Citi Trends Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2023

There are 7 speakers on the call.

Operator

Greetings and welcome to the Citi Trends First Quarter 2023 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, May 23, 2023. I would now like to turn the conference over to Nitsa McKee, Senior Associate.

Operator

Please go ahead.

Speaker 1

Thank you, And good morning, everyone. Thank you for joining us on Cititrans' Q1 2023 earnings call. On our call today is our Chief Executive Officer, David McEwen and Chief Financial Officer, Heather Platino. Our earnings release was sent out this morning at 6:45 am Eastern 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.ciditrends.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.

Speaker 1

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 to you to the company's most recent report on Form 10 ks and other subsequent filings I will now turn the call over to our Chief Executive Officer, David McEwen. David?

Speaker 2

Thank you, Nitsa. Good morning, everyone, and thanks for joining us today on the City Trends Q1 fiscal 2023 earnings call. I will begin our call with highlights of our Q1 financial and operational performance. Heather Plutino, our Chief Financial Officer, We'll then elaborate on our detailed financial results and a few other items related to our outlook. Then we'll open The call for your questions.

Speaker 2

Against what remained a challenging macro backdrop for the low income families that we serve In African American and Multicultural Neighborhoods, our first quarter results were in line with our previously stated guidance. Our We doubled down on offering extreme value basics, fashion and trends by stocking our stores with more entry price points, which translated to approximately 70% of our units for sale in stores priced $9.99 and under. Additionally, we have great momentum behind continuously improving our store experience from appealing visual merchandising of fresh Head to Total Hooks to welcoming customers we know by name like a friend. Having visited dozens of stores During the quarter, I can tell you that our experience is getting better and better. During our last call, we mentioned sharpening our focus on Candy and HBA Essentials.

Speaker 2

Lastly, we've seen solid response to our spring and early summer newness. Thanks to our buy team Being really on top of our customers' wants and needs. Having said this, the macro About what they put in their basket as they are still resetting their discretionary spending habits, prioritizing family February April sales compared to last year were very similar in trend, while March A clear signal our assortments are resonating and the City Trend brand positioning remains strong. As we manage the I'm pleased to report that our financial position remains strong as we ended the Q1 with liquidity of approximately 164,000,000 Inclusive of $89,000,000 in cash and no borrowings on our $75,000,000 asset based lending facility, we are leveraging our Now let me take a moment to update you on our progress in support of our 4 strategic priorities, which are number 1, driving comp store productivity number 2, managing inventory maximizing margin number 3, controlling SG and A expenses and leveraging our balance sheet and number 4, executing technology First up, driving Comstor's productivity. Despite our negative first quarter trend, Our buy, move and sell teams took action to capture targeted demand Some important highlights are our customers really came out for their kids during the quarter.

Speaker 2

Our City Mini It was extremely strong. Easter was hopping with sweet casual dresses for girls and short sets for boys and the older kids Opting for active inspired brands. Wonky weather patterns drove unexpected but strong momentum in ladies long denim, lightweight outerwear Fashion Fleece. As the weather normalized, our ladies scooped up casual looks from trendy tees to woven tops, while our guys Gravitated to new curated urban looks. Strong results in commodities, scrubs, basics and replenishment items for the home As well as health and beauty, where we offer value and convenience, we're definite bright spots.

Speaker 2

Our customers are definitely choosing Fashion and fun. Lastly, the rebuild of our footwear business is gaining traction and new businesses show a promising feature With an expanded missy size assortment, strength from our Just One More queue line and our expanded assortments And we captured more than 20,000 new members during the quarter. Our second priority is managing inventory and maximizing margin. In controlling what we can control, our buy team effectively managed inventories across all of our product cities or categories with total inventory dollars down nearly 12% to last year. However, as we discussed during last quarter, Our in store inventory levels were on the low side and we suffered from too many out of stocks.

Speaker 2

Therefore, we intentionally built Our in store inventories during April across targeted year round and seasonal ZIP codes or departments within our cities, and Ending the quarter with 8% more in store inventory than last year. In total, I feel we are well positioned to market share and to capitalize on future demand. Rest assured though, our inventory philosophy remains anchored Our third priority is controlling SG and A expenses and leveraging our balance The headline here is all about being prudent in our decision making. Our expense management discipline is consistent and steadfast as We have ample liquidity to refine assortment as the demand environment evolves. Lastly, our 4th priority Is executing technology enhancements.

Speaker 2

We have numerous good developments on this front. We are making great progress towards the launch of our new platform later this summer, which as a reminder will significantly improve our core operational abilities. We are also making In line with our previously stated guidance, but we aren't satisfied. To be clear, we aren't hunkered down per se, Rather, we are running really fast and are deeply committed to improving our operating results. At the center of our efforts Live bold, live proud, respect all.

Speaker 2

We call it City Life and to for whatever comes their way. Our buy team is making bold decisions using analytics and customer feedback. Our move team is respects all by creating a customer experience that is welcoming and engaging. Keep in mind, we are the rare Brands that serve the entire family within a tight household income range of 15 ks to 50 Okay. With 50% of our customers earning $25,000 or less per year, our job To roll with their ups and downs and help bring opportunities to life for them each and every day.

Speaker 2

We know our customers really well And we know they are under immense financial pressure, which is showing up in lower traffic and spending levels. We also The macro environment remains uncertain. Therefore, we are prudently adjusting our outlook for the fiscal year, Incorporating a continued challenging backdrop through the first half followed by forecasting a modest improvement in the second With that, I'll turn the call over to Heather. She will discuss our Q1 results in detail as well as a few items to our outlook. Heather?

Speaker 3

Thanks, David, and good morning, everyone. As David mentioned in his opening remarks, our 1st quarter results were in line with our previously stated guidance. While the sales environment is uncertain and the low income consumer, The bulk of our customer base remains under pressure. Our teams continued to make significant progress against the strategic priorities David outlined, An undrawn $75,000,000 revolving line of credit and no debt allows us to manage this environment with agility and flexibility. Turning to the specifics of our Q1 financial results.

Speaker 3

Total sales for the first While our results were at the low end of previously stated guidance, Shopper conversion remained strong throughout the quarter as our assortments resonated well. We did experience pressure on both traffic and basket as our customers are being very selective about their discretionary purchases. 1st quarter comp sales Increased 14.1% compared to Q1 2022. Gross margin was 36.7% for 37.0 percent as adjusted for cyber incident expenses versus 39 0.0 percent in Q1 2022. The year over year contraction in gross margin was primarily due to higher markdowns and higher freight expense as we strategically cleared aged inventory and shifted our focus of 4 70 basis points versus prior year to a rate of 38.8 percent of total sales.

Speaker 3

We continue to manage the business with disciplined expense control, while driving additional or $0.42 as adjusted. Now turning to the balance sheet. Total inventory dollars atquarterend decreased 12% Q1 2022. Total in store inventory was up 8% We entered the 2nd quarter comfortable with the level and makeup of our inventory and we'll continue to apply a disciplined approach to inventory management, while investing appropriately We continue to expect the first half of fiscal twenty twenty three to remain challenging for low income families. Recall that we serve African American and multicultural families within a tight household income range We now expect the cadence of economic relief for our customers to be more muted than we first thought, and therefore, We believe it is prudent to update our fiscal 2023 outlook.

Speaker 3

Our revised guidance is as follows. Total sales for fiscal 2023 are expected to be in the range of negative mid single digit to negative low single digits as compared to fiscal 2022. Full year EBITDA is expected to be in the range of $5,000,000 to $20,000,000 an expanded range that reflects the level of uncertainty we're experiencing in the market. We now expect to open 5 new stores and to remodel 10 to 20 stores in the year. As a result, full year capital expenditures are now expected to be in the range of $15,000,000 to $20,000,000 All other aspects of the prior guidance remain unchanged with full year gross margin expected to be in the high 30s and the closure of 10 to 15 underperforming stores.

Speaker 3

To recap, amidst a difficult backdrop, We delivered 1st quarter results in line with our previously stated guidance. Make no mistake, our first quarter results The City Trends team is pulling all possible levers to drive improvement. We continue to focus on controlling what we can control by executing against our strategic priorities and operating the business with discipline from both an expense and a capital standpoint. Importantly, I'm confident that the progress we are making on our strategic initiatives will serve us well over the near and the long term. With that, I'll turn the call back to David for closing comments.

Speaker 3

David?

Speaker 2

Thank you, Heather. Before we wrap up, as you know, We take our connection to our neighborhoods very seriously. And during the quarter, we celebrated 2 milestones from a First up, we are pleased to announce that our CityCares Council has formally partnered with Goodwill International To create the CityCycle program, CityCycle is designed to move end of season goods that have reached the end of their markdown life to a new usage opportunity in Goodwill stores helping to reduce environmental waste. The CityCycle partnership is aligned with Goodwill's goal of keeping £150,000,000 of materials out of landfills. Proceeds from the sales of our goods in Goodwill stores are then used to support community programs such as Project Search in Milwaukee, a transition program for young adults It's currently available in 8 markets and we plan to continue to roll out to more markets in the future.

Speaker 2

Secondly, we are very This year marks the 3rd year of our Black History Makers program, also managed by our CityCares Council, the Black History Makers program increases awareness of black owned businesses and community organizations, recognizing who are positively impacting their communities. After considering thousands of inspiring applicants, the program awarded dollars $10,000,000 $5,000 grants to Black business owners doing exceptional work. We have now played a role in furthering the Success of 30 black owned businesses across the United States in the last three years. I'm so proud of our CityCares team that operates at such a high level to make multiple impacts in our African American neighborhoods. Before I turn the call over to the operator, I want to take a moment to thank the entire City Trends team for their commitment and resilience as we continue to navigate the current environment.

Speaker 2

We are now ready to take your questions. Kelly?

Operator

Thank you. Our first question comes from Jeremy Hamblin with Craig Hallum Capital Group, you may proceed with your

Speaker 4

I wanted to start with the commentary around the quarter to date trends. So Sounds like some crosscurrents in here. You noted good response to spring and early summer assortment, But you noted that the customers are being selective about what they put in their basket. So I would assume that means conversions continue to be Pretty good. And your maybe your units per transaction is down.

Speaker 4

But I wanted to see if you could give us a sense for what you've seen quarter to date, if the trends have Improved on a comp basis from what you saw in Q1. And then just a little bit more color around The dynamics on your units per transaction versus transactions, overall.

Speaker 3

Hey, Jeremy, it's Heather. Thanks for the question. Appreciate it. A couple of things. So when we look at The way we exited Q1, David mentioned the construct of the quarter in his prepared remarks, right?

Speaker 3

Feb and April were performed similarly to each other. March was softer. So April was Certainly, in the pocket of what we expected when we did our prior guide, but it was on the lower end of That guide, right? And not where we hoped it would be. That trend continued into Spring and summer is being received well with our customer and that is translating in continued strong Conversion, but traffic remains under pressure and basket is under pressure.

Speaker 3

We said it multiple times in prepared remarks that our customer is being very, very selective about what he and she are putting in their basket, and we see that as a reflection of the amount of Economic pressure that they're under. So we're seeing some green shoots, but it is very much a story of Selectivity of our customer on what makes it into the basket.

Speaker 4

Got it. That's helpful. And then you guys have done a great job of controlling inventory here. You noted that it might have even been a little bit lower Then where you wanted it to be, maybe there were some opportunities missed because of that, but you feel good about where it is now. You did see gross margins adjusted gross margins down about 200 basis points in Q1, But still expecting high 30s for the year.

Speaker 4

I wanted to get a sense of how you expected that dynamic kind of year over year Play out. And if in conjunction with that, if you could discuss it all, freight And the impact we expect freight to have, I know it has been a headwind last year, expected to be a little bit of a tailwind, I believe, this year. But wanted to see if you could provide us with some more color on that.

Speaker 2

Hey, Jeremy, it's David. Thanks. Good question. We'll do a 2 parter and I'll hand it over to Heather for Great. But on your questions about inventories, I think you're remembering right at the Q4 call, we definitely weren't Pleased with our in stock levels across certain targeted zip codes within our store that We knew would be generally good sellers during these tougher times, meaning things that are in the essentials bucket, Health and beauty, some non apparel categories that we could see in the tea leaves were going to be better sellers than not.

Speaker 2

So when you heard us talk about the +8 percent in stores, primarily driven by fueling more inventory in to set us up for Q2, we really addressed those categories. So it wasn't store wide, it was very Targeted, very planful and meant to satisfy the upcoming Q2 demand, even a little bit of late Q2, early Q3 3 as we flow it. So we're feeling good about that decision making and we're seeing some good Indicators, call them green shoots, of when we increased inventory, sales responded. So I I think that validates our thinking back from mid March that we knew we needed to do some rebuilding. I'll hand it over to Heather for the Great question.

Speaker 3

Yes, I think you had a margin question in there too. And Jeremy, let me address margin In the quarter, adjusted margin, we did see a decrease to prior year, by 200 basis points and that's, Call it 60% freight, 40% markdowns. We took action in the quarter on both of those 1, on the freight side to make sure that we got that exciting product that David just described into the stores in a timely manner, which in some cases meant that we purposely chose a higher cost mode of transportation. On the markdown side, we made the decision to take a higher level of markdowns than we had originally anticipated in order to go into Quarter clean, Q2 clean. So we feel good about those decisions.

Speaker 3

Certainly, it showed up in the margin, Understand that, but we feel good about the decisions because we feel like that plus the inventory comments that David just made, have really set us up well For the balance of the year and the key selling seasons that are in front of us. Freight specifically, Let me do a shout out to our move team who are working very hard to control expenses In both inbound and outbound modes of transportation. Recall, Jeremy, we are 100% domestic freight, right? So we are not seeing the benefit directly in our margin line on container costs. In our margin line on container costs coming down.

Speaker 3

So, they were working hard with existing and with new business partners to bring those rates down and to give us flexibility within our supply chain. So Shout out to them and that will mean that freight expense will moderate throughout the year, allowing us

Speaker 4

Got it. And then in terms of the cyber attack earlier this year, which had clearly some impact on the profitability in Q1. Have you seen any lasting impact to that? Has there been any reputational damage at all? I just wanted to see if that's something that you think could linger on a go forward basis.

Speaker 2

Thanks, Jeremy. I'll take that one. The quick answer is absolutely not. No reputational damage. It's really, if you recall, it was 100 Internally focused had no impact in our stores or to our customers.

Speaker 2

And so it's something that we've largely Put in the rearview mirror, the team did a great job conducting all the right recovery exercises and We're set up well going forward from a security standpoint. So, we're

Speaker 5

we've moved

Speaker 2

on is the best way

Speaker 4

Got it. Last one for me. Your cash balance, you Based on current share count, I think it translates to about $10 to $13 a share. You have additional liquidity on top of that, but really strong. In terms of mentality on how You could deploy capital.

Speaker 4

Obviously, you have not done buybacks for a number of quarters here, I think that's probably prudent. But just wanted to understand, in terms of thinking about that down Before we think about doing anything else, I noted that you took your CapEx guidance down by about $5,000,000 But thinking about it in terms of that the buyback you still have out there for $50,000,000 but then also as it relates to Remodels are potentially opening up stores on a go forward basis.

Speaker 3

Yes, I'll take this Jeremy, thanks for the question. Yes, so the decision to bring down the CapEx guidance for the year, In my opinion, it just makes sense, right? I mean, our top line is a bit too choppy right now to feel good about Going big and bold on capital spend. And so we're making the decision to ratchet back on the number of new stores and the number of remodels. It also signals the amount of focus this team has on the strategic initiatives that David laid out, right?

Speaker 3

So we're looking at no distractions. And the fact that we're also preserving cash is important. The question about share repurchase, I've said this for several quarters now, so forgive the repeat, but not off the table. It's just a not now because we really are in preservation of cash mode and investing in the business. So the Inventory investments that we talked about in the Q1 are really 1st and foremost and top of mind, right, because That's going to drive the top line, which is what we're looking to be the signal of when we are feeling a bit more stable and we'll start to think differently about capital allocation.

Speaker 3

I'll also remind you that I'm saying this as one person, but there is an active conversation with Board of Directors about So, it is a continuous discussion. We just want to make sure we're doing That's right for the business in the long term and so we're preserving right now.

Speaker 4

Got It seems prudent. Thanks so much for taking the questions and best wishes here.

Speaker 3

Thanks so much, Jeremy.

Operator

Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed with your question.

Speaker 6

Good morning, everyone. As you think about the CTX stores, how are those performance versus the base? Is there any difference between the remodeled stores? And then David, you mentioned that 70% of the units are now at $9.99 and under. Does that differ by Category at all, does it differ by newness and how you're planning pricing going forward?

Speaker 6

And just lastly, with the trend development being effective and you mentioned sharpening the focus. What are the next levers as we move through this trend development time period? Thank you.

Speaker 2

Good morning, Dana. Thanks for those good questions. I'll kick through those. From a CTX standpoint, for our Our existing base of CTX stores, which is nearing 100 of the fleet, we are still seeing a nice separation between them And the rest of the chain, they are a little longer in their history, as you know, since we did a number of them in And they're starting to show up regularly in our top 100 stores and all that good stuff. So we're So thrilled about the performance of those.

Speaker 2

Secondly, on your pricing question, that's a good one. I would tell you, It does differ by category. For example, in Beauty, almost probably 85% Under $10 but in apparel, it's more like 60%, 55% to 60%. So it depends on the category. But I would And we typically test before we roll to the chain.

Speaker 2

And we see some really or excuse me, we've seen some really good voting results dating Back to January when we started dabbling in a more kind of entry price point mindset given the nature and the state of the economy. And we're seeing some great pickup by And frankly, a thank you from the customer, right, for voting for these lower price points. So we're monitoring it carefully. I do want to send a message that above $10 is working really well too. It's not as if we're not seeing any AURs that are higher.

Speaker 2

That work as well. But we really wanted to be mindful. And as I mentioned in the call, we really know our customer. And while they didn't say bring in For $6 stuff, we could tell and we know based on their situation that it will only help and it Our top line. So that's been a good development.

Speaker 2

Thirdly, on trend development itself, I would tell you similar refrain from last call. When we think about the moments in the year that are most important to our customer, that's where we really 0 in on which trends will deliver great moments, so to speak. So I'll use back to school as the next one, holiday, in fact, one before back to school, obviously, would be the heart of the summer, starting with this week in Memorial And, culminating with July 4. And our team has done a great job at recognizing what we missed last year and what we can do better this year, Both from a trend standpoint, but also importantly, the timing of the trends. Last year, we were

Speaker 4

the time that the customer

Speaker 2

is likely to respond to, for example, a cool new short or a great new woven top or A great summer dress. So the team has done a better job, not only sharpening the trends themselves, but also sharpening when we bring it And then how we exited as well. So I would tell you we're checking in with some better scores on that as well.

Speaker 6

Thank you. And then one other follow-up. Heather, when you think about the shaping of the year and obviously last quarter we heard about the meaningful improvement in the second half of the year, It's moderate given the pressures on the consumer. Any puts and takes that you think about whether it's second, 3rd and fourth

Speaker 3

The conversation that we had last quarter holds just coming down a bit, right? So the idea of Sequential quarterly improvement in the top line holds, it's just a more moderate sequential improvement throughout the year. SG and A will remain constant throughout I'm sorry, Dana, will remain constant throughout the year. Margin will Start to see improvement throughout the year as well. So consistent with last quarter conversation, just Unfortunately, given the top line environment, we felt it was prudent to bring our guidance

Speaker 6

Just one last thing, we're hearing about shrink all over the place with retail. Is your price point Low to be impacted, is it an impact? What are you seeing there?

Speaker 3

Yes. David, I'll take that one as well. So shrink is a hot topic within the Citi Trends 4 walls as well. It is something that we are monitoring and working to manage In a cross functional way, it gets senior leadership attention. I think it's not too extreme to say on a daily basis.

Speaker 3

I will tell you, it saddens me to tell you that the number of instances of scary events has Increased, not unusual in this economic environment, but still disappointing. And I will say Number one concern, certainly, we worry about the margin impact, but our number one concern is the safety and security of our associates and our customers. So we take that very seriously and are monitoring it. We are putting some new processes in place, more to come on that, that We think will help us be able to manage and monitor more closely and more efficiently. But In total, it's up a smidge.

Speaker 3

Ethical term, it's up a smidge, but we're watching it very,

Operator

Our final question comes from John Laurence with Benchmark. You may proceed with your question.

Speaker 5

Great. Thanks. Good morning, guys.

Speaker 2

So David,

Speaker 3

would you

Speaker 5

comment a little bit about, if you look at Just the inventory situation across the vendor base, what are you seeing out there As you go try to be sharper in certain categories, just that discipline of trying to find newer and fresher And how does that work? You mentioned the idea of getting something in faster. Can you just talk about that environment And with other people having trouble with apparel, what are you seeing out there in the marketplace?

Speaker 2

Sure. Hey, John, good question. First of all, I'll give a shout out to our vendor partners because I would tell you our tried and true partners They've got terrific offerings as we go through these difficult times. And you're right, they're feeling it too, right? Their retail base, so to speak, It's causing them to seal it as well, but they've been terrific partners.

Speaker 2

And then secondly, we've added an incredible amount of new vendors. So I would tell you we're playing big time offense and we're constantly in the marketplace looking for new resources That can actually deliver the trends that we've talked about in the right at the right cost, excuse me, and also in the right time window. And so we're being really creative. We're working with more and more vendors out in LA, certainly sticking with plenty we can do with in business within New York And even in between, the 2 coasts for certain categories that are outside of apparel. So we're fast at We're on top of it.

Speaker 2

I think the opportunity remains and you kind of hit on it. How can we just stay on that current sort of modern Fashion and trends plain, so to speak, and just keep on bringing it. And that's our job. And it's It's our job to write those orders in the right quantities, so we're not over our skis and write it in a way where we want to celebrate selling out. So we're all over We see plenty of advantageous product in the marketplace.

Speaker 2

We're well ahead of things in In terms of back to school, we start shipping that in actually about 4 weeks, and we're all over holiday. Like I mentioned earlier, 2 really big moments that you know are Extremely important to our customer and to our sales line. So I think we're acutely aware of all the peaks And how to manage them. And we trust, as Heather mentioned, that the customer will come along and it's our job Sure. Read the tea leaves as they present themselves and adjust accordingly.

Speaker 2

But I think we've got the right team to do so and the right vendor partners

Speaker 5

Great. Thanks. And just a quick follow-up. Obviously, Remind us again a little bit about the ERP system, sort of 90 days to 100 days behind there. What and obviously a lot of that benefit goes to the 24.

Speaker 5

Can you just remind us a little detail there? And I assume there's no sort of diminished outlook as far as What that system is going to provide for your productivity?

Speaker 2

Sure. Happy to do that. Yes, at a high level, We are on track after a temporary delay from the cyber incident. We are on track to deliver the new platform At the end of the summer. And what it will bring us really is a brand new way of planning and allocating our inventory and then Much different way in the back of house running our finance operations.

Speaker 2

Those are kind of the 2 teams, The Buy team and the support finance team that will really benefit from this. And then a third benefit, organizationally Generally speaking, it's the power of data and analytics that this new platform will bring to the entire organization, spanning stores, HR, you name it. So we're really excited about it, and we've got a team that's marshaled against the new timeline, bringing it home at the end of And it basically will replace literally a green screen antiquated system that has served us well, but we are ready to to the cloud literally and take advantage of this new easy to use interface Send the right goods to the right store at the right time. And I can't underline that enough. Those that little that simple line, We will see great benefit from.

Speaker 2

You're right, it won't be as big a benefit in 'twenty three, but we're going to little bit out of it for sure. And then We will absolutely count on it to impact 2024 and 2025.

Speaker 5

Great. Thanks. Good luck.

Speaker 2

You're welcome. Thanks, John. Good hearing from you.

Operator

There are no further phone questions at this time. Mr. McEwen, I will now turn the call back over to you for your closing remarks.

Speaker 2

Thanks, Kelly. Thanks, everybody, for joining today.

Operator

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

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