Yahoo Finance Citi Trends, Inc. (NASDAQ:CTRN) Q1 2024 Earnings Call Transcript
Citi Trends, Inc. (NASDAQ:CTRN) Q1 2024 Earnings Call Transcript June 4, 2024
Citi Trends, Inc. misses on earnings expectations. Reported EPS is $-0.41512 EPS, expectations were $-0.35.
Operator: Greetings, and welcome to the Citi Trends First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Nitza McKee, Senior Associate at ICR. Thank you. You may begin.
Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends first quarter 2024 earnings call. On our call today is Interim Chief Executive Officer, Ken Seipel, and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6.45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today 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 Interim Chief Executive Officer, Ken Seipel. Ken?
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Ken Seipel: Thank you, Nitza. Well, good morning, everyone. I'm pleased to join you today to discuss the work ahead for Citi Trends. Heather will provide you a review of the Q1 business results and then, I will give you a brief overview of my prior experiences and a high-level outline of the work that we are undertaking to increase shareholder value. Before we discuss the business, on behalf of the Board of Directors and the entire City Trends team, I'd like to thank our former CEO, David Makuen, for his hard work and leadership these past four years. David shaped and built our purchase driven City Trends culture, while leading the company through some of the most challenging consumer environments in recent history. And on a personal level, I'd like to thank David for his willingness to provide business advice to ensure a smooth transition, and we want to send him very best wishes. I'd like to turn the call over now to Heather to review Q1 business results. Heather?
Heather Plutino: Thank you, Ken, and good morning, everyone. We are pleased with our first quarter performance in which we registered an improved top line trends by delivering a positive comp store sales increase of 3.1%. The quarter was further highlighted by gross margin expansion of 160 basis points compared to last year. Both of these Q1 wins were assisted by our inventory rebuilds and targeted product categories, combined with our buy team's continued focus on making wise inventory investments, maximizing markup, while also providing incredible values for our customers. Early in the quarter, we felt the impact from the slower start to the tax refund season as well as unfavorable spring weather pattern. However, we posted positive comps in each month of the quarter.
We also experienced an improved trend in store traffic with basket size similar to last year and continued healthy in-store conversion. These key performance indicators are proof-points that our unique assortment curated specifically for our African American and multi-cultural customers resonated. As mentioned on recent earnings calls, our teams remain committed to setting up key selling moments earlier, and it paid-off in the first quarter. Our Q1 product offering included a healthy balance of exclusive trends, leading brands, year-end fashion and, of course, basics for spring selling, the tax refund season and the Easter holiday. From a category perspective, our performance was broad-based with particular strength in home and lifestyle, impulse also referred to as our Q Line, Big Men's and ladies plus, all areas positively impacted by our inventory rebuild efforts.
Across our largest categories, ladies, men's and kids apparel, quarterly comp sales were all positive, driven by trend right values and incredible brands that met the needs and wants of our customers for the spring season. We exited the first quarter with total inventory dollars up 4%, in line with our expectations. We feel good about the quality, mix and value proposition across our inventory as we enter the second quarter. We are positioned to capitalize on late spring and peak summer selling weeks with a robust assortment of made for Citi Trends coordinating short and tee-sets, plenty of tees for the whole family, fresh takes on Americana and June tees, and all the goodies for summer barbecues from outfits to audio. With a large portion of our fleet in areas that go back to school by mid-August, we will also be well-positioned to capture demand in July, with a heightened focus on kids apparel, accessories and footwear.
Lastly, our value proposition is showing up loudly on the sales floor with many new deal priced offers that are driving strong sell-through. In addition to the inventory rebuilds and targeted product categories that we've been discussing for the past several quarters, in Q1, we leveraged our new ERP system to optimize assortments in key African American neighborhoods, where we've identified significant sales opportunity. This initiative, using our improved planning and allocation methods is impacting about 20% of the chain and had encouraging results in the quarter. We'll continue to monitor results and refine our approach based on what we learn with the potential to expand this effort as we move through the year. In the quarter, we continued testing radio and paid social marketing, turning the dials on market size, repeat markets, frequency of messaging and combinations with other initiatives.
We've seen particularly strong results with the combination of remodels and marketing. To date, we've touched about 140 stores with our marketing efforts, and we'll increase that number throughout the year with back to school and holiday campaigns. We remodeled 20 stores in the first quarter and an additional 15 locations in May, quickly closing in on our fiscal year goal of 40 remodels. As we've discussed in prior calls, these refreshed stores see positive results with mid to high-single digit sales lift and at half the prior cost. Including the May remodel, CTS stores represent approximately 21% of our fleet. Turning to the details of gross margin. Our first quarter adjusted gross margin expansion of 160 basis points was driven by the focus on markup I described earlier, significant freight expense improvement and effective markdown management.
Partially offsetting the gross margin benefits in the quarter was an unexpected shrink headwind as a result of physical inventory count. As we've discussed on prior calls, we count a portion of our store fleet each month and continue to see issues in very specific stores and very specific categories. We do not believe that this is a chain wide problem. At Citi Trends, we are accustomed to managing shrink, and although, a headwind this year, it remains a very small component of our margin structure. Internally, we have engaged cross functional experts reduce the impact of shrink with particular focus on internal theft. We are ensuring that stores have well placed cameras and are leveraging recently improved exception reporting to quickly identify root causes and to take appropriate action.
We're updating key loss prevention policies and are establishing a more robust restitution program. And key to all of this, we've been working to upgrade our store talent and our training programs. Next, we'll turn our attention to our supply chain, tightening controls and reporting to identify and resolve any additional causes of shrink. Importantly, we will continue to place the safety and well-being of our employees and customers at the center of our operational decisions to stem this headwind. Despite pressure from shrink, we remain confident in our ability to deliver continued gross margin expansion for the balance of 2024, driven by incremental markup improvement and reduced freight rates. Moving to SG&A. Adjusted SG&A expenses increased about $3 million in the quarter compared to last year, in line with our expectations and reflecting our previously discussed reset of the SG&A base.
The increase, as expected, was driven by merit increases in stores and corporate and a modest increase in advertising spend. During the quarter, we closed three stores as part of our ongoing suite optimization effort, ending the period with 599 locations. Now turning to the balance sheet. At the end of the quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver and $58 million in cash. With liquidity of approximately $133 million, we can more than sufficiently fund our business initiatives, building on our foundational strength for future profitable growth. Before I turn the call back to Ken, I want to reiterate that we are encouraged by our first quarter results.
Our strategic initiatives are driving improved performance, and we are playing offense, while controlling what we can control. This approach is particularly important as our customer continues to face inflationary pressures and is carefully managing their discretionary spend. We still believe in the overall approach to the annual outlook we shared in March. However, with one quarter under our belt, we felt it was prudent to make a few adjustments to our 2024 outlook as follows. Full year comp store sales are expected to grow by low to mid-single digits compared to fiscal 2023, a range slightly below our previous outlook. We expect full year gross margin to expand by approximately 75 basis points to 100 basis points, consistent with previous outlook.
We are now planning an SG&A dollar increase of 1.5% to 2.5% over 2023, slightly better than what we discussed during our last earnings call, driven by streamlining costs in a variety of areas. Consistent with our previous outlook, resulting full year EBITDA is expected to be in the range of $4 million to $10 million. As we shared in March, we plan to open up to five new stores, remodel approximately 40 locations and close 10 to 15 underperforming stores, ending fiscal 2024 with approximately 595 stores. Finally, we continue to expect full year capital expenditures to be approximately $20 million. With that, I will turn the call back to Ken. Ken?
Ken Seipel: Thank you, Heather. Appreciate it. First, I'd like to share my appreciation to the City Trends team for their hard work that generated a 3.1 comp store sales increase and gross margin rate growth of 160 basis points compared to last year. The board remains committed to the core strategies of the business. As I take the reins, I'm focused on ensuring that the business consistently executes those strategies to improve top line sales and EBITDA profit. Now if I may, I'd like to briefly introduce myself and discuss the near-term road ahead for City Trends. I joined the City Trends Board in late 2019 and have recently served as Chair of the nomination and governance committee and also members of the audit and finance committee.
The majority of my 40 year professional career has been in value apparel retailing. The first half of my career was with JCPenney in the 80’s. I was with Target in the 90’s during their brand development and rapid growth. Old Navy in the 2000s where I led explore -- explosive store growth and eventually becoming the largest specialty store retailer in the world. And during my time in the Fortune 100 Companies, I held a number of executive roles in most company functions, including merchandise buying and in operations. In 2010, I entered the second phase of my career focused on working in private equity backed retail companies, where I assume the role of CEO and co-investor in all business engagements. I found that owning a financial stake in each business created strong alignment with the shareholders and really helped to reinforce an acute focus on increasing shareholder value.
As co-owner, entrepreneur, and leader, I was able to generate three successful business turnarounds, which resulted in returns of 3 times and in some cases over 6 times the initial investment for our shareholders. I've been fortunate to have a wide variety of retail experiences. However, my time as CEO who gave an off-price apparel store serving a low end consumer, is the most relevant to City Trends. My experiences in both public and privately held companies have taught me there just a few critical and foundational points for restoring company profit and setting it on the path to long term sustainability. First, successful companies need to clearly understand the core customer and how to best serve their needs. And as this core customer evolves in response to their environment, it's critical for that organization to be nimble and adaptable as well.
Next is a compelling and differentiated value proposition that distinguishes the business from competition and generates increasing market share in a highly competitive environment. Also critical to success is operational excellence. This is the ability for a company to consistently execute the business model with profitable cost efficiencies. Next is a compelling growth plan that allows the company to continually expand and capture market share. And last but not least, our well trained highly engaged people who are dedicated to bringing the strategies to life. I have found in my past a balanced focus on the core customer, a compelling value proposition, strong operational excellence, further growth avenues, and engaged people creates unstoppable momentum for a company.
Yeah. And by the way, all of this has to be done very fast. I'm really looking forward to bringing my past retail experiences and learnings to lead the next chapter for Citi Trends. I'm optimistic about Citi Trends because of its unique position in the marketplace as a valued retailer serving a largely underserved consumer. With nearly 600 retail locations, we're one of the largest national retailers focused on lower income consumers. Our company is rooted on the strength that we have in the African American community, which to this day accounts for the majority of our financial success. Because of our long term neighborhood presence, our customers are highly engaged and loyal to Citi Trends. When we get it right, our customers respond. Another positive trait of our company is the balance sheet, which gives us a big competitive advantage today in today's world of a higher interest rates, also allowing us the flexibility to take advantage of growth opportunities to increase our market position.
You know and although, an appointment of an interim CEO could be viewed as a transitional period, I want to assure you there will be minimal disruption because I am familiar with Citi Trends, which will aid me in quick transition into the day-to-day work. My objective is to deliver consistent top line growth, streamline expenses, lay the groundwork for long term store expansion. And it all begins with really getting back to the basic blocking and tackling of a good retail company. My goal is to first clearly understand what's working and find ways to accelerate that work as well as remove obstacles, so our team can perform their jobs more efficiently. To that end, we're going to focus on the following initiatives. Number one, driving profitable sales.
Number two, sharpening our product assortment decisions and improving inventory returns. Number three, streamlining costs. Four, optimizing our supply chain, and five, leveraging benefits from recent IT upgrades, Heather mentioned a moment ago. I plan to lead the company through a fresh review of our current business performance in each of these areas. Our goal is to align on the facts, focus on the opportunities to accelerate areas of success, and course correct areas of opportunity. The strategy themes are pretty familiar, and I believe many of the answers already exist. The difference will be a laser focus on initiatives to significantly improve our execution and speed on all fronts. Regardless of external factors, we will control what we can control, and we're going to fight hard to significantly improve our top line sales results.
As I enter the business, there are a few questions on my mind that I want to quickly answer. First, are we offering enough exciting brands at compelling prices? Increasing frequency and enticing new customers begins with putting more treasure in the treasure hunt of product choices. The thrill of finding unexpected deals is the reason customers love to shop off-price and value retail formats. It's also the key reason our business has a defensible mode around external competition and online retailers. We will review all product categories and adjust the assortments as needed to ensure that we have compelling treasure throughout the store to excite our customers. Next question is really our product assortment breadth of offering and value -- price value equation strong enough in all of our categories.
We know that many of our product categories are doing well and they offer us opportunities to study and replicate their success. We can capitalize on these early positive results in our Q line product for example and the successful apparel departments, plus continue expanding our reach in home categories. However, there is an opportunity in some categories to sharpen the value equation and improve customer choice counts. All-in-all, I see a good deal of opportunity to consistently grow our top line sales. Also in support of our sales initiatives, we have an opportunity to ramp up business analytics and product allocations. As previously reported, the company installed a new enterprise resource system and we had the opportunity to realize efficiency savings from the new technology, which include driving sales through more accurate store by store product allocations and the ability to more accurately analyze markdowns.
Another area to review is our supply chain costs, which impacts our gross profit. Work is already underway in the supply chain where our distribution teams are beginning to uncover ways to reduce our transportation costs and the cost of processing product. An example is vendor direct to store shipments that can be reduced and result in a significant savings. We also have line of sight with savings and transportation by renegotiating inbound shipping rates. Both business analytics and supply chain efficiency initiatives will have a positive impact on our gross profit. We also need to lower SG&A expense base. Over time, our total sales have decreased while our SG&A has steadily increased. Clearly, this relationship is untenable and it must be reversed.
Increasing sales will help, but we also need to find cost efficiencies to offset inflationary pressures. We intend to deep-dive review every cost center to ensure that the SG&A is cost efficient and supports our go forward strategies. I expect we're going to find a lot of smaller expenses that's going to add up to significant SG&A savings. We will find ways to lower our expenses and improve our operational execution. I also want to dig into our new stores. Our recent new stores performance has been a divergence from our long successful new store strategy. We're embarking on a detailed review of our performance to understand root cause issues and what's driving the underperformance. Nonetheless, the company has a long history of successful new stores and our demographic market wide space data tells us we have a sizable opportunity to grow our square footage.
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We are a growth company and we will return to industry standard return on investment new store growth. An initiative that we can accelerate also is our successful store remodel program that Heather touched on. She outlined the remodel count and our success so far this year. But with a little over 20% of our store base remodeled, we have an opportunity to bring more stores current over time. We're going to continue this good work and combine current store remodels with top market growth initiatives to ensure that we capture top line sales available to us in each marketplace. Another big question we're going to work on is getting a fresh view of the quantitative characteristics and qualitative desires of our customer base. As the new shopping alternatives have emerged, it has likely shifted our customers' perception, value and selection.
We need to clearly understand our customer current needs and understand our recently lapsed customers, so we can more able and accurately focus strategic efforts on remaining or becoming their store of choice. We'll use differential analysis to determine how to implement measured and meaningful steps to sharpening our overall value proposition, investments in categories of product to fulfill consumer demand, and service and convenience options that might be expected in a neighborhood store. This work will take us a few minutes to complete, but I expect the insights will be a key driver of our long range growth plans. Well, as I just outlined, we have a lot of work to do. I plan on spending the first few weeks listening and learning from the internal team.
My goal is to clearly understand what's working and accelerate that work, as well as remove obstacles so our team can perform their jobs more efficiently. And some of the themes mentioned on today's call may sound familiar to those of you that have been tracking our business for the past few years. As I mentioned, at the beginning of the call, operational excellence is one of the five tenants of a successful company. I plan to lead the team through deep thorough analysis, narrowing focus on opportunities that have the most significant impact on sales and EBITDA, relentless tracking of results and course directions as needed. In short, we will execute, we will achieve operational excellence and we will move fast. Citi Trends is really fortunate to have such a talented team of people who are highly invested in our company's success, and I feel fortunate to work with the Citi Trends team.
We will analyze together, we will learn together, we will execute initiatives together to significantly improve our shareholder value. I look forward to updating you in the future on our progress. I'd like to now return the call to our operator to facilitate questions. Christine, back to you.
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