Citi Trends Q2 2024 Earnings Call Transcript

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August 22, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Citi Trends 2Q23 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, August 22, 2023. I would now like to turn the conference over to Nitza McKee, Senior Associate.

Operator

Please go ahead.

Speaker 1

Thank you, Chris, and good morning, everyone. Thank you for joining us on City Trend's Q2 2023 Earnings Call. On our call today is our Chief Executive Officer, David McEwen and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 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.ciditrends.com.

Speaker 1

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 to you to the company's most recent report on Form 10 ks 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.

Speaker 1

I will now turn the call over to our Chief Executive Officer, David McKeown. David?

Speaker 2

Thank you, Nitsa. Good morning, everyone, and thanks for joining us today Heather Plutino, our Chief Financial Officer, will then elaborate on our detailed financial results and a few other items related to our outlook. Then we'll open the call up for your questions. We are pleased with our 2nd quarter results that reflect positive momentum for both the top line and gross margin against a continued challenging macro backdrop. The quarter was highlighted by significant sequential comparable store sales acceleration from the Q1.

Speaker 2

As you've heard, We are committed to improving our operating results with an extreme focus on driving improved comp Our 8 80 basis points sequential increase in our comp sales trend is a direct result of our We delivered a strong gross margin of 38.2 percent, which was above last year and 100 50 basis points better than the Q1. Importantly, we experienced improved traffic levels and Strong conversion throughout the quarter, signaling that our product assortment strengthened by our strategic inventory rebuild Key areas of the business is definitely paying dividends. Central to the rebuild is offering a balanced assortment Good, better and best priced styles with an emphasis on incorporating a healthy mix of entry price points that appeal to our value based customers. Our total inventory at the end of the quarter was down 5% versus the prior year compared to down 12% at the end of the Q1. We are right where we want to be.

Speaker 2

And rest assured, We are keeping tight reins on our inventory and ensuring we have the right amount of newness and freshness across our primary category cities. During our last call, we mentioned sharpening our focus on trend development as a key lever for the year. With the first half in the books, We are seeing some clear sustainable wins on the product front, which I'll speak to in a few minutes. And I'm that we are moving in the right direction. We definitely have more work to do, consistent with our theme of doubling down on In fact, across our 3 primary operational pillars, buy, move and sell, We have many initiatives in flight that further optimize business productivity.

Speaker 2

What's important to note is that our They are designed to benefit our customers who mean so much to us. After visiting many stores and interviewing customers and Tenured associates who know our neighborhoods better than anyone, I can confirm that inflationary pressures The bulk of our customer base makes it work on $50,000 or less per year, with about half of our Living on $25,000 per year. I've met customers whose rent is up 25%, making it work on $35,000 a year. Incomes are really being stretched. As we sit in the heart of the neighborhood, what I also observed is how resilient lower income families are.

Speaker 2

Our everyday mission is to provide access to fresh and fun Getting this right means everything to us. And I can assure you our model is well suited to thrive as times get better. Now for a little more detail on our performance during the quarter. While all months were better than the Q1 on the Sales trend line, our best month was July, buoyed in part by pent up demand that showed up after the cooler weather trends abated in the northern portion of our fleet. Our family centric seasonal moments were strong, including Mother's Day, Memorial Day, and July 4th.

Speaker 2

From an assortment perspective, positive momentum in the quarter was broad based. Notable Inventory rebuild efforts and had customers voting yes to trends at amazing values. As we head into the 3rd Our stores are stocked with the latest trends, fashion and basic needs across apparel, backpacks, that reflects their deep connection with our customers. I have seen so many great examples of our customer experience Our title for store managers delivering tailored service to their regular customers, helping them to look great, For the fall season and well along setting up for a successful holiday season, the marketplace remains right with high quality, high value Our flexible and agile operating model combined with our strong balance sheet puts us in an excellent position to continue to buy the right goods at the Price. Importantly, we ended the 2nd quarter with liquidity of approximately $141,000,000 inclusive of $65,000,000 in cash, No borrowings on our $75,000,000 asset based lending facility and no debt.

Speaker 2

I am incredibly proud of how the We will continue to manage the business in this environment, while maintaining a laser focus on our strategic priorities. We were clear during our Q1 earnings call that we would take decisive actions that reflect our deep connection with our customers. Our performance during the quarter boiled down the positive momentum I'll now turn the call over to Steve to review the execution of the priorities that we said would fuel our sequential top line improvement over the course of the year. In this Dane, let me take a moment to update you on our 4 strategic priorities within the context of driving profitable sales during the rest of the year. First up, and number 1, driving comp stores productivity.

Speaker 2

The headline here is all about aligning our efforts to build awareness and traction within rapidly changing multicultural neighborhoods, thanks to the outsized growth of the Teanex populations. While the first half tilted towards essentials and surprise and delight pickups and accessories, We are seeing in Q2 apparel and footwear demand moving in the right direction. Our customers are responding to our Healthy penetration of sharp price pointed goods for her, him and the kiddos. This shows up in our strong conversion indicating our lower income Customers are really appreciative of our potent offering of trend, quality and value at $9.99 and less. Timing of fresh goods is also playing a role in that our customers value high quality setup in the store and presentation of newness in our Stores for a given season.

Speaker 2

We have worked really hard this year to refine the timing of our product flow in order to satisfy the early adoption of new We believe there are significant share of wallet opportunities by deploying incremental talent and promoting from within to drive the top I am more confident than ever in our people to drive comp store sales productivity. Our second Strategic priority is managing inventory and maximizing margin. I think you can tell from the stats that we are controlling what we with respect to our inventory levels, while delivering on our promise to rebuild where appropriate in in targeted areas of the store. Our primary approach is adding breadth in the right stores and in the right categories, which is yielding results that Strong consumer satisfaction and adoption. We are learning a lot along the way and calibrating as we go.

Speaker 2

I'm most We are maintaining a maniacal focus on sell throughs and turns in order to maximize merchandise margin. We also So include domestic inbound and outbound freight in gross margin. And the good news here is that during the quarter, we completed a large freight optimization initiative that will help us deliver reduced freight costs already embedded in our guidance. In total, I feel we are well positioned to Our third priority is controlling SG G and A expenses and leveraging our balance sheet. The good news is the headline on expense management remains consistent.

Speaker 2

We've instilled a disciplined and prudent approach To expense management across the entire organization, we delivered on our internal expectations for the Q2. Although we will continue to look for opportunities to drive incremental cost efficiencies, We believe our cost structure will remain relatively consistent and more important, highly leverageable as we look to fuel our top line, providing significant potential operating flow through. Additionally, liquidity allows Executing technology enhancements. The main highlight for this initiative is our upgraded ERP system, which will go live shortly. The upgraded ERP system will benefit our teams throughout the organization with a particular boost to our Buy at the right time, ultimately fueling improved full price sell through while reducing markdowns, a win win for both the top line and bottom line.

Speaker 2

In summary, we are pleased with our second quarter results that reflect positive momentum for both The top line and gross margin attributed to proactive efforts by the team to execute our stated plans that our customers Responding to living our purpose known as city life, which means we live both, Live proud and respect all is more important than ever and is the centerpiece of our local neighborhood strategy, serving as With that, I'll turn the call over to Heather Plutino, our CFO. She will discuss our Q2 results in detail as as well as a few items related to our outlook. Heather?

Speaker 3

Thanks, David, and good morning, everyone. Before I walk through our Q2 results, I want to take a moment to thank our many associates for their hard work and dedication. Each of our buy, Move, sell and support teams contributed in a big way to our improved performance in the Q2, and I couldn't be more proud or more grateful. While the selling environment remained uncertain, particularly for our core customer base, Our teams continue to execute against our strategic priorities, while remaining disciplined with cost control. Additionally, Given the challenging environment, we continue to leverage our strong balance sheet with $65,800,000 of cash, well controlled inventory an undrawn $75,000,000 revolving line of credit and no debt.

Speaker 3

Turning to the specifics of our 2nd quarter financial results. Total sales for the quarter were $173,600,000 a decrease of 6 0.2% versus Q2 2022. As David mentioned earlier, shopper conversion remained strong throughout the quarter as our assortments resonated well with customers. We are pleased to have seen traffic and basket improve sequentially from the Q1 as a result of our inventory build rebuild initiative and our efforts to rebalance our good, better, 2nd quarter comp sales decreased 5.3% compared to last year, an 880 basis points acceleration from Q1. We opened 5 new stores at the end of July, including a store in Englewood, California, marking our 1st store in LA County proper.

Speaker 3

We supported these Early results have been encouraging across the 5 new locations. During the quarter, we also remodeled 8 stores to drive improved comp sales productivity. Gross margin for the 2nd quarter was 38.2%, slightly higher than last year and significantly stronger than our Q1. This sequential improvement was primarily due to lower markdowns and moderation of freight expense in Q2. As David mentioned, we expect freight to further moderate in the second half of the year.

Speaker 3

SG and A expense dollars totaled approximately $69,500,000 for the quarter for $69,400,000 as adjusted, down about 1% to last year. Lower sales in the quarter drove adjusted SG and A deleverage of 300 basis points versus Q2 2022 to a rate of 40% of total sales. Operating loss was $7,900,000 in the quarter or $7,800,000 as adjusted compared to an operating loss of $3,300,000 in Q2 2022. Net loss per share was $0.61 or $0.60 as adjusted versus loss per share of $0.31 in Q2 2022. Now turning to the balance sheet.

Speaker 3

Total inventory dollars at quarter end decreased 5.4% to last year compared to a decrease of 12% at the end of the Q1. We remain comfortable with the level and makeup of our inventory While we expect discretionary spending to remain under pressure in the second half for the low income families we serve, We are reiterating our guidance for the year, which incorporates the expected impact of our key initiatives of controlling the controllable And building on the momentum experienced during the Q2, our reiterated outlook for fiscal 2023 is as follows: Total sales for the year are expected to be in the range of negative mid single digits to negative low single digits as compared to Full year gross margin is expected to be in the high 30s. Full year EBITDA is expected to be in the range of $5,000,000 to $20,000,000 During the year, we plan to open 5 new stores, remodel 10 to 20 stores and close 10 to 15 underperforming stores. Full year capital expenditures are expected to be in the range of $15,000,000 to And finally, year end cash balance is expected to be in the range of $85,000,000 to 105,000,000 Overall, we are pleased with our 2nd quarter results.

Speaker 3

The teams are not standing still and are taking aggressive actions to drive Top line growth, while maintaining a disciplined approach to our expense structure and to capital deployment. This approach, combined with our strategic growth initiatives, gives us confidence in our ability to continue to drive the improved results embedded in our guidance. With that, I'll turn the call back to David for closing comments. David?

Speaker 2

Thanks, Heather. I can tell you that the foundation of our 77 year old brand is Strong. 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. Our 6 11 stores are located in the heart of these neighborhoods, often within 5 miles from the homes of our core customers and with little or no competition in the immediate area. Our customer base is loyal and well aware that the whole family can rely on City Trends for apparel, accessories and home trends for way less Spend.

Speaker 2

We curate our product offering from a strong base of vendor partners with some of these partnerships lasting multiple As a result, we enjoy a large share of the markets we're in. I remain excited about the potential of this important brand and believe that our strong foundation coupled with the growth minded investments we are making to fuel the top line We'll unlock our flow through earnings potential. Before I turn the call over to the operator, I Take a moment to thank the entire City Trends team for their hard work and dedication day in and day out. They have done an excellent job of helping to manage the business in a difficult environment. And we are so thankful for each and every one of them.

Speaker 2

Thank you. And

Operator

And our first question is from the line of Jeremy Hamlin with Craig Hallum Capital Group. Please go ahead.

Speaker 4

Good morning. Thanks for taking the question. So I thought I might start, with just asking for a little bit more color on quarter to And what you've seen thus far, as we start Q3, it sounds like you're encouraged by what you're seeing on the traffic front, But wanted to see if you could share a little bit more color on the kind of that sequential improvement that We assume that you're continuing to see here.

Speaker 3

Hey, Jeremy, it's Heather. I'll take that question. Thanks so much. Good to hear from you. So look, it's early, right?

Speaker 3

We're in the early days, but I will say that we're pleased with how we entered Q3 from an inventory perspective, Both in quantity and quality, our buy team is working hard to make sure we have the assortment to delight our customers. We believe that the building blocks starting with back to school are in place to have another quarter of sequential year over year comp improvement.

Speaker 4

Got it. And then in terms of you also noted, I think, A shift in terms of the types of categories that were performing best, first half of the year, more tilted towards essentials. And now it sounds like you're seeing a shift in the second half to more apparel, in footwear as being drivers. Anything you can share on, A, that shift, does that give you a sense that your core Customers feeling better about where they are and maybe they're managing those inflationary pressures Better as they've shifted their spending habits. And then 2, I just wanted to get a sense as well with that shift, What types of impact might it have on gross margins as you see that shift from maybe more essentials in the first half to

Speaker 2

Hey, Jeremy, it's David. Good to hear from you. Good question. And let me clarify, It might not have been as clear as it could have been. The tilting towards accessories was Really Q1, so the first half of the first half.

Speaker 2

And what we saw nicely happening during Q2 was, as I stated, A gradual shift to footwear and apparel. And I would tell you, it all goes back to what we talked about. It was directly resulted Some of our inventory rebuilds are getting kind of sharper on the entry price points and as I mentioned sharper on trend development. And I think thirdly, to your point, the customer definitely showed up a little bit more and was willing to invest, so to speak, And apparel things that she might not have needed coming out of Q4 into the difficult headwind filled Q1. And we do think that things have gotten, as we've all seen in the news, a little better here and there, and we think that's playing a small role.

Speaker 2

I think By far, the bigger reason is the things that we can control. And some of our strategic rebuilds, as I mentioned, in targeted areas of the store, We're keenly focused on footwear and apparel. And as I mentioned, those are paying dividends. So I'd probably say the weight is probably more What we did to impress and excite our customers and that caused some of the shift, but I agree with you that there has been some improvements That might be finding their way into the communities that we're in little by little. And that's a great thing, right, as that continues hopefully over course of the rest of the year.

Speaker 2

Yes. Your second portion impact on gross margin. As I think, we're pretty evenly balanced, meaning our gross margin doesn't swing in tremendous directions from apparel to non apparel, for example. With that said, we are keeping a keen eye on Our price points and our gross margin by item or I should say our mark up by item. And I think the team is doing a great job managing Really, we put it all in the blender and say, we got to buy it right, we got to sell through it right, meaning timing and price point and in the right stores.

Speaker 2

And then we got to Chip it, right, freight's in our gross margin line. When that all works, we see the high 30s. So it's there's no one reason I could tell you. It's More that when the whole pie gets cranking, it shows up in high 30s.

Speaker 4

Got it. And Heather, I wanted to see if you might be able to quantify for us the freight impact you noted We should sequentially get even a little bit better here in the back half of the year. Would you be able to characterize that in terms of Kind of basis points of magnitude, kind of Q1, Q2 and then what you would expect here in at the back half of the year.

Speaker 3

So here's what I'll say, Jeremy, is that our outlook for the year Assumes that freight improves in the second half to the point that freight is approximately in line with last year For the full year.

Speaker 4

The rate is in line With last year?

Speaker 1

Yes.

Speaker 2

Okay.

Speaker 3

Approximately in line on a full year basis.

Speaker 4

Okay. And then just last one real quick here. Your ERP system update, which sounds like that's On track here and about to turn on. In terms of when we might expect to see that begin flowing Through, in terms of financial benefit, is that more of a kind of 2024 impact? Do you expect to see some

Speaker 2

Thanks, Jeremy. You pretty much nailed it. It's really The 2024 and forward impact, the rest of 2023 will be getting traction With the new system and learning our way around all the new functionality that will eventually deliver some great benefit. But We're baking it more into our forward looking. And if we do see some benefit in 2023, it's gravy, and we'll take it obviously, but you kind of summed it up well with these size upgrades, you got to kind of have an on ramp after you go live and have it sort of gain traction throughout the organization and that's what we've kind of planned.

Speaker 2

So we're looking forward to it. It's as I stated, it's a real game changer And the upgrade is going to be greeted with lots of smiling faces and users.

Speaker 4

Well, congrats on the progress and best wishes. Thanks for taking the questions.

Speaker 2

Thanks, Jeremy. Have a good one.

Speaker 3

Thanks, Jeremy.

Operator

Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Speaker 5

Hi. This is Greg Sommer on for Chuck. I just wanted to kind of dig into what gives you confidence that the second Half can improve. Obviously, student debt is hitting in a couple of months and we've seen rising gas I just kind of wanted to confirm, I guess, your consumer is probably under indexed to student debt. And then are potentially higher

Speaker 3

Hey, Greg. Good to hear from you. Yes, so here's what I will say. We've been talking for a while now that we anticipate Some modest improvement for our customer in the second half, and we've confirmed that with 3rd party economists that, that still holds. You are right that we under index on student debt.

Speaker 3

Gas price increases harm our customer, there's no doubt. But Here's what we need to focus on is really controlling what we can control. So if you think about the 4 initiatives that David has laid out, That is what is driving our expected improvement in the second half, making sure that we have the right product in the stores That we are being as agile as we are known to be in adjusting to our the way our Customers voting with their wallet, making sure we've got the right mix of good, better, best, managing margin, you've heard before, Right. Controlling expenses and leveraging our technology. So it's really, we're hopeful That our consumer who we love very much, gets some relief, but we're not sitting back and waiting for that.

Speaker 3

We are being Pretty aggressive in going after all of the levers that we can pull.

Speaker 5

Great. I had a quick follow-up. I was wondering if you could Just comment on direction that your basket is trending and then also kind of the breakdown of the basket between AURs and

Speaker 3

Yes, sure. Thanks, Greg. So we're happy to say that has improved in the Q2 versus the Q1, and it's really driven by UPT primarily. So that's telling us that Our customer is responding to our move to put more opening price points in our store, and they're filling their basket accordingly.

Speaker 5

Great. Thank you.

Speaker 3

Thank you.

Operator

Our next question is from the line of John Lawrence with Benchmark. Please go ahead.

Speaker 6

Thanks. Good morning. Congrats, guys.

Speaker 3

Thanks, John.

Speaker 2

Thanks, John. David, would you Talk a

Speaker 6

little bit about, we've talked a lot about the ERP system. You're doing high 30s and you work Really hard to maintain that gross margin line. Looking forward, obviously, That system gets a return. We've talked about all the benefits and all of that. Can you It's been a little time on what does it do for you on the expense line?

Speaker 6

I mean, does it help you leverage that line a little bit? And I So either possibility in 25% and 26% of a 40% plus gross margin, is that reasonable?

Speaker 2

Catered towards better planning and smarter allocation. So always want to The benefit around improving top line sales, which as you know is really what we're aggressively chasing given a relatively and high, frankly, fixed cost structure within the City Trends model. So I want to be sure We always anchor our talks around ERP system impact that it's all about the Now to your point, it will impact gross margin, we believe, over the course of the next couple of years. Can't comment whether or not we'll hit the number you mentioned just yet, too early in the game here. But it definitely provides A really interesting way and compelling way to think about how we run the business a little differently from a planning and That kind of kicks in, like I mentioned a few minutes ago in 2024.

Speaker 2

From an expense side, tough to If you consider kind of markdown expense and expense, which we should, yes, it should in theory impact that, which we're looking forward. It might even impact freight expense a little bit because it might inform us how we better distribute out of our DCs. Still again, very But as you can tell by my answer, we're thinking about it really holistically. 1st and foremost, it's sales driving. But then we'll see, I believe, benefits kind of sprinkled throughout different functions in the organization, including others world.

Speaker 2

It has a finance team benefit as well. So in any event, we're looking forward to all those And it'll just take a little bit of time as we kind of phase into it. Does that make sense?

Speaker 6

Yes. Thanks for that. Just a follow-up. The never ending question you get, I'm sure is, Can you give us an update on how the remodels are doing? And as some of those comp against The year before, how were they comping against prior history?

Speaker 3

Yes. John, I'll take that. We remain pleased with our remodel program. Right now, we've got 15% of our fleet in CTX format. And we like the look, our associates like the look and our customers like the look.

Speaker 3

We still see a lift In the mid to high single digit range for a period of time after the remodel. On a year over year comp basis, they start to perform kind of like their market, right? I mean, they perform a bit better, but that The degree of delta starts to come down over time because our customers getting used to our store and we're comping over it, right? So Still something that we're really excited about. We love the look, like I said, and we'll Keep looking for opportunities to refresh our stores.

Speaker 6

Great. Thanks. Congrats.

Speaker 3

Thanks, John. Thank you, John.

Operator

And there are no further questions on the line at this time. I'll turn the call back to David for closing remarks.

Speaker 2

Thanks, Chris. Thanks, everyone, for joining us today. Have a great remainder of the summer, and we'll see you on the next call. Take care.

Operator

That does conclude the conference call for today.

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