Citi Trends Inc (CTRN) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2018 earnings release. (Operator Instructions) As a reminder, this conference is being recorded, Friday, November 30, 2018.

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

Thank you, Mary. 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 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 our President and Chief Executive Officer, Mr. Bruce Smith. Bruce?

Thanks, Tom. Good morning, everybody, and thank you, for joining us today. Also on the call is our Chief Financial Officer, Stuart Clifford; and our 2 merchandising Senior Vice presidents, Christina Short and Brian Lattman.

In the third quarter, comparable store sales increased 0.6% on top of a 7.4% increase in last year's third quarter, led by continued strength in the Home and Accessory businesses. We had expected a comp sales increase of 2% to 3% even with the challenging comparison to last year's strong third quarter results.

However, weakness in the Ladies apparel category caused us to fall short of our goal. Although we had good early reads on certain Ladies fashion classes, they did not perform nearly as well once we increased the penetration this fall.

Due to our buying model, which avoids overreliance on long-term commitments and builds in merchandise liquidity, we've taken the corrective action to make the needed pivot in Ladies fashion.

From the standpoint of total sales and net income, we mentioned in the last quarter's earnings release that $5 million of total sales would shift out of this year's third quarter in relation to last year due to a change in the fiscal calendar. As expected, this had a fairly significant negative impact on our bottom line.

While the sales moved out of the quarter, costs such as freight and SG&A expenses are fairly constant from week-to-week and, therefore, did not have a similar shift out of the quarter.

Now I will turn the call over to Stuart to provide additional details on the results, before I discuss future expectations.

Thank you, Bruce. Total sales in the third quarter decreased 0.9% to $175 million. As we mentioned on last quarter's call, each fiscal quarter this year starts 1 week later than in fiscal 2017 due to last year having 53 weeks. As a result, the third quarter total sales comparison was negatively impacted by $5 million. Due to the shift of the strong back-to-school week that falls at the beginning of August from the third quarter last year to the second quarter this year. For clarity, the calendar shift does not impact our disclosure of comparable store sales, which compare identical weeks on a shifted basis.

In the third quarter, the 0.6% increase in comparable store sales compares to the 13 weeks ended November 3, 2018, to the 13 weeks ended November 4, 2017. The positive comp sales reflected an average unit sale that was 3% higher, partially offset by decreases of 2% in the number of customer transactions and less than 1% in the average number of items per transaction.

And looking at comp store sales for the various merchandise categories. The Home area continued to be the strongest performer, up 13% on top of the strong 29% increase in 2017 third quarter. Accessories including footwear were up 4% in addition to a 7% increase in last year's third quarter. Children's sales were up less than 1% after a 4% increase last year. Men's sales were flat in this year's third quarter, going up against a strong 8% increase last year. And the Ladies category was down 7% this year after being up 6% in the third quarter of 2017.

In the first 3 quarters of the year, total sales increased almost 5% while comparable store sales were up 2%. Third quarter gross margin decreased 80 basis points, due primarily to a 70 basis points increase in freight cost as a percentage of sales. In addition to continued pressure on freight costs due to transportation rate hikes and higher fuel prices, freight as a percent of sales was impacted by the shift of $5 million of sales out of the quarter without a proportionate shift of freight costs.

For the year-to-date, gross margin is flat compared with the first 3 quarters of 2017. Third quarter SG&A expenses were virtually flat compared with 2017. As a percentage of sales, third quarter SG&A expenses increased 40 basis points to 34.9%, due primarily to the deleverage in the expense ratio as a result of the loss of sales from the calendar shift. Year-to-date, SG&A expenses as a percent of sales have declined 10 basis points in relation to last year's adjusted expenses. Net loss in the third quarter was $500,000 or $0.04 per share, compared with net income of $600,000 or $0.05 per share in last year's third quarter. Year-to-date, the company has net income of $14 million or $1.06 per share compared with $9.3 million or $0.65 per share earned in last year's first 3 quarters. Adjusted for proxy contest expenses, last year's net income through 3 quarters was $11.1 million or $0.77 per share.

Now I will turn the call back over to Bruce.

Thanks, Stuart. In other third quarter developments, we successfully opened 4 new stores and expanded 1 store, while closing 1 store. We expect to open approximately 20 new stores for the full year.

Also, in connection with our expanded capital return program, we completed the $25 million stock repurchase program authorized by our board in March of this year. And today, we announced that the board authorized another $25 million stock repurchase program. These actions taken by our board are a continuation of the capital return program that we started in 2015. Since that time, we have returned approximately $78 million to our stockholders through a combination of dividends and share repurchases. As we enter the prime holiday selling season, we are excited about our merchandise selection including the most gift-giving offerings that we've ever had. As stated in this morning's release, we maintained our earnings guidance for the fourth quarter at a range of $0.60 to $0.65 per share including comparable store sales guidance of positive 1% to 2%. Thus far in the fourth quarter, comp store sales are at the midpoint of that range.

Looking forward, we continue to maintain our focus on growing both the apparel and non-apparel components of our business by being the leader in providing value-priced urban fashions to our customers.

Now Mary, we'll take any questions.

(Operator Instructions) And the first question comes from [Luke Hatton].

So I guess, just starting with the Ladies business, what is the time line you're expecting for fully correcting that business? And then also, what's your strategy for moving through that Ladies inventory that did not resonate as well and low last quarter?

Yes. [Luke], thanks for your question. Brian Lattman, would you please answer that?

Sure. As far as the timing to fix the business, fortunately, we have a merchandising model that tends to result in a decent amount of liquidity at any point in time. So that we can react to what we're seeing from our customers. As you can tell from our comp guidance for Q4, we are not expecting a dramatic change in our sales trends in Q4 but we would expect better results in the spring. And as far as the strategy to move through the liable Ladies inventory, as we've always done in the past, appropriate markdowns have been taken to ensure that we move through this merchandise through the stores. We will continue to monitor this situation and take markdowns as needed.

Great. And then we've been hearing from a couple of our other retailers sort of the upward pressure on wages. And I was just wondering are you experiencing anything in terms of upward wage pressure? And can you provide any initial thoughts on sort of how you're thinking about that heading into 2019?

Yes. Luke, we've actually had a wage pressure for a number of years. And through those years, we have consistently found ways to try to make our store processes more efficient in order to offset the impact of raising our wages. Currently, although all of our store associates make more than the federal minimum wage, we still do feel a wage pressure on a lot of our markets. We believe that these pressures will probably continue to exist for the foreseeable future. And we'll continue to make every effort to offset them as much as possible through continued productivity gains.

Got it. And then sort of along the same lines, are you seeing any pressure on transportation and supply chain costs?

Yes, definitely. We mentioned earlier that freight was a pressure point in the third quarter, and it really has been all year. And even until last year, for the year-to-date, freight as a percent of sales is up 40 basis points over the last year. During the quarter, it was 70 basis points. Although that was somewhat impacted by the shift of sales, but 40 basis points is probably kind of the norm and that's been a 9-month number. As we look out to 2019, we're looking at a number of things, various alternatives including a transportation management system that will allow us to, I guess, you'd call it automate the carrier choice on each inbound shipper to ensure that we get their lowest rate on each shipment. We're also looking at some strategies on the outbound side that might likely change our approach to the way we do shipments to the store today. So it is a continuing pressure point. Fortunately, year-to-date, our gross margin is flat with last year, so we've been able to offset it in other areas, but we're going to have to continue working it.

Understood. And then I guess, last one for me. Can you just walk us through the building blocks of that longer-term 12% to 15% EPS algorithm? Sort of what gets us there in terms of comp, store growth and then on the margin side as well?

Sure. So that 12% to 15% earnings guidance, if you will, is really based on a 3% annual comp combined with a 2% to 3% store growth model. Assuming that we do both of those things, it should yield a small amount of expense leverage. We tend to get expense leverage on expenses when we're in that 2.5% to 3% range and above. I will note that year-to-date, our comps are up 2% and we've still been able to get 10 basis points of leverage. So we've done a little bit better than that this year, and we also did a little bit better than that last year. But long term, we think it's reasonable to expect, maybe 20 to 30 basis points of expense leverage if we get a 3% comp. And we would expect that over the long term. We could continue to push our gross margin up, as we continue to improve our store planning capabilities. So maybe a 20 to 30 basis point improvement there. And so between expenses and gross margin, maybe 40 to 50 basis points of improvement per year, hopefully, leading to our operating margin increasing from, let's say, 3.3% up towards 5% and above over the long term.

(Operator Instructions) We do have a question from [Elan Danon].

Another question on the Women's fashion list. Can you just give a little bit more color and detail on what it was? Was is it tops, bottoms? Or what's in this exactly?

Yes. Thanks for the question, [Elan]. Really for competitive reasons, we try not to give specific details any lower than the category level. So while we talked about the Ladies fashion, apparel fashion being off for the quarter, we'd rather not give our competitors an advantage over what that miss was.

And has -- I know that you kind of touched that on the last caller but -- the question but have you worked through the inventory of -- are you -- or when do you -- I guess, is that inventory still in the stores now? Is it being discounted? How should we look at when that should kind of work its way through the system?

Brian touched on that earlier. Brian, why don't you give some insight into that?

So I mean, like, I said earlier, as we've always done we take appropriate markdowns when we need to. And we -- to ensure that we move through the merchandise. So we are currently working through it and are confident we'll get through it.

And so the up 1.5% includes kind of the -- still includes the weakness in Ladies, quarter-to-date?

That is correct.

Okay. And then in terms of -- I know that you've -- you had some gross margin pressure, you discussed it, I mean, and some of the logistics. What about, from a merchandise margin perspective, how much did -- is there any way to quantify what that -- what the negative impact on merchandise margin was from Ladies?

Yes, not just from Ladies, but over -- on an overall basis, the core merchandise margin was down about 30 basis points due to higher markdowns during the quarter.

And our next question comes from [John Lawrence].

Yes. Could you comment just a little bit, Bruce, on the real estate side, as you get this new capital program and you're looking at this 2 to 3 -- some of the markets you are looking at as far as possible, are you seeing any, I guess, advantages from some of these larger boxes that are becoming available where you can cut out? Or just any gains in real estate negotiations at all?

If you look back over the last couple of years where we've seen the biggest change is probably where you would expect it. And that has been that we have been able to open up mall stores that we never really were able to get into before, because of the cost. And so if you go back a few years, we just had 2 stores in malls in the entire chain. Today, we're up to 22. So we have been able to take advantage of some situations there. Outside of that, when you look at the shopping centers that we're in and that we tend to be in and want to be in, there hasn't been a radical shift. And even when you look at the guys that we compete with the most, the Rainbows of The World, and its Fashion Metro, which is Cato's urban division and, of course, Ross' urban division, dd's Discounts, none of those guys were contracting. And so we're not really seeing a major shift in our typical shopping center. It's primarily in the mall opportunities.

Great. And secondly, when you talk about some investments on the transportation side efficiency, are those systems that would be CapEx projects? And would that move out to first half of next year? Or is this something more eminent than that?

First half of next year, yes.

And any time frame on -- is it far enough along to know what CapEx budget would be on anything like that?

As far as the transportation management system goes, it would not be significant.

Okay. And last one for me is, did -- I was a little late on the call, did you quantify what you think the fashion situation cost you in comps? Did you mention that at all?

Well, we did in the context of.

(technical difficulty)

Ladies comp was down 7% during the quarter.

Well, 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.