparable store sales.

Expenses were 6% higher than last year's third quarter due primarily to a 3% increase in store count, normal expense inflation and the effects associated with increasing comp store sales and improving operating performance, including higher incentive compensation expense. Year-to-date, SG&A expenses declined by 40 basis points as a percent of sales or 90 basis points after adjusting for proxy contest expenses incurred in the first half of 2017.

Our third quarter net income improved by $1.4 million to $600,000 or $0.05 per share compared to last year's loss of $800,000 or negative $0.06 a share. Year-to-date, we earned net income of $9.3 million or $0.65 a share compared to $7.8 million or $0.53 a share earned in last year's first 3 quarters. However, this year's net income in the first 3 quarters was $11.1 million when adjusted for proxy contest expenses, representing year-over-year growth of 42%.

In other third quarter developments, we successfully opened 5 new stores, relocated or expanded 2 stores and closed 1 store. We also began the rollout of the next phase of enhancements to our merchandise planning and allocation systems, which are designed to improve our ability to better tailor the merchandise mix on a store-by-store basis. This was a major strategic initiative designed to support our efforts to continue the sales momentum, while also improving our gross margin and inventory turns.

We believe that we're in excellent merchandise position, with inventory up only 2% after a quarter in which sales were 10% higher. And after the first 3 weeks of November, comparable store sales were up 7% on top of a 6% increase in the same 3 weeks last year.

In further discussing the fourth quarter, as a reminder, fiscal 2017 is a 53-week year. Therefore, Q4 has an extra week. As discussed in an earnings call earlier this year, we expect that week to generate approximately $11 million to $13 million in sales, while, from an earnings perspective, we would expect it to be close to breakeven. In other words, expenses for that week would approximate gross profit.

Also for the fourth quarter, there are 2 expense items that will impact the year-over-year comparison in addition to the effect of the 53rd week. One is approximately $700,000 of favorable insurance results from last year's fourth quarter that we do not expect will reoccur this year. And the other is higher incentive compensation accruals this year due to our strong operating performance in comparison to last year when incentive compensation was not earned by management. Although, incentive comp expense is not expected to be significantly different from earlier quarters of this year, it could be approximately $1 million higher than last year's fourth quarter.

Looking forward, our strategy continues to be focused on growing all areas of our business by providing our customers with highly fashionable merchandise at great values. Our commitment to being the leader in providing value-priced urban fashions is working. Our strategy has resulted in sales gains in all categories as we continue to successfully improve our apparel offerings and to target our customers' broader lifestyle needs.

Now, Chris, we'll take any questions.

(Operator Instructions) And our first question comes from the line of Patrick McKeever with MKM Partners.

Question on the e-commerce exit. Just wondering if you might talk through the thought process there and also, just talk about how your customers are interacting with you digitally, whether that's -- I guess, it's primarily with social media. So that's my first question. And then my second question is I'm just wondering if you feel like you had -- there's been any positive impact on some of the competitor or let's just say retailer store closures. There have been so many this year, wondering if you're seeing -- you feel like there's a positive impact there or if there's been some kind of a negative impact with liquidation sales. And then are there some merchandise, incremental merchandise opportunities that are stemming from that particular dynamic?

Okay. Thanks, Patrick. Starting with the e-com question that you asked. We did think it was important to test e-com to see if it could be profitable, but ultimately, we didn't see the potential needed to continue operating it. So we are no longer selling merchandise on the Internet. We found it challenging, quite honestly, to be profitable selling apparel online at price points that are as low as ours. And as we know from our own stores, 60% of our sales in store to our customers are in form of cash, not charge card. Therefore, there are some challenges to selling through the Internet in our business. I think you asked a related questions to that, related to advertising or communicating with our customer. Through the years, our advertising has evolved more from radio to mobile and social media, primarily to create brand awareness and draw people to stores. We do allocate some of our advertising to new store openings, but the rest of it goes to branding. And you have to keep in mind there that we only have advertising expense of 0.3% of sales because we are an everyday-low-price retailer, so we don't spend money to promote merchandise or ads or anything like that. For the most part, it goes strictly to branding and new stores. And then your last question dealt with what we're seeing in the market as it relates to store closings and so forth. We haven't seen a lot of closings in our neighborhoods. In the markets that we serve, a lot of the closings that you're referring to have tended to be more in the malls and the power centers, not in the strip centers in the neighborhoods and small towns that we operate. So we haven't been affected to any great extent at all by maybe what's going on in the malls. And then as far as merchandise and so forth, nothing big to report there. We have plenty of merchandise available to us, as we have for some time now. And so no issues as it relates to that.

Any update on the CEO search?

Patrick, there's nothing new to report there. The search does continue, and the board has reviewed a large number of candidates. But at this point, is not yet settled on the best fit for Citi Trends.

And there appears to be no further questions on the line at this time. Mr. Smith, I'll turn the call back to you.

Okay, I want to thank everybody for joining us today. Have a good 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 lines.