Citi Trends, Inc. (NASDAQ:CTRN) Q3 2022 Earnings Call Transcript

Citi Trends, Inc. (NASDAQ:CTRN) Q3 2022 Earnings Call Transcript November 29, 2022

Citi Trends, Inc. beats earnings expectations. Reported EPS is $0.24, expectations were $-0.06.

Operator: Greetings and welcome to the Citi Trends 3Q 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Tuesday, November 29, 2022. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee: Thanks, (ph), and good morning, everyone. Thank you for joining us on Citi Trends third quarter 2022 earnings call. On our call today is our Chief Executive Officer, David Makuen; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 AM Eastern Time. If you have not received a copy of the release, it’s available on the company’s website under the 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 Chief Executive Officer, David Makuen. David?

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David Makuen: Thank you, Nitza. Good morning, everyone, and thanks for joining us today on our third quarter fiscal 2022 earnings call. I will begin the call with a review of third quarter results, as well as some fourth quarter to date insights. Heather Plutino, our Chief Financial Officer will then elaborate on our financial results and a few other items related to the rest of our year outlook. Then we’ll open the call up to your questions. To begin, we delivered $192 million in top line sales, which equates to a three year comp stack of 1.4%, both of which were in line with our expectations. Our Buy, Move and Sell teams worked tirelessly to deliver compelling value driven trends coupled with an engaging in store experience to post a 39.8% gross profit, our 10th consecutive quarter of expanding gross profit when compared to pre pandemic 2019 levels.

Additionally, we continue to manage inventories tightly with high freshness factor. Total inventory at the end of the quarter was only 1% higher than 2021, an improvement from 26% higher at the end of the second quarter. Lastly, I’m pleased to share that we delivered positive operating income of $2.4 million. I want to spend a few minutes on how we got here. It all starts with people and our team’s ability to be both scrappy and strategic within a challenging macroeconomic backdrop. Our mantra is to remain laser focused on controlling what we can control from front of the house to the back of house. At the end of the second quarter, we committed to lowering our expense structure while shoring up our foundational infrastructure and most importantly, offering an exciting curated assortment that will never break the bank for our customers.

We are right on track on the expense savings front and Heather will provide more detail. What I will focus on is how we are driving the top line and margin. More specifically, we focused on four key areas to ensure we met expectations in the third quarter, while preparing for a successful fourth quarter holiday season. They were: number one, we shipped record amounts of packaway inventory, chock full of incredible values to excite our customers; Number two, we continue to roll out new zip codes in our product cities, including Q merchandise, missy size ranges and tween girls offerings; Number three, we infused hot price points in key categories to capture market share from value shopper. And number four, we successfully lapped last year’s macro supply chain issues to deliver an on time gift assortment for a strong start to the fourth quarter.

It’s important to recognize that the inflationary backdrop our core customers facing is truly unprecedented, particularly in the areas of rent, food, utilities and transportation. Our core customer with an annual household income of about $40,000 and 50% of our customer base having an annual household income of $25,000 and below has been hardest hit from these extreme macro pressures. Having said that, the Citi Trends customer is doing an admirable job adjusting his and her shopping patterns. What we saw in the third quarter is that our customer is shopping much closer to — much closer to need, employing a buy now, wear now strategy for important events and end use needs in their lives. Slide back to school, which I’m pleased to report was a solid performance for Citi Trends this year.

Throughout the third quarter, our traffic and conversion rates remain steady and strong and our average dollar basket size continues to hold up very well against last year’s results. Through it all, I can assure you and consistent with my points in the past, the Citi Trends customer relies on — in the heart of neighborhoods where we are the primary destination for their family apparel and accessories, home and essential needs. Before I turn the call over to Heather. I want to highlight a few remainder of your points. First, we are set-up really nicely for the remainder of fourth quarter. We generally excel during need-based events and we are confident that our families will Gift Big and Spend Less at Citi Trends this year. As we exited strong Black Friday week, our stores are full of great values across gifts, stocking stuffers and wonderful self-purchase outfits.

Next, we are reiterating our second-half guidance provided at the end of the second quarter. And lastly, it’s no secret that the marketplace is right for procurement of high quality, high value goods. Our flexible and agile operating model combined with our strong balance sheet allows us to be quite active for spring and fall of 2023. With that, I’ll turn it over to Heather to discuss our third quarter results in detail, as well as our outlook for the second half of the year. Heather?

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Heather Plutino: Thanks, David and good morning, everyone. As David mentioned, our third quarter results were in-line with our expectations despite the challenging macro backdrop and the significant inflationary headwinds our customers facing. We manage the business prudently and our teams continue to execute against our transformation strategy, delivering strong gross margins and a reduction in SG&A dollars for the quarter. We ended the quarter with a strong balance sheet, including $77.8 million of cash, well-controlled inventory and our $75 million revolving line of credit remained unused. We also completed the sale-leaseback transaction on our Roland, Oklahoma distribution center for $36 million in proceeds. The strength of our balance sheet positions us well to continue to navigate the current environment, while focusing on our strategic initiatives.

Now let’s turn to specifics of our Q3 financial results. As mentioned in our earnings release, we are comparing select operating results for the third quarter and 39 weeks of 2022 relative to the same periods in 2019 in order to provide a more normalized comparison of performance. Total sales for the third quarter were $192.3 million, a decrease of 15.6% versus Q3 2021, or an increase of 5.1% versus Q3 2019. Comparable sales decreased 18.3% compared to Q3 2021, lapping a 19.7% increase in Q3, 2021 versus Q3, 2019, representing a three year stack of 1.4%. Comparable store transactions versus prior year sequentially improved 760 basis points from Q2 to Q3, an improvement of 1,270 basis points from Q1. Gross margin was 39.8% versus 40.3% in Q3, 2021 and 37.4% in Q3, 2019.

Our strong gross margin results are reflective of our disciplined inventory management and product assortments that continue to strongly resonate with our customers. While SG&A expense dollars declined 7.6% versus Q3 2021, we experienced SG&A expense deleverage of 310 basis points versus Q3 2021 to a rate of 35.9% of total sales. We announced last quarter that we are streamlining our organization and our aligning SG&A expenses to our sales expectation as a result of a difficult macro backdrop. In the third quarter, we made terrific progress, rightsizing our expense structure and driving operating efficiencies across our business. As a result, we remain on-track to deliver approximately $10 million in expense savings for the second half of 2022 or about 7% of total SG&A expense.

We will continue to manage expenses with a heightened focus on building further operating efficiencies across the organization. Operating income was $31.6 million in the quarter or $2.4 million as adjusted for the gain on the sale of our distribution center, compared to operating loss of $1.6 million in Q3, 2019. Third quarter adjusted EBITDA was $7.5 million compared to $2.9 million in Q3, 2019. GAAP net income was $24.6 million in Q3, 2022, compared to net loss of $1.1 million in Q3, 2019. Earnings per diluted share was $3.02 or $0.24 as adjusted versus diluted loss per share of $0.09 in Q3, 2019. Turning to our 39 week results. For the fourth — for the first nine months of 2022, sales were $585.6 million, a decrease of 22% to prior year and 2.6% increase to 2019.

Comparable store sales declined by 24.5% versus 2021 on-top of a 26.9% increase in 2021 sales versus 2019, a three year stack of 2.4%. Gross margin was 39% versus 41.3% in 2021 and 37.4% in 2019. EBITDA in the 39 week period, adjusted for the gain on sale of our two distribution centers was $19.6 million versus $82.2 million in 2021 and versus $22.6 million in 2019 as adjusted. Year-to-date earnings per diluted share was $6.34 or $0.35 as adjusted for the two sale leaseback transactions compared to $5.71 in the first nine months of 2021 and compared to $0.60 in 2019, $0.67 as adjusted. Now turning to our balance sheet. As David mentioned, total inventory at quarter end increased only 1.3% to Q3, 2021 versus an increase of 25.5% at the end of the second quarter.

Compared to Q3 2019 total inventory decreased 5.1%, while sales increased 5.1%. Average in-store dollar inventory was down 19% compared to 2019 with units down 29%, reflecting our focus on turning goods fast and offering our customers fresh merchandise each and every time she shop. Our packaway goods decreased almost 40% from Q1 as planned as we released these exciting products to support fall and holiday sales. We continue to leverage this important merchandising strategy packing away near to current season goods that represents a tremendous value for our customers, while supporting our high gross margin rate. We are comfortable with our level of inventory and our super-proud of our team for their continued commitment to agile, disciplined inventory management.

Turning to our fleet, during the quarter we opened two new stores, closed four locations and remodeled three. Year-to-date, we’ve added 12 new stores, closed six stores and remodeled 35 locations. As it relates to our buyback program, year-to-date we repurchased approximately 331,000 shares at an aggregate cost of $10 million, leaving approximately $50 million remaining on our program. Capital allocation remains a primary focus of our Board of Directors and in light of the dynamic macro-environment we are carefully evaluating our cash and investments to ensure we maintain adequate liquidity. Now turning to guidance. We are reiterating our second half 2022 guidance provided with our second quarter earnings. That guidance, including the impact of the sale leaseback of the Roland distribution center included low-single digit increase in second half total sales compared with first half total sales.

Gross margin in the high-30s to low 40s range for the second-half, less SG&A deleverage versus prior year and the second-half compared to the first-half due to aggressive expense reductions, net of incremental lease expense from the sale-leaseback transactions. Second half operating income approximately in line with results from the second half of 2019. And year end cash balance of approximately $85 million to $100 million. In summary, we are pleased with our third quarter results in light of the difficult inflationary environment. While we expect these challenges to continue, our teams are focused on managing inventory and expenses, while continuing to execute against our transformation. Combined with our growth strategies, this gives us confidence in our ability to continue to delight our customers, especially during the upcoming holiday season.

With that, I will turn the call back to David for closing comments. David?

David Makuen: Thanks, Heather. With three quarters of 2022 on the books and with plenty of data patterns to study, we have work to do to be better. Most of our insights center on reacting faster to trends and keeping pace with our fashionable customer base. They really do live our purpose of live bold, live proud, respect all on the daily. We’ve got the source faster, ship faster and react faster. The great thing is nothing structural in the way. Our foundation is strong and our start-up mindset is in-full year. I’m committing to you that our amazing people are becoming excellent operators so that we can dial into our customers’ needs better than we do today. Reimagined processes, revved up leadership and important new technology and infrastructure solutions we will drive our momentum on-top of a solid foundation.

As we think about what’s next. It’s important to note that based on many external data sources, discretionary retail will likely be affected by inflationary pressures into a portion of 2023. Let me assure you this will not slow us down from making continuous improvements to our operating model. You’ve seen us play offense, you’ve seen us course correct when needed and you’ve seen us involve the Citi Trends brand to be as relevant as can be. I will highlight what we’ll spend our full days and probably some nights on. Number one, driving comp sales and margin. Continuing to broaden the appeal of Citi Trends to new multicultural lower income households in search of trend right apparel, home and accessories at prices that don’t break the bank. Number two, upgrading our fleet, continuing to upgrade our customer experience via our CTX remodel program with 42 remodels to date and combined with new stores to date within the CTX format, 78 stores or 13% of the fleet in the CTX format with many more to come.

Number three, maximizing our tech and DC investments. Leveraging our recent DC upgrades along with our upcoming new ERP system that will be a game-changer for our Buy team. Number four, actively managing our balance sheet, longer strength of Citi Trends, Heather is focused on applying fresh and innovative thinking to managing operating expenses, working capital and cash usage. And finally, number five, expanding our Citi Cares program, our platform for both CSR and ESG. Some exciting things are afoot here when it comes to giving back and focusing on our CSR initiatives, which we will share in early 2023. And of course, we will conduct our third annual Black History Makers event during February. As we speak. We are knee deep in 2023 plan. I got to say, we’re pretty excited about what’s on the horizon.

The off-price value space is ripe for evolution. As we improve our execution and take advantage of new long overdue tools, we are optimistic about delivering better efficiencies and productivity throughout many areas of the business. As always, I want to thank the entire Citi Trends team, all the people that are the face of our brand, creators of our culture and drivers of our customer engagement. Their hard work and endless efforts in making a difference in the neighborhoods we serve never goes unnoticed. Their passion to live our purpose is shining bright and will carry us into the future. We are now ready to take your questions. Malika, over to you.

Q&A Session

Operator: Thank you. Our first phone question is from the line of Jeremy Hamblin with Craig-Hallum. Please go-ahead, your line is open.

Jeremy Hamblin: Thanks, and nice job in a tough environment. I wanted to see if I could get into the kind of the cadence of sales trends that you’re seeing. In terms of maybe using 2019 as the best baseline, but to get a sense for how things slowed August, September, October? And here as we get started in Q4, it sounds like you’re encouraged by what you saw over kind of the past week, but wanted to see if you might be able to provide a little bit more detail around the cadence of sales trends?

David Makuen: Sure. Hi, Jeremy. Thanks for joining us today. Good question. I’ll take the first portion of that and Heather can enhance if needed. But at a high-level, couple of things. We had our first really normal back-to-school since €˜19. And that proved to be a really strong selling period for us that started kicking in at the end of July and kind of peaked during the main weeks of August and a little bit in September. So we were very pleased with the performance of that time period, of course, driven by outsized performance in our kids business. And that was driven by some excellent packaway goods, so all that panned out like we thought. As we creamed into the rest of the quarter, we had some puts and takes based mainly on weather, but overall, our traffic conversion and sales flow was relatively consistent throughout the rest of September and October.

The only thing that we really saw affected was the warm weather trends in late October into early November clipped some of our basket, because she and he bought less higher price outerwear and heavier weight clothing, that seems to have a higher retail. It wasn’t for that, we would have been better than we thought honestly on that front. So overall, nothing to be concerned about. The warm weather was certainly slower, if you will, but we bounced back right away when the cold snapped in November week two and strong ever since.

Jeremy Hamblin: Great. Helpful color. And then, in terms of just the environment that we’re seeing out there or that you’re seeing, clearly, there has been a lot of shift in focus towards value messaging, which is a sweet-spot for Citi Trends. Not everybody — you did a remarkable job of managing your inventory levels, but not everybody in every apparel retailer has done quite as good a job. I wanted to get a sense for what you’re seeing in terms of, either the promotional environment, the mark-down environment that you’re seeing in Q4 as it relates to Q3 in your competitive set.

Heather Plutino: Hey, Jeremy, it’s Heather. Thanks for the question. Really appreciate it. And thanks also for the comment about inventory. We are really proud of the team and the way that they managed inventory throughout the quarter and that they will continue to manage inventory in Q4. So real focus, and it’s really paying-off as you saw with our strong gross margin rates. There is no doubt that the fourth quarter is always a highly promotional season. So that will change, that won’t shock you. What I will remind you though is that, we serve and under-served customer in their community. So our strategy of being in their neighborhood and being everyday low-price, we’re not high-low, we’re not promotional, we don’t need to be, because we are value all day long and our customer knows that, entrust us for it.

So we’re feeling good about the way we’re positioned for the holiday season because of that plus the fact that we’ve got amazing product ready to go to really fuel their holiday needs. And our price points are to quote David Makuen, hot. And the assortment is really-really great. So we’re feeling really good about the way we’re set-up for the holiday season.