Citi Trends, Inc. (NASDAQ:CTRN) Q3 2023 Earnings Call Transcript

Citi Trends, Inc. (NASDAQ:CTRN) Q3 2023 Earnings Call Transcript November 28, 2023

Citi Trends, Inc. misses on earnings expectations. Reported EPS is $-0.56 EPS, expectations were $-0.17.

Operator: Greetings, and welcome to the Citi Trends Third Quarter 2023 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, November 28, 2023. I would now like to turn the conference over to Ms. Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends’ third quarter 2023 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 a.m. Eastern Time. If you have not received a copy of the release, it’s available on the company’s Web site 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?

David Makuen: Thank you, Nitza. Good morning, everyone. And thanks for joining us today on our third quarter fiscal 2023 earnings call. I will begin our call with highlights of our third quarter performance. Heather Plutino, our Chief Financial Officer, will then elaborate on our detailed financial results and our outlook. Then we’ll open the call for your questions. In the third quarter, our team continued to advance our strategic initiatives while navigating a very challenging selling environment and controlling the controllables, like we always do. We successfully managed the middle of the P&L as we registered a strong gross margin of 38.2% and kept operating expense dollars essentially flat compared to the prior year. That said, our third quarter top line performance did not meet our expectations with sales held back more than we expected by the ongoing challenging macroeconomic backdrop.

Our primarily low income customer base, consisting mostly of families earning $45,000 and less per year, is being very selective and purchasing much closer to need as they navigate higher cost of living, a buying pattern further impacted by unseasonably warm weather throughout the quarter. Our third quarter comp sales decline of 6.2%, while similar to the prior quarter’s run rate, did benefit from the intentional inventory rebuilds that I referenced during our Q2 earnings call. In particular, rebuilds in Home, Men’s, Big Men’s and Beauty were embraced by customers, thanks to significantly better inventory levels, enhanced assortments and better values than last year. Additionally, our Ladies business benefited from excellent preseason trend forecasting that showed up in one of our best assortments ever.

As the quarter unfolded, we experienced strong and consistent in-store conversion, signaling that many components of our trend right assortment for all ages continue to resonate with our customers. Our total sales were held back equally by stubborn traffic and basket trends. Contributing to these trends was meaningfully warmer weather throughout most of the quarter across a large portion of our fleet. Additionally, in our latest research, it’s clear that rent, utilities, food and gas are still real issues for our customers who top out at about $55,000 annual household income, with 50% of customers earning $25,000 or less per year. Our back-to-school and back-to-college business felt this pressure as parents and students bought less during a volatile financial environment, coupled with persistent heat waves that kept kids in shorts and short sleeves far longer than normal, therefore curtailing historically strong selling of Fall goods.

Even though we fell short of our quarterly expectations, we continued to play offense. We began testing a more robust marketing strategy in a few markets to drive traffic and deeper customer engagement from current lapse to new customers and we are very pleased with early test results and are planning to have digital and radio marketing play a bigger role in our future. Additionally, our remodels in the quarter contributed strong sales lifts, more evidence that when we refresh our store experience in established markets, our customers’ excitement translates to better traffic and basket trends. Lastly, our focus on inventory and margin management in the face of discretionary sales headwinds continues with a steady hand at the wheel, ensuring we flow to stores the appropriate amount of newness 2 to 3 times per week.

With many important selling days ahead of us, I am pleased to report that we’ve experienced improved top line momentum fourth quarter to date. Our customers are loving our Ready. Set. GIFT! campaign, supported by a timely setup of our holiday floorset and a wide offering of gifts, including great toys, mega Bluetooth party speakers, the most amazing fragrance gift sets, all the cozy a person could want, and of course, so much trend right clothing accessories and home for all ages, all at incredible values. We are also ready with must have fits to help our customers show up to their holiday gatherings with style and confidence. We know for sure that our customers show up in stores for the big moments in their life and this holiday will be no exception.

Our stores and staff are energized and we feel really good about our jaw-dropping prices and appropriate inventory position. Notably, this year’s extra selling day between Thanksgiving and Christmas and resulting super weekend is perfect for last minute shopping, a hallmark of our customers. I’m confident we are well positioned to win the holiday season, and we look forward to updating you on our progress during our fourth quarter call. Importantly, the strength of our balance sheet with total liquidity of $135 million at quarter end with no debt provides us the necessary flexibility to navigate the dynamic consumer environment while maintaining our focus on our strategic initiatives as we seek to create long term shareholder value. I’d like to take a moment to express my gratitude to our teams for their unwavering dedication in serving our African American and multicultural families across the United States in the heart of their local neighborhoods, making them feel welcome each and every time they visit, particularly during the busy holiday season.

Before I pass it on to Heather for a review of our third quarter results and a discussion of our outlook, I want to quickly review the steps we are taking to improve our top line performance. During the quarter, we made significant progress against our four strategic initiatives. To remind you, they are: first, driving comp stores productivity; second, managing inventory and maximizing margin; third, controlling SG&A expenses and leveraging our balance sheet; and fourth, executing technology enhancements. In addition to these initiatives, we are taking decisive actions to drive top line sales for the remainder of 2023 and into first quarter 2024. Examples include, first, marketing testing. As I mentioned, during the third quarter, we began testing a more robust marketing strategy in a few select markets.

Early results are promising, and we have advanced this marketing effort to approximately 20% of our fleet for the holiday season, the first time in Citi Trends’ history. Next up, optimizing inventory. We are still bullish regarding the ongoing benefits of building optimal inventory levels for specific categories that offer unique items and upsides at the best values around. Many of these categories, such as Home, Big Men’s and Beauty were not rebuilt during last year in spring. So we’re excited to see continued momentum during holiday and continued traction when we turn the corner into 2024. Third, delivering a differentiated store experience. We are laser focused on improving our in-store experience. This includes heightened attention towards visual merchandising, accentuating newness and putting together head-to-toe looks.

In essence, creating a specialty store buy with an everyday emphasis on style, quality and affordability. Our customers think of us as a guide or approach, providing all ages with today’s trends at totally gettable prices. Lastly, in the list of quick, decisive actions, improved Spring ’24 setup, we are looking forward to the Spring selling season. And from a product standpoint, we are highly focused on flowing newness on a regular basis while delivering our Spring assortments to our warmer weather stores earlier than last year. Our decision to launch Spring assortments earlier was influenced in part by our new ERP system launched in the early portion of the third quarter. This is a significant upgrade from our previous ERP system and allows for more dynamic analytics, product allocation and assortment planning.

Our teams across the organization are benefiting from this new and exciting tool. Looking ahead to next year, we believe the new ERP system will gradually improve our planning and allocation functions and lead to more precise allocations of the right product to the right store at the right time. As you can hear, we are not standing still. We have highly engaged loyal customers that shop us frequently for curated made for them trends, fashion and basics for way less spend and lots of complementary accessories, home and impulsive items that they just can’t resist. I have met with customers during the last quarter in the heart of our most important neighborhoods, from Jackson, Mississippi to Birmingham, to Tuscaloosa, to Jacksonville, to Savannah, to Charleston, to Atlanta and beyond.

And I can assure you that our customers love their Citi Trends. Our job is to deliver goods aligned to their trend based wants and needs at values that fit within their needs. It’s what we know how to do for our core African American customer base. With that, I’ll turn the call over to Heather. She will discuss our third quarter results in detail as well as our outlook. Heather?

Heather Plutino: Thank you, David, and good morning, everyone. As David mentioned, our third quarter results were softer than expected, given the difficult macro environment that continued to pressure our customers, coupled with unseasonably warm weather. The quarter was highlighted by healthy gross margin of 38.2%, flat to the second quarter, continued expense control and inventory that remained in good shape throughout the quarter as we made progress on improving in-stocks in targeted merchandise categories. We finished the quarter with a strong balance sheet that provides us with the financial flexibility to continue to navigate the current uncertain environment. Importantly, we are very proud of our team’s execution against our strategic initiatives that will continue to drive our business forward as we focus on driving profitable growth ahead.

Turning to the specifics of our third quarter financial results. Total sales for the quarter were $179.5 million, a decrease of 6.7% versus Q3 2022. Strong shopper conversion throughout the quarter once again served as proof that our assortment is resonating with our customers. Basket, while still under pressure versus last year, showed trends consistent with the second quarter. Third quarter comp sales decreased 6.2% compared to last year. Gross margin remained strong in the third quarter at 38.2%. While flat to prior quarter, we did see contraction versus prior year, driven primarily by higher freight expense as we moved more cartons through the network. The decline to last year was also impacted by higher shrink with a small group of stores accounting for most of the impact.

Through cross functional collaboration, we remain keenly focused on minimizing the impact of shrink. SG&A expense dollars remained well controlled and flat to prior year at $69.7 million for the quarter or $70.8 million as adjusted. Lower sales in the quarter drove adjusted SG&A deleverage to a rate of 39.5% of total sales. Operating loss was $6 million in the quarter or $7.2 million as adjusted compared to operating income of $31.6 million or $2.4 million as adjusted for the impact of a sale-leaseback transaction in Q3 2022. Net loss per share was $0.47 or $0.56 as adjusted versus diluted earnings per share of $3.02 or $0.24 as adjusted in the third quarter of fiscal 2022. During the third quarter, we closed five stores and remodeled seven stores, bringing our total store count at the end of the quarter to 606 and our year-to-date remodel count to 15 stores.

Now turning to the balance sheet. Total inventory dollars at quarter end increased 0.9% versus Q3 2022 as we stock the stores for the holiday season and continue to rebuild certain categories. We remain comfortable with the level and makeup of our inventory as we enter the holiday gift giving season. As David mentioned, our stores are geared up to delight customers with our Ready. Set. GIFT! campaign. Additionally, we are pleased with the buying environment as we procure attractive merchandise for Spring 2024 for our value seeking customers. Finally, we ended the quarter with $135 million of liquidity, made up of approximately $60 million of cash, no borrowings under our $75 million revolving line of credit and no debt. Now turning to our outlook.

As we’ve discussed in prior earnings calls, our previous guidance assumes improvement in the second half of the year, driven primarily by our initiatives, plus slight economic relief for our customers. While we still believe in our initiatives, what we’ve learned is that our customers remain under more pressure than our expectations assumed, are shopping closer to need and are reducing their average spend per basket. We now believe that this dynamic will continue for the low income families that we serve through the balance of the fiscal year. As a result, we are updating our outlook as follows for fiscal 2023: Total sales for the year are expected to be down mid single digits as compared to fiscal 2022; full year gross margin is still expected to be in the high 30s; full year EBITDA is expected to be in the range of $1 million to $7 million; full year capital expenditures are expected to be in the range of $17 million to $20 million; and year end cash balance is expected to be in the range of $80 million to $90 million.

While we don’t give quarterly guidance, given where we are in the year, let me help clarify what this revised annual guidance implies for the fourth quarter. Fourth quarter total sales are expected to be approximately flat to up low single digits versus Q4 2022. As a reminder, the fourth quarter this year includes 14 weeks compared to 13 weeks last year. Comp sales for the quarter, which is measured on a 13 to 13 week basis, are expected to be in the range of down mid single digits to flat to last year. EBITDA is expected to be in the range of $9 million to $15 million in Q4. In closing, there is no doubt that this is a difficult selling environment and that our customer is under pressure. While we aren’t satisfied with our top and bottom line results in the third quarter, we remain focused on our strategic initiatives while carefully managing our expenses and inventory investments.

Doing so will allow us to continue navigating the current environment alongside our loyal customer base and in the longer term will fuel our ability to drive the full earnings potential of this important brand. With that, I’ll turn the call back to David for closing comments. David?

David Makuen: Thanks, Heather. As a brand and a company, we’re really proud of our connection to our neighborhoods, employing and serving true locals with a high quality experience. During our 77 years of operation, our differentiated positioning in markets where others aren’t, including the vast majority of stores located within 5 miles or less of our core customer, has fueled our ongoing presence in more than 250 amazing neighborhoods in 33 states. Importantly, our strong and expanding partnerships with our vendors continue to supply our customers with a compelling merchandise offering that drives our customers’ loyalty and continued engagement, even in a challenging environment. As we look ahead, we will continue to execute against our key strategies in support of our Citi Life purpose, which is live bold, live proud, respect all.

Perhaps most vital is our ability to help our customers show up for whatever comes their way and bring opportunities to life at prices that don’t break the bank. We continue to be excited to drive the full potential of our brand as we focus on driving long term profitability and shareholder value. Before I turn the call over to the operator, I want to again extend my gratitude and appreciation to our Citi Trends team. It is their execution that drives our strategy forward and reinforces my confidence and excitement in our future. Happy holidays to all. We are now ready to take your questions. Over to you, Frank.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

Jeremy Hamblin: So I wanted to start by getting an understanding of the cadence of comps that you saw throughout the quarter. You noted on the August call that July was the best month that you had in Q2, and I wanted to get a sense, given that you missed your own expectations. Does that imply that was September worse than you expected or October worse than you expected? Can you provide a little bit more color? And then also just to get a sense for what you’re seeing thus far in Q4 on a same store sales basis?

Heather Plutino: I’ll take at least part of that question. Cadence of comps in the quarter, in Q3, it was really consistent. The range between the months was fairly tight and just really in line with full Q2. So you’re right, July was our strongest month in the second quarter, but that’s what I’ll say about Q3, right, tight and more in line with the full quarter of Q2 results. So when you peel it back and you look underneath the cover of those months, it’s really a story of — weather was abnormally warm, comps are down. Weather is not back, comps are up. And I will say that we thought — we used the word stubborn, stubborn traffic and basket trends throughout the quarter as well for all the reasons that we talked about in the call, right, continued pressure, buying closer to needs.

And we talked about this in many earnings release calls, right, that need equals weather changes for our customer as well, right, not just gifting moments but the weather changes, back-to-school is a good example. The mom and dad were only buying what the kids needed. And if they’re going back in 90-degree weather, they are wearing the T-shirts and shorts that they were wearing during the Summer, we mentioned in the prepared remarks, right, so that had an impact on Fall selling, for sure, throughout the quarter.

David Makuen: On the Q4 question, yes, I mean, the headline really is like we stated in our release, improved momentum has been really encouraging, driven by a really timely setup of our gift presentation kind of within the context of our Ready. Set. GIFT! holiday campaign. We were in boxes by late October, meaning in our stores with the right assortment, that’s driving the momentum. And we’ve seen some decent weather snaps throughout some, not all, of November. And so that’s all contributing to the improved momentum, giving us a nice run into the rest of the quarter. So we’re excited about what we’re seeing.

Jeremy Hamblin: So just coming back then to what you saw in Q3. So if comp trends were relatively steady, then you were expecting more of an acceleration on comps than what you got and you think maybe that didn’t happen because of weather or maybe was a macro maybe more of a factor? Just trying to understand the difference between your expectation and the end result.

David Makuen: I think they were both important factors, Jeremy. As we stated in the Q2 call, we entered BTS set up really well, similarly to the setup that I just mentioned for Q4. So we were confident in our offering, in our values and in the mix across all ages. And what really bamboozled the quarter, in our view, was weather and the macro impact being far more pressurized than we anticipated, right? As we’ve often said, we can’t predict the macro. We do our best to estimate whether it gets worse or better. But in this case, it really presented a lot of pressure. And I think one of the telltale metrics, Jeremy, that we’ve shared before is our conversion remains incredibly good. So for those who come in and have the means to shop, we convert so consistently.

I mean, it’s been 24 months of consistent conversion. But what we see, as Heather pointed out in her remarks, is the stubborn traffic — the stubborn basket pressure is just kind of presenting more of a fight for every dollar in the basket. We’re getting the conversion, we’re getting the transactions. It’s just the basket pressure. And it’s both, right? It’s abnormally hot weather, it’s the macro. So I can’t give you exact percentages, but it’s — they’re both being felt, for sure.

Jeremy Hamblin: And just coming back to Q4 because I want to make sure that on the guidance — is it implying like a down 1 to a down 4 comp, is that kind of what your expectations are? There’s some noise added, obviously, with the extra week in Q4.

Heather Plutino: Well, comp again, is on a 13 to 13 week basis. So that’s the cleanest way to look at it, Jeremy. And as I mentioned in the prepared remarks, we are expecting down mid single digits to flat in the quarter from a comp perspective.

Jeremy Hamblin: And then moving on, I want to understand a little bit about the gross margin impact. So down 160 basis points year-over-year. Conversion remains strong, I think you noted two things in here, higher shrink, higher freight expense year-over-year. I wanted to understand attribution of each of those components. And if there was anything else that might have contributed to it, given where you were in Q2, which was also the 38.2% gross margin. But on a year-over-year basis, certainly was a bit more of a step back, I think, than expected.

Heather Plutino: Yes, as you mentioned, the two components really are freight and shrink, more heavily weighted towards freight. And the issue there is that, as I mentioned, we’ve got more cartons going through the system. And if you think about some of the rebuilds that David called out, Big Men’s, Home, Footwear, those are bulkier items, right? So in the weeds here, Jeremy, forgive me, but the units per carton are lower. So in order to get that 1% increase in inventory that we reported at the end of the quarter, you’re moving a lot more cartons through the system. So higher volume equals higher freight expense as we expect that to mitigate in Q4 as the rebuild, the bulk of the rebuild is behind us. So for the shrink line, which is a smaller component, but still a component, is as I mentioned and I think you know this, we talked about this in the past.

Our cadence is to take physical inventories in a section of our stores every month, as opposed to other retailers to do it maybe 1 time a year or 2 times a year. So we’re testing our results every month, but it is subject to how those particular stores are performing from a shrink perspective. So in Q3, we had a group of stores, a class of stores, if you will, who had higher strength than the balance of the chain, which was driving the majority of that increase in shrink expense. So bummer, for sure. As I mentioned, we’re really focused on controlling strength. We’ve got a cross functional team, loss prevention, field HR, field leadership that are really, really focused on controlling shrink, whether it’s from a talent perspective, from a reporting perspective, from a local law enforcement perspective, we are all over it.