Citi Trends (NASDAQ:CTRN) Q3 2019 Earnings Call

0:00 Greetings and welcome to the CTRN Third Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Tuesday, November 26, 2019. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead. Thank you. Our earnings release was sent out this morning at 6.45 a.m. Eastern Time.

0:46 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.citytrends.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.

1:33 I will now turn the call over to our President and Chief Executive Officer, Bruce Smith. Bruce? Thanks, Nitsa. Good morning, everybody, and thank you for joining us today. Also on the call is Peter Soxie, a member of our board and currently serving as Special Advisor to the CEO, and our Chief Financial Officer, Stuart Clifford. We were very pleased with our return to positive comparable store sales during the third quarter. Our strategic reallocation of merchandise mix more towards the growing non-apparel lines continued to produce strong sales increases in the accessory and home categories. It is also important to note that within apparel, Our ladies and men's categories both contributed to the sales growth, despite a significantly leaner inventory investment in this year's third quarter.

2:24 In fact, total inventory investment was down 3% at the end of the third quarter, including a 7% decrease in inventory in comparable stores. This decrease in inventory, together with a 2.6% increase in comparable store sales in the quarter, resulted in a much improved inventory turnover rate. As we enter the fourth quarter, we are very pleased with the quality of our merchandise and the inventory liquidity that we have to chase trends and capitalize on opportunistic merchandise deals. We were pleased to see our strongest sales increases in the last month of the third quarter, and we believe our shift more towards non-apparel merchandise will benefit the holiday season Due to the heavier gift-giving nature of the assortment during that period.

3:15 Now I will turn the call over to Stuart to provide additional details on the results before I discuss future plans and expectations. Thanks, Bruce. Total sales in the third quarter increased 4.4% to $183 million, while comparable store sales increased 2.6% in the quarter. The increase in comp store sales during the third quarter was reflected in increases of nearly 2% in both the number of items per transaction and customer transaction counts, partially offset by a decrease in the average unit sale of less than 1%. In looking at comp store sales for the individual merchandise categories, the Home Division continued to be our strongest performer.

4:08 up 11% on top of a strong 13% in 2018's third quarter. Accessories were up 9% in this year's third quarter and up 4% in the third quarter of 2018. Sales in the ladies' division were up 1% after being down 7% last year. Comp sales in the men's division were up less than 1% this year after being flat in the same quarter last year. And children's comps were down 2% after being up less than 1% in last year's third quarter. In the first three quarters of the year, total sales increased 0.4%, while comparable store sales were down 1.2%.

4:59 Gross margin in the third quarter increased 40 basis points due primarily to improvement in the core merchandise margin, which consists of initial markup, net of markdowns. For the year to date, gross margin is 100 basis points lower than the first three quarters of 2018, as we had to take more markdowns in the first half of the year when comparable store sales were down almost 3%. Third quarter SG&A expenses increased 7% compared with last year to $65.5 million from $61.2 million, reflecting the impacts associated with a higher store count, normal inflation, and approximately $700,000 of costs associated with the planned CEO transition and board changes.

5:59 As a percent of sales, third quarter SG&A expenses increased 90 basis points to 35.8% from 34.9%. Year-to-date SG&A expenses, when adjusted for $1 million of proxy contest expenses incurred in the first quarter, increased 60 basis points in relation to last year's expenses. Net loss in the third quarter of 2019 was $1.1 million, or $0.09 per diluted share, compared to $500,000, or $0.04 per diluted share, in last year's third quarter. The costs associated with the CEO transition and board changes had an adverse impact of $0.05 per share during the quarter.

6:52 Year to date, the company has net income of $7.1 million, or $8 million when adjusted for proxy contest expenses compared to $14 million in last year's first three quarters. Earnings per diluted share were 60 cents in the first three quarters of 2019 or 67 cents when adjusted for proxy contest expenses compared to $1.06 in the first three quarters of 2018. Now I will turn the call back over to Bruce. Thank you, Stuart. Regarding earnings guidance, we have raised the lower end of our previous range based on recent sales trends and the quality of our inventory position.

7:39 The result is full year 2019 earnings per share guidance in a range of $1.40 to $1.50 when adjusted for the proxy contest expenses incurred earlier in the year. This guidance range assumes comparable store sales increases of 2% to 4% in the fourth quarter. As noted in this morning's release, the Board has once again extended the company's capital return program by authorizing an additional $25 million share repurchase plan. Since the program began in 2015, we have returned $107 million of capital to our shareholders in the form of cash dividends and share repurchases while continuing to invest in and grow the City Trends store base.

8:31 Also noted in the release, in connection with the CEO transition, Peter Soxie will become the interim CEO effective December 9th. I will remain with the company as president until the end of the fiscal year, February 1, 2020, working with Peter to provide a smooth transition for our leadership team. I would now like to ask Peter to make a few comments. Thank you, Bruce. It is a pleasure to be speaking with all of you today. Let me begin by saying that I am so grateful for Bruce's unwavering support as I transition into my role as City Trends interim CEO. I have been working with this team for the past five months, and I am so impressed by the quality, the dedication, and the flexibility of the organization.

9:24 We have built a very good business in a niche category that is very defensible, and now is the time for us to take it to the next chapter of profitable growth. I look forward to helping the team achieve all of their short and long-term goals. Over the past five months, we have been working diligently to develop a three-year strategic roadmap as we enter the next phase of growth for City Trends. We have been working on a number of initiatives, including the appropriate mix of apparel to non-apparel, our organizational structure and resources, system opportunities. We did customer research. We're looking at real estate optimization and much more. As we said, we are now planning 25 to 30 new store openings in each of the next three years.

10:19 combined with 50 major store remodels per year as we look to modernize our store fleet. Although there is much work ahead of us, we believe we are off to an excellent start to implement our long-term vision to grow City Trends and deliver value for our customers, our associates, and our shareholders. I'd also like to highlight a recent key hire. I am thrilled that Lisa Powell who spent over 20 years with TJX has joined the City Trends team in the very important role of Chief Merchandising Officer. She is a fantastic addition to our leadership team and we look forward to her positive influence.

11:05 Now, let us take any questions you might have. Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment please for the first question. Our first question coming from the line of Eric Beder with SCC Research. Please proceed with your question.

11:50 Good morning. Hello? Yeah, good morning. Good morning. Gotcha. Remodels, that sounds like an interesting piece here. You know, what are you doing with the remodels? How are you changing the stores? And what historically have been the returns? when you started to aggressively remodel stores? Thanks for the question, Eric. What we're doing with the remodels that we've done and will do next year and the years after is we are making changes to all the signage, both exterior and interior, as well as the pylon signage out on the street. In addition, we are changing all of the graphics that run along the top of the store.

12:37 We are adding a number of fixtures that we haven't had in the past, and we tend to do any kind of repair-type work that needs to be done, whether it's paint or carpet repair or anything like that. And then you also ask about the performance. I really don't want to provide sales guidance separately just on those stores, but bottom line, we're seeing a return on investment that justifies those capital expenditures. and I think there's probably an added benefit that in addition to just the first year effect, there is a longer tail on this benefit because we're really showing our customers that we are investing in their community for the long haul. Right. You've talked before about the Hispanic initiative.

13:22 How is that going and are most of the newer stores in that initiative that you plan going forward? Let's see. We have now opened two stores. We opened them earlier this year. We're opening a third soon, and there will likely be some in the group next year. We've got several markets in particular that we have identified for that concept. To this point, we're not giving any individual guidance on those stores, but I will tell you that we have seen enough in the two that we've opened thus far to continue to pursue that concept. And finally, last question, the shift over to non-apparel, what does that entail in terms of working capital needs for the stores, in terms of physically having to change them around, and in terms of a customer base for that, in terms of tracking a different potential customer base?

14:18 So as far as the working capital needs go, it really has not had any significant impact one way or the other. We've effectively shifted inventory from apparel to non-apparel and we've really been doing that for several years now. Let's see, the second part of your question was, oh, physical alterations to the store. One thing that we have done just recently is we have rolled out some new fixtures that we haven't had before to really accent the accessory type items, gift giving items and so forth during the holiday season. and fixtures that are more flexible in terms of handling the non-apparel. And I think you can tell from our results, not only this year but in other years, that our customer is guiding us towards this merchandise.

15:08 We're not just hell-bent on doing this. We're doing this because the customer is requesting the merchandise with their pocketbook. Right. Good luck for the rest of the year and the holiday season. Thanks, Eric. Thank you. Our next question coming from the line of Elan Dannen with Dannen Capital. Please proceed with your question. Hey, gentlemen. Good morning. Just to continue on the remodel questions, what are the costs per remodel per store? The cost on a per-store basis is around $100,000. Net of tenant improvement allowances from the landlords.

15:58 So it's $5 million in total. Per year, correct. And then in terms of will there be any store disruptions? I mean, you're doing it during the two busiest quarters. Will there be, do you foresee any disruptions within the store? No, not really. We are timing them so that they are being done during the slower time of the year. For instance, 20 of them will be done in January, which is our slowest month, and then we will wait until we get past Easter to do the next 30. And then we'll make decisions about when the other ones would come after that. So we're doing 20 this year. We're going to do 50 next year.

16:44 So 30 of them will be just after Easter, and then the other 20 will either be in January or before the holiday season, depending on what we decide as far as timing goes. And remind me, how many stores did you remodel in 2019? These major remodels, we did five. Five, okay. And then you're going to follow the same three formats? I guess there's no color change, and there's no... New Fourth Format that you're introducing or anything, correct? You're just going to follow the same color schemes that these stores have and store layout and format. Yep, exactly. All right. My next question is typically you give a kind of a quarter of the date update.

17:31 I think last year you guys were running up 4%. You're starting to lap the myths in ladies from last year. And then you guided, you know, Pretty nicely up to the four. Any reason why no update this time around? Well, we did mention that the sales were solid thus far in the quarter, which simply means that they're up thus far and that they are also in line with our fourth quarter guidance. The issue is it's a bit hard to say that the sales are truly comparable because Thanksgiving fell a week earlier last year, and so last year Thanksgiving week fell within this stub period. Whereas this year, Thanksgiving is not in the stub period.

18:17 Got it. Okay. Just fair enough. And then you guys are working on the strategic roadmap. When do you think you'll be kind of updating the street on that roadmap going forward in terms of where it seems like the operating model is changing a little bit, where it should land? where the mix of non-apparel can go to over time, where the mix of Hispanic stores versus non-Hispanic markets over time can go. Yeah, I would say as far as updates on the strategy, that will play out over time, but I think we'll do kind of like we've done the last two quarters. We'll update you as we have information, so it will be an incremental approach to There will be more disclosures to the extent that there are more things happening and having been accomplished.

19:12 So I think you'll continue to hear a lot more over the next year about this. And then lastly, it was great to see ladies pick back up again into the positive territory. I know you guys were laughing at some of the numbers there, but is there anything – Maybe any call-outs that you can say that maybe is helping to kind of drive the ladies' business now? I know you have a new chief merchant. Is there stuff going on that you can see an acceleration from here? Yeah, I think the key thing is really that we're staying liquid and chasing trends as we see them. Last year in ladies, we admitted that we made some fashion misses. And not only that, but we committed too far out. and unfortunately it was in assortments that the customer really didn't want and at retails it were probably a bit high. So we had issues last year and we have corrected those and we are being much more liquid with our inventory and looking for opportunistic opportunities.

20:15 And then one more. The children's down too, is that maybe some of that space, some of that square footage that's been devoted to children's, is that maybe being devoted to other categories or is that A weather issue where there just wasn't, you know, where children's often is bought when needed. Is there something you can attribute that to? Yeah, when you look at the five major categories, children's was the area where we pulled back the inventory more than any of the others. So although we reduced inventory in all three of the apparel categories, children's had the lion's share of that. So that's really the only reason for that. Oh, and then the new stores for next year, off-mall versus on-mall, I know that you guys have opened some C-malls where some of you got some available rents.

21:04 Is it primarily in strip centers? Yes, they would primarily be in strip centers. We do go into a mall occasionally on an opportunistic basis. We've got about 20 or so stores that are in malls today. All the others are in strip centers. So That's what you should expect to see. We are actually seeing a little bit of loosening up in the real estate in our type of center. Over the past several years, all the loosening up has been in the malls. And since we're not in malls, that really hasn't helped us that much. But we are finally seeing some loosening up in strip centers such as ours. Some of it is due to retailers like Payless and Fred's completely going out of business.

21:50 as well as other retailers that are contracting in these centers. So that is actually helping us to an extent, finding opportunities that might not have been there two or three years ago. Is that playing into the acceleration of new units? It is. Got it. Well, I asked a lot of questions. Bruce, thanks a lot for all your help through the years. You've been tremendous, and I look forward to keep following the company. All right. Thanks, Elon. Thank you. Mr. Smith, there are no further questions at this time. I will now turn the call back to you. Okay. Thank you, everybody, for joining us today. And as always, I'm available for one-on-one calls.

22:37 Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.