Edited Transcript of CTRN earnings conference call or presentation 26-Nov-19 2:00pm GMT

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

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Stuart C. Clifford, Citi Trends, Inc. – Senior VP & CFO [4]

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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%.

And looking at comp store sales for the individual merchandise categories, the Home division continued to be our strongest performer, up 11% on top of a strong 13% in 2018 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 3 quarters of the year, total sales increased 0.4%, while comparable store sales were down 1.2%.

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 3 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. 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.

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 3 quarters.

Earnings per diluted share were $0.60 in the first 3 quarters of 2019 or $0.67 when adjusted for proxy contest expenses, compared to $1.06 in the first 3 quarters of 2018.

Now I will turn the call back over to Bruce.

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [5]

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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. 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 Citi Trends store base. Also noted in the release, in connection with the CEO transition, Peter Sachse will become the interim CEO effective December 9. 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.

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Peter R. Sachse, Citi Trends, Inc. – Director & Special Advisor to the CEO [6]

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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 Citi Trends’ Interim CEO. I have been working with this team for the past 5 months, and I am pressed by — I am so impressed by the quality, the dedication and the flexibility of the organization. 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 5 months, we have been working diligently to develop a 3-year strategic road map as we enter the next phase of growth for Citi 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 3 years, 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 Citi 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 Citi 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.

Now let us take any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question coming from the line of Eric Beder with SCC Research.

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Eric Martin Beder, Small Cap Consumer Research, LLC – CEO & Consumer Analyst [2]

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Remodels, it sounds like an interesting piece here. What are you doing with the remodels? How are you changing the stores? And what historically have been the returns when you’ve started to aggressively remodel stores?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [3]

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Thanks for the question, Eric. What we’re doing with the remodels that we’ve done and we’ll 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. 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 corporate repair or anything like that.

And then you also asked 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.

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Eric Martin Beder, Small Cap Consumer Research, LLC – CEO & Consumer Analyst [4]

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Right. You’ve talked before about the Hispanic initiative, how is that going? And are most of the newer stores in that initiative that you plan going forward?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [5]

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Let’s see. We have now opened 2 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 2 that we’ve opened thus far to continue to pursue that concept.

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Eric Martin Beder, Small Cap Consumer Research, LLC – CEO & Consumer Analyst [6]

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And finally, last question. The shift over to non-apparel, what has that entail in terms of working capital needs for the stores, in terms of physically having to change them around and in terms of the customer base for that in terms of tracking a different potential customer base?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [7]

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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 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. We’re not doing — we’re not just helping on doing this, so we’re doing this because the customer is requesting the merchandise with their pocketbook.

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Operator [8]

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Our next question, coming from the line of Elan Danon with Danon Capital.

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Elan Danon;Danon Capital;Analyst, [9]

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Just to continue on the remodel questions. What are the cost per remodel per store?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [10]

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The cost on per-store basis is around $100,000 net of tenant improvement allowances from the landlords.

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Elan Danon;Danon Capital;Analyst, [11]

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Okay. So it’s $5 million in total?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [12]

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Per year. Correct.

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Elan Danon;Danon Capital;Analyst, [13]

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Great. Well, okay. And then in terms of — will there be any store disruptions? I mean you’re doing it during the 2 busiest quarters. Will there be — do you foresee any disruptions within the store?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [14]

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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. 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 our — what we decide as far as timing goes.

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Elan Danon;Danon Capital;Analyst, [15]

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And remind me, how many stores did you remodel in 2019?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [16]

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These major remodels, we did 5.

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Elan Danon;Danon Capital;Analyst, [17]

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Five. Okay. And then you’re just going to follow the same 3 formats? I guess there’s no color change, there’s no new flip format that you’re introducing or anything, correct? You’re just going to follow the same color schemes that new stores have and store layout?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [18]

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That’s right. Yes. Exactly.

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Elan Danon;Danon Capital;Analyst, [19]

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All right. Yes. My next question is typically you give a kind of a quarter-to-date update. I think last year, you guys were running at 4%. You’re starting to lap the miss in Ladies from last year. And then you guided pretty nicely up to the 4. Any reason why no update this time around?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [20]

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Well, we did mention that they were — 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.

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Elan Danon;Danon Capital;Analyst, [21]

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Got it. Okay. Just — fair enough. I just — and then you guys are working on so many for — on the strategic road map, how — when do you think you’ll be kind of updating the Street on that road map going forward in terms of where the operating — it seems like the operating model is changing a little bit. Where to 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?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [22]

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Yes. 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 in the last 2 quarters. We’ll update you as we have information. So it will be an incremental approach. There will be more disclosures to the extent that there are more things happening and having been accomplished. So I think you’ll continue to hear a lot more over the next year about this.

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Elan Danon;Danon Capital;Analyst, [23]

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And then lastly, it was great to see Ladies pick back up again into the positive territory. I know you guys were lapping some weaker numbers there, but is there anything — maybe any call-outs that you can say that maybe it’s helping to kind of drive the Ladies business now? And I know you have a new Chief Merchant, is there stuff going on that you could see an acceleration from here?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [24]

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Yes, 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 an assortment that the customer really didn’t want and at retails that 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.

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Elan Danon;Danon Capital;Analyst, [25]

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And then like one more. And then Children’s down, too, is that maybe some of that’s space, some of that’s square footage that’s been devoted to Children’s, is that maybe devoted to other categories? Or is that a weather issue where they just wasn’t — Children’s often is out when needed. Is there something you could attribute that to, the down comp?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [26]

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Yes. When you look at the 5 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 3 of the apparel categories, Children’s had the lion’s share of that. So that’s really the only reason for that.

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Elan Danon;Danon Capital;Analyst, [27]

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Okay. And then the new stores for next year, off-mall versus on-mall, I know that you guys have opened in some C malls where you got some billable rents. Is it primarily in strip centers?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [28]

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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 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 2 or 3 years ago.

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Elan Danon;Danon Capital;Analyst, [29]

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So is that playing into the acceleration of new units on a percentage basis?

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [30]

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It is.

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Elan Danon;Danon Capital;Analyst, [31]

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Got it. Well, that’s a lot of questions. Bruce, thanks a lot for all your help through the years. You’ve been tremendous and we look forward to following the company.

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [32]

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All right. Thanks, Elan.

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Operator [33]

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Thank you. Mr. Smith, there are no further questions at this time. I will now turn the call back to you.

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Bruce D. Smith, Citi Trends, Inc. – President, CEO, Secretary & Director [34]

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Okay. Thank you, everybody, for joining us today. And as always, I’m available for one-on-one calls. Thank you.

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Operator [35]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.