Citi Trends - Earnings Call - Q4 2020

Transcript

Operator (participant)

Greetings and welcome to the CTRN Q4 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded on Friday, March 13th, 2020. I would now like to turn the conference over to Nitza McKee, Senior Associate with ICR. Please proceed.

Nitza McKee (Senior Associate)

Thank you. Our earnings release was sent out this morning at 6:45AM 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 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 Executive Chairman, Peter Sachse. Peter.

Peter Sachse (Executive Chairman)

Thank you, Nitza, and good morning, everyone. It is a pleasure to be speaking with you this morning, and I am truly excited about the road that lies ahead for Citi Trends. We have put in place a clear strategic roadmap, and we are well on our way. In taking on the interim CEO role in December, it was my goal to establish a framework and culture of success at this company with a clear focus to enter into the next growth phase for Citi Trends. In establishing that framework, we made key hires, including Lisa Powell, our Chief Merchandising Officer. Lisa joined us from Century 21. She has 30 years of retail experience, 20 of which were with TJX in merchandising and planning roles. Lisa is a tremendous partner and a true leader. We also hired Charlie Hynes in the critical role of Senior VP of Supply Chain.

Before joining us, Charlie spent the last eight years with Burlington, and prior to that, he was a supply chain consultant. We look forward to leveraging Charlie's expertise. Rounding out our leadership team, I am thrilled with the recent appointment of David Makuen as our CEO. David has only been with us for five days, but he is already engaging with our teams. David comes to us with over 24 years of retail experience, most recently as Executive Vice President of Marketing, Strategy, and E-commerce for Five Below. David was a member of the leadership team that oversaw Five Below's explosive growth over the last eight years. David's proven leadership experience, along with his unique skill set, gives us confidence that he is the right leader to drive Citi Trends' long-term strategic plan. With that, let me allow David to introduce himself.

David Makuen (CEO)

Thank you, Peter. I am incredibly excited to join the Citi Trends team, and I see this as a tremendous opportunity. The uniqueness of Citi Trends' value proposition, servicing the complete apparel, accessories, and home goods needs of African American consumers, provides a significant platform for growth. I look forward to working alongside you and the talented team at Citi Trends as we set our sights on growing our business into a $1 billion brand.

Peter Sachse (Executive Chairman)

Thanks so much, David. Along with David's appointment as our CEO, our board has also appointed me as Executive Chairman. In my new role, I will work alongside David as he transitions into the CEO role. David is aligned with and will lead the strategic vision we laid out for the company at the ICR Conference in January. Now, I will jump into a few highlights of our Q4 results. We ended 2019 on a high note with very strong top and bottom line performance. The results are a testament to the early successful implementation of our strategic plan. Our Q4 sales increased nearly 5% to $211 million. We delivered a comparable store sales increase of 3.1%. Reflecting strong full price selling and lower markdown rates, our gross profit expanded by 235 basis points to 39.7%.

Selling, general, and administrative expenses delevered 151 basis points in the Q4 to 32.1%, primarily due to higher distribution center labor costs and the reversal of an accrual for incentive compensation in the prior year. Our operating profit margin was up 116 basis points, and operating profit dollars grew 28% to $11.3 million as compared to the Q4 in 2018. Q4 earnings per diluted share were $0.84, compared with $0.59 in the Q4 of fiscal 2018 on a GAAP basis, or $0.88 in the Q4 of fiscal 2019 when we adjusted for interim CEO-related expenses. Our quarter-end inventory was down 1.1%, comparing very favorably to the 5% total sales increase, which led to a high-quality inventory position entering the spring season.

In looking at the top store sales performance by merchandise categories for the Q4, we continued to successfully shift our offering more towards the non-apparel merchandise categories, which comped at a positive 11.7% for the period, more than offsetting an apparel category comp decline of 2.2%. Moving next to our fiscal 2019 results, total sales increased 1.6% to $782 million. That's inclusive of a slight comp store sales decline at 0.1%. Our earnings per diluted share, as adjusted for interim CEO expenses, proxy content expenses, and asset impairment expenses, was $1.56, which exceeded our prior guidance. For the year, we opened 16 new stores. We remodeled, relocated, or expanded 25 stores, and we closed 7 stores to end the year at a total store count of 571. We returned approximately $32 million to our shareholders in the form of share repurchases and dividends.

Now, for an update on our performance quarter to date and our guidance for the Q1 and the fiscal year 2020. Despite a delay in income tax refunds that materially affected the third week of February, for the first five plus weeks of fiscal 2020, I am pleased to report that our comparable store sales are up 3.6%. For the Q1 of fiscal 2020, our guidance for adjusted earnings per diluted share is in a range of $0.87 to $0.91, and that compares to $0.72 on an adjusted basis last year, a midpoint year-over-year increase of approximately 24%. Our Q1 guidance is based on a comparable store sales increase of approximately 2.5% to 3%.

For fiscal 2020, we are guiding adjusted earnings per diluted share to be in the range of $1.75 to $1.85, which assumes a comparable store sales increase in a range of 2.5% to 3.5%. As you have heard from many others, we are paying close attention to developments relating to the outbreak of the coronavirus. First and foremost, we are focused on the health and safety of our employees and our customers, as well as planning for business continuity. We are closely monitoring local, state, and federal government agencies and will follow all recommendations. The extent and duration of the impacts that the coronavirus may have on our business are not known at this time, but we are monitoring developments in order to be in a position to take the appropriate action. Our 2020 guidance does not include any potential impact related to the coronavirus.

Let me conclude with an update on our long-term strategic plan and an update on our capital return program. We are continuing to make meaningful progress on our long-term strategic plan. We have approved 22 of the planned 30 store openings for 2020. We have completed 20 of the 50 planned remodels for 2020, with the remaining 30 targeted to be complete by the end of May. We have hired Deloitte to identify and help us execute our strategic systems roadmap, and we are making major improvements in supply chain, including reductions in freight costs and efficiencies within our distribution centers. On the capital return front, we completed the $25 million share repurchase program that was announced in November of 2019. As I mentioned earlier, in 2019, we returned approximately $32 million to our shareholders in the form of share repurchases and dividends.

I am pleased to report that the board today announced the authorization of another $30 million share repurchase program, which we expect to fund from cash on hand. In summary, we ended the year on a high note. We believe that we have the right team in place to lead Citi Trends into our next phase of growth, and I am confident we are well positioned to achieve our three-year objectives, including a net sales CAGR of approximately 8.5%, reaching $1 billion in sales by 2022, and delivering an earnings per share CAGR of 20% to 25%. With that, Nitza, we are ready to take any questions.

Operator (participant)

Thank you. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question comes from Eric Beder with SCC Research. Please proceed.

Eric Beder (CEO and Senior Research Analyst)

Good morning. Congratulations on a solid Q4 and start to the fiscal year.

Peter Sachse (Executive Chairman)

Thanks, Eric.

Eric Beder (CEO and Senior Research Analyst)

Could you talk a little bit about the inventory? We've heard that the coronavirus has been somewhat disruptive to inventory flows. What are you seeing, and how are you responding to that?

Peter Sachse (Executive Chairman)

Eric, at this point, we have had no disruption to the supply chain and the flow of inventory. We are in constant contact with our major vendor partners out there and working with them very closely. Today, we do not see any trouble getting merchandise.

Eric Beder (CEO and Senior Research Analyst)

That's great. When you look at the remodels, what are you seeing in terms of the impact of the remodels? How are you looking at that in terms of how much of the store base after this year's 50 should be remodeled? How would you feel that is changing the consumer and what they're purchasing when those remodels are occurring?

Peter Sachse (Executive Chairman)

Yeah. We're getting a very positive reaction from the customer as well as from our store employees. They are proud to work in the remodeled stores, and our customers are incredibly appreciative that we are spending money in their Citi Trends. We have stated, Eric, that we intend to do 50 remodels every year over the next three: 50 in 2020, 50 in 2021, and 50 in 2022. Based on the results, that could accelerate. We could do more if we get even higher ROIs than what we anticipated, or they could go to a little less if we get lower ones. We anticipate 50 every year for the next three years. We did ship the merchandise—I'm sorry, Eric. I just want to reply to your last comment about what they're buying. We did shift to more non-apparel in the remodeled stores, which is what we're doing chain-wide.

We just accelerated that shift in the remodels, and we are accelerating that shift in the new stores as well, and we're seeing positive results from both of those.

Eric Beder (CEO and Senior Research Analyst)

What is the approximate cost per store for the remodel?

Peter Sachse (Executive Chairman)

It's slightly over $100,000.

Eric Beder (CEO and Senior Research Analyst)

Okay. When you're rolling out the new stores, is there a particular region or area you're looking at? What is the focus in terms of the new stores and where you're putting them?

Peter Sachse (Executive Chairman)

The new stores, are you asking about now, Eric?

Eric Beder (CEO and Senior Research Analyst)

Yes.

Peter Sachse (Executive Chairman)

Yeah. It's a combination of a fill-in strategy and some new markets. We are looking most importantly at the most viable MSAs where our concept fits. That might be a fill-in market. It might be a new market, but that's the way we're approaching it.

Eric Beder (CEO and Senior Research Analyst)

Great. Again, congratulations and good luck in 2020.

Peter Sachse (Executive Chairman)

Thank you, Eric.

Operator (participant)

Our next question comes from Alex Silverman with AWM Investment Company. Please proceed.

Alex Silverman (Portfolio Manager of Private Equity Fund)

Good morning. Congratulations on a pretty spectacular quarter. Wondering if you could talk a little bit about the tax refund season, what you're seeing in terms of the linearity of the year versus a year ago.

Peter Sachse (Executive Chairman)

Yeah. I'd be happy to. I think it's been fairly widely reported that there was a significant decline in the third week of February. As I stated in my remarks, we felt that decline. We were materially affected in the third week of February. I'm happy to report the other four weeks, if we got five weeks in thus far, have all had positive comps to them. The government, for whatever reason, didn't get the money out that they got out a year ago and substantially less than two years ago in that third week of February. Our customer felt that, and subsequently, we felt that.

Alex Silverman (Portfolio Manager of Private Equity Fund)

Got it. Very good. Thank you very much.

Peter Sachse (Executive Chairman)

Thank you.

Operator (participant)

There are no further questions at this time. Please continue with your presentation or closing remarks.

Peter Sachse (Executive Chairman)

I think we're all set, Frank. Thank you so much, everybody, for participating today, and we look forward to talking to you again.

Operator (participant)

That does conclude the conference call for today. We thank you for your participation, and as such, you please disconnect your line. Have a great day, everyone.