Q1 2020 Earnings Call
Greetings and welcome to the first quarter earnings conference call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your telephone if it anytime during the conference you need to reach an operator.
Please press Star Zero as a reminder, this conference is being recorded Thursday May 28, 2020, I would now like to turn the conference over to meet some Mckee senior Associate. Please go ahead.
Thank you Dina and good morning, everyone. Thank you for joining us on Citi trends first quarter 2020 earnings call on our call today, as our Chief Executive Officer, David Mcewen, and our Vice President Finance, Jason Moshe.
Our earnings releases sent out this morning that 645 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 Dot Citi trends dotcom.
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 question. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company. 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 could differ materially from those described in the forward looking statements I will now turn the call over to our Chief Executive Officer, David Mcewen David.
Thank you need so and good morning, everyone.
As the new CEO of Citi trends it it's a pleasure to be speaking with you. This morning, and I hope, you're all shapes and well.
We are in unprecedented triage Coburn Daiichi.
'cause had a tremendous human intact and an impact on our economy in the retailing landscape.
Throughout this crisis, our top priority has been and continues to be the health and safety ever associates, our customers and the communities research.
We like many others have made some difficult but prudent decisions throughout this pandemic to ensure that Citi trends remains a strong financial position.
And is poised to exit this crisis, well position for a safe recovery and long term growth.
I would like to take a moment to think our leadership team and associates for their unwavering dedication to the business and our communities throughout this crisis.
Our people are the heart and soul see trends and alongside many other priorities in their own personal lives. They rose to the challenge balancing lights needs with the needs of the business.
I am so incredibly proud of their efforts and all that we have collectively accomplished during this time.
Moving onto the topics to be discussed during today's call.
I will first discuss how do we are safely and prudently navigating through cobot night cheap.
I will review, our reopening strategy, which is well underway.
No I will provide an update on the early results, we are seeing quarter to date.
Next I will turn it over to Jason Masha, Our Vice President Finance, who will briefly review our first quarter results.
Finally before opening the call to your questions I will summarize how we are viewing our previously stated strategic initiatives.
First let me recap the highlights of actions, we've taken to ensure the safety Barr associates and customers preserved capital and bolster our financial liquidity.
In response to the growing pandemic in New York City, We closed our corporate office on March 13 Institute didn't work from home policies on March 20 years.
Due to stay at home and shelter in place orders and based on guidance from federal state and local authorities. We temporarily closed all 574 of our stores across 33 states.
On March 27th we temporarily closed our two distribution centers in our corporate office in Savannah, Georgia.
We made it difficult decision to furloughs substantially all of our store and distribution center personnel and about 40% of our corporate stuff.
We temporarily reduced cash compensation for the Chief Executive Officer, Senior executives and board members by 15% to 25%.
We created a cold at 19 response team.
Focused on business continuity.
Phelps, new protocols and action plans to limit and reduce operating expenses address forward looking safety requirements and prepare the business for reopening.
We partnered with vendors and extended payment terms.
We partnered with landlords to negotiate store right in the weeks of our closure.
We announced that we do not intend to repurchase any shares for the time being under our previously announced share repurchase program.
We proactively drew down $43.7 million under our revolving credit facility.
And extended the term of our credit facility to August 2021.
We temporarily suspended our quarterly cash dividend beginning in the second quarter.
And we appropriately reduced our inventory receipts.
It is important to highlight the health of our balance sheet pre Kobin Daiichi helped us prepare for this uncertain and unpredictable period.
We entered the Twentytwenty fiscal year, and a healthy financial position with no debt.
And cash investments of roughly $63 million.
Our prudent management of inventories our largest payable.
Could it the cancellation of spring goods, resulting in a quarter and inventory decrease of 7.1%.
Paired to the end of the first quarter last year.
I am confident at the actions we have taken combined with the stringent management of the business will keep Citi trends in a strong financial position.
As we complete the reopening of our stores and shift our focus back to growth.
The first quarter fiscal Twentytwenty began to unfold our comparable store sales increased 3.1% due March seven and we were on track to have a stellar starts a year until the impacts of the coated 19 pandemic began to affect our country and unprecedented ways.
What unfolded next was a series of extraordinary actions taken by management grounded in their passion.
Leadership and attention to detail to guide the companies, who the cobot 19 pandemic.
We quite literally hunkered down in our homes and leverage technology to continue working together our leaders net multiple times, a day and ultimately devised a plan to slowly reopen stores when we could safely do so.
We began reopening stores on April 24.
And by May nine.
More than 300 of our stores will reopen.
And does it may 20 eightth.
More than 3000.
Our furloughed associates were back at work in 498 stores.
Seeing our dedicated associates and loyal customers in stores for the first time in several weeks brought many smiles and in some cases tiers of happiness.
Moving to the topic of store Reopenings, Let me first spend a moment discussing some specific in store protocols, we haven't place to protect the health and safety of our associates and customers, while also hearing to social distance and guidelines.
Face masks and sanitizer CDC recommended cleaning procedures reduced hours, social distancing signage closure of fitting rooms and suspension of our return policy became standards in our stores and where appropriate.
Distribution centers.
Once our corporate offices reopened.
We will institute necessary safe guards to protect our employees.
Now moving onto early results, we are sitting in the stores, we have riocan today.
As of today, we reopened 498 stores across 26 of 33 states.
Our performance quarter to date.
While still very early is quite strong as our customers in the communities. We serve have enjoyed returning to a favorite pastime shopping for the family.
I'm pleased to report that just shy of four weeks into our fiscal second quarter reopen stores are registering comparable store sales growth.
That has substantially exceeded our expectations and plan.
Benefiting from a combination of the strength of the company's Brad.
Its value proposition.
The federal government stimulus consumers that began in early April.
Increases driven by healthy transaction trends and an increase in average number of items per transaction.
Throughout our early stages or recovery I'm impressed with our buying cheap.
How the abuse data driven insights.
Jennifer for notable patterns and customer behavior.
Patterns help us to wisely navigate and developed plans for the balance of the quarter and remainder of the year.
Let me take a few minutes to elaborate on these customer patterns.
The first pattern.
We'll call it welcome home.
Customers turn to nesting planning at home guiding in sprucing up their space.
Our home business, including bedroom decor, and kitchen has thrived as customers looked to replenish expand and improve their personal spaces.
It's we're also in need of some distraction for being limited in their activities and we saw an increase in sales of toys.
And gaming.
The second pattern, we'll call it mom, it's too small.
Simply put our kids outgrew their seasonal closets.
Prompted a disproportionate amount of spend in this area shorts cheese matching sets in dresses led the pack.
Brandon fashion focus.
The third pattern there emerge is.
Mom and dad break time.
Breaking the cabin fever, and getting outside became a major milestones.
As our customers started to head out of the house updated fashion is in assessing the.
Men's branded and fashion apparel womens new summer fashion performed exceedingly well.
The fourth of last pattern.
Relax just hang out.
In other words relaxed and easy comps with along with DIY activities ruled the day.
Unconstructed bra was woven boxers pajamas loungewear slides and stocks were key assortment drivers with the closure of salons cosmetic stores gyms schools and playgrounds, we saw an increase in sales in a variety of products used in home related activities.
You did categories, such as nail products lashes fragrances and fitness also all outpaced expectations.
Citi trends is broad offering basics.
Fashion trends and sought after brands at extreme value price points within an engaging in store experience is strongly resonating with our customers importantly, we are driving the positive results at healthy margins as we entered the second quarter.
Corporate inventory levels and in a strong open to buy position.
Has enabled our buying team to take advantage of unique opportunities in this changing environment.
I will now turn the call over to Jason who will discuss our first quarter financial results.
Jason.
Thank you David.
Total sales in the first quarter decreased 43.4% to $116 million, including the comparable store sales decrease of 44.5%.
The decrease in sales was due to clothing, all 574 of our stores from March 20th until April 20 Threerd.
At which point, we began to gradually reopened our stores.
I want to reiterate David's comments that we had good momentum in the quarter prior to the onset of Cobot 19.
Comparable store sales positive, 3.1% through the first week of March.
However, as the pandemic sudden we began to see a decrease in the number of transactions leading up to the closure of our stores.
Gross margin in the quarter was 27.3% a decrease compared to 37.5% in the first quarter of last year.
The decrease was primarily due to markdowns that we took as a result of our stores being closed.
SGN, a expenses decreased by approximately $9 million or 14.8% compared to the first quarter last year.
The decrease was primarily in payroll expenses as a result of furloughs.
Combined with decreases in certain variable and semi variable expenses.
As a percent of failed.
She had a expenses increased to 46.6% compared to 30.9% last year.
Due to the material de leveraging effect from lower sales.
Our net loss for the quarter was $20.9 million compared to net income of $7.8 million in the first quarter last year on a GAAP basis.
Or on an adjusted basis.
A net loss of $20.2 million this year.
When adjusted for CEO transition expenses and asset impairment expenses.
Compared to net income of $8.7 million in the first quarter of last year.
When adjusted for proxy contest expenses.
Net loss per diluted share with a loss of $2 on a GAAP basis.
Compared to earnings per diluted share of 65 subs in the first quarter of 2019.
On an adjusted basis net loss per diluted share with a loss of $1.94 cents.
Compared to adjusted earnings per share of 72 cents in the first quarter of last year.
I will now highlight a few items on our balance sheet.
As David mentioned, we were fortunate to have a strong balance sheet coming into the cobot 19 pandemic.
With approximately $63 million of cash and investments and no debt.
On March 20th as a result of the pandemic and our companywide store closures.
We drew down $43.7 million on our revolving credit facility.
We ended the first quarter and a healthy financial position with cash and investments of approximately $108 million.
On May 12.
We amended our credit agreement to extend the maturity date by 12 months.
August of 2021.
We ended the first quarter with a very clean inventory position with our inventory down 7.1%.
Compared to the end of the first quarter of 2019.
As we emerge from the Cobot 19 pandemic.
We are confident in our current liquidity position.
We are continuing to evaluate our overall capital structure to ensure we have sufficient liquidity for our long term growth plans.
Combined with our clean inventory position in the positive comparable store sales, we have experienced to date and our reopened stores.
We are excited to capitalize on opportunities in the marketplace in the near term and returned to executing on our strategy.
Based on the company's quarter to date performance.
The company is estimating a second quarter comparable store sales increase of mid to high single digits.
And meaningful margin expansion.
This estimate is subject to potential consumer and marketplace. The volatility during the early stages of post cobot economic recovery.
And therefore may change as the quarter progresses.
Due to the continued uncertainty surrounding the cobot 19 impact on consumer behavior.
And the company's business operations, we are not providing any further guidance at this time.
Now I will turn the call back to David for closing comments.
David Thank you Jason.
At Citi trends, we are community based retailer and primarily mid sized markets nearly 75% of our customers live within a 15 minute drive to one of our stores.
The outpouring of excitement and support during our reopening phase has been simply amazing.
We've created a unique can store experience and in the words of our social media followers don't sleep on Citi trends or Youre. This out.
None of this would have been possible without our stores teams I cannot be more proud of our associates, we simplified our brand values through their agility and flexibility to ensure we provide a safe.
And healthy environment for our associates to work and our customers to shop.
As we reopened the company for business their commitment to putting safety first in all of our actions with flex the responsibility and accountability, we have towards the communities in which we serve and conduct business.
As we continue to navigate through this pandemic.
Evolving and adapting our operating model.
I feel confident we will emerge from this crisis stronger and better equipped to grow our business.
Well, we wrap up and take your questions I'd like to share a few stocks from my first few months at CEO.
First off I'm. So excited to lead this great brand towards our stated goal the billion in sales.
The company navigates the current times and returns to a version of normal our vision remains the same.
Citi trends aspires to be a leader in extreme value retailing space one of few multi category off price retailers focused.
Looking at American market.
I'm proud to say that our teams in our corporate offices and stores, our brand values and our culture are stronger than ever.
With a strong balance sheet liquidity to manage through a chain closure.
Hi, energy team with the growth mindset Citi trends is prepared to return to executing on many initiatives.
Build a stronger foundation set us up for scaling our unique model years to come.
We intend to make meaningful progress.
While team structured long term strategic plan.
Including while maximizing real estate opportunities, including opening three new stores during the first quarter fiscal twentytwenty.
We knew stores in the second quarter.
The potential to open up to 14 total new stores this year.
Number two.
Can you improvements in supply chain freight costs four wall efficiencies.
The three reducing inventories increasing margins and increasing terms, while delivering a highly appealing assortment of always fresh merchandise for the entire family.
Lastly, addressing select technology enhancements to improve efficiencies and productivity.
The company anticipates that the country normalizes and assuming no further complications from the covert 19 pandemic that it will return to executing on its three year strategic plan to increase earnings per share compounded annual growth rate of 20% to 25%.
Lastly, I want to thank Peter succeed in his role as interim CEO regarding the team in 2019 through Q1 of Twentytwenty, and providing and valuable teaching and coaching.
Ruminated, what great looks like.
Peter has been an invaluable partner to me during my ramp up and I look forward to working.
And as chairman role going forward.
With that we are ready to take your questions I will turn it back over to meets our needs.
Okay, operator, we're ready for questions.
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It's going to be a moment for the first question.
Our first question comes from the line of Eric Theater with FCC Research. Please go ahead.
Good morning, congratulations on.
Weathering this co bid virus.
Okay.
Good morning, Eric back to hear from it.
Hi.
You've opened a lot of stores obviously.
The.
Somewhat of a.
Crazy time did you take the opportunity to look at those stores I'm sure you did and where there any changes you decides make in the stores as they rolled out in terms of focusing on product mix or different fixturing. How did you think about this I guess somewhat opportunity to somewhat reinventing stores a little bit.
Hi, Eric it's David Thanks, and good question.
Well, the really Howard panned out as we as you know and most of retail or retailers throughout the us had to close their chain rather quickly. So I would tell you that.
Closing the chain happened in a matter of days. After we saw the pandemic rising to a level that required closure and then as you May know, we also had to try to stay away from those stores and kind of let them sit for a little bit after the height of pandemic past and as we return to our us.
Stores and opened them back up really what we spent all of our time on was making sure. The PE personal protection equipment was in place all of the safety measures for customers in place, including masks for our associates to make customers feel safer hand, sanitizer as you walk in the.
Proper social distancing signage in place in the stores.
The proper taped markings on the floors the proper distance between you and the register and so forth and so on that's where we spent the bulk of our time, we havent here to four really changed any fixturing.
Because with a limit of people coming into stores, which is largely dictated by.
State and local guidelines, we haven't had any trouble in general managing those customer limits and making sure people are adhering to the guidelines issued by the CDC. So overall, we opened everything backup pretty much.
Like the store looks.
Prior to the closure from the merge and Fixturing standpoint, and we continue to monitor things that you can imagine. We're every group of stores. We opened we learn something new but I would tell you. The overall earnings are we've been very consistent across the different clusters of stores. We've opened from a performance standpoint permitted here as to all the new.
Standard standpoint, so we're proud of the teams we're following daily protocols to clean the stores thoroughly every time, we are opening close and we're really pleased with what we're seeing out there.
Thanks for your equate when you look.
Thanks, when you look at I know you guys don't do right now online has.
Led you to maybe rethink how you want to handle online and I know lot of this three is the treasure under the store in the prices the product.
But is there place maybe going forward in the future down the word for online sales.
Eric That's a good question and obviously online the channel has enjoyed quite a big uptick during this pandemic based on people being confined to their homes.
Utility overall, it's just too early to even think about online and beauty of our business is a new nailed. It. It's all about a treasure hunt, it's all about discovering newness and Wow items and these amazing sought after brands that are buying team has secured as part of our assortment.
And we're also in communities, where we serve the locals we not only employ the locals, but we serve the locals and the communities as I mentioned in the script. We we have a tremendous density of customers within a short drive and in fact, many walk or bite to our stores and we.
We think it's kind of the you know the year of the store quite frankly, you've been pent up in your home.
Cabin fever, and you want to get back out and enjoy shopping again and the truth is the majority of our public in United States loves going into stores and we are as you know, 100% historic business and we're going to be that way for some time, so I don't really.
As the new Guy Who's obviously still ramping up into the business I don't feel a need to rush into ecommerce at all I'd, rather celebrate our fleet built more stores and and take advantage of.
The really neat treasure hunt, we offer to the unique target customer we cater to.
Great again, congratulations and good luck going forward.
Thanks, Eric stay safe.
Yes.
Our next question comes from the line of Ilan Dannon wind down and capital. Please go ahead.
Hey, guys I welcome aboard David.
Thank you.
So I want to start off with.
Kind of following this company.
For awhile.
Hey, David in your sense any changes to the.
Store in terms of merchandising.
You did you want to implement versus kind of whats happen puts the prior strategy was over the last five six years, which was kind of.
He risking somebody inventory carry more basics.
Yes.
Also minimizing so some of the national brands. It just curious to your thoughts out merchandising and how you want the store footprint to look.
Sure. So great question and I would tell you merchandising in our assortment is really the lifeblood of the brand and we're fortunate to have Lisa how onboard she joined US last fall as Gms.
She's got a great team and all they do is think about the customer and what that customer is likely to vote on and I can tell you I come from the school of always working back from the customer and if you do that right and in a consistent manner.
You'll you'll figure it out and that's exactly what our buying team is doing and when I've been able to do in my short time is really begin to understand the magic of the assortment at Citi trends is this.
Great blend basics fashion trend and saw after brands.
And we're going to we're going to continue to work on that mix as a team.
Those are the very things that are customer need and wants their their herring and there are causing the basic T. The basic undergarment with a fashion tops they might pair of fashion top with fashion bottom and then they're buying really cool brands at amazing prices.
So I would tell you it's a mix of all those things and perhaps versus the past the difference maybe key differences were going to pay more and more attention to the customer and more and more attention to the trends in the marketplace and then free up our buyers to utilize their dollars wise.
I find the right brands and Don brands that resonate with our customer and that's the real biggest opportunity and then I would tell you. The second opportunity is how we array those goods in the stores and so over time, we'll we'll work on our visual merchandising of all of that great product and make sure we get credit for.
The brands make sure we get credit for the value.
And I'm confident that which we do those two things really well the customer will vote and will be off and running.
As to merchandise, we see the for now is that part of Lisa and the teams.
Efforts.
Yeah. The merchandise is selling through right now is absolutely part at least in her teams efforts and.
They're based on our positive momentum during our reopening their feverously buying more and seeking out that right mix. According to those sort of four buckets I mentioned based fashion trend brands and they're out there all over it it's great great to see a lot of energy coming from her team to fulfill what.
Customer is calling for.
Great and then.
In terms of when you returns to buying back stock given.
Hello, Touchy, just the stock is and has been.
Do you foresee give a timetable on that or restricted from.
From drawing down the revolver.
I had to the said the simple answer would be no timeframe, yet where we're in this period of recovery.
We feel for the country, we show for the people that have been affected by Cobot 19, and I would tell you I will just take a slow right now.
We've had to reopen a chain, which is no small feat bring back thousands of people and where we're going to put that on the list in terms of when how and so forth, but right now we're focused on.
Managing our liquidity managing the reopening.
Process and success and getting our feet on the grounds for the rest of Cheechoo and then we'll turn our heads towards the second half.
Well, we'll certainly keep keep your question in mind.
We look at things a little further down the road, Jason you want to add anything on that.
Sure I said, I mean, absolutely have to wait and see approach right now as we emerged from the pandemic, but.
But I would reiterate that we are absolutely committed to returning to.
Our strategy to return capital to shareholders in the form of reach share repurchases and in the dividend. That's part of our long term strategy that we have communicated and.
As our plan to get back to that but just too early to tell at this point.
Got it and then in terms of have you had conversations with some of your leverage in terms of rate reductions.
Okay.
Yes, we are we're in active conversations landlords are so important to us in our real estate current holdings. If you will through our leases in our future real estate vision is just critically important to the growth of Citi trends and so we are at active negotiations with with nearly all of them and hats off.
You are small, but nimble real estate team and they are out there figuring out what makes most sense landlord by landlord and we'll get to a good place with all of them.
Got it and then.
In terms of.
Possibly monetizing the Dcs any similar like shoulders and its success with other companies it involved with in monetizing some of those noncore assets.
Any any thoughts there.
I believe you said monetizing the Gecs, if I heard you correctly.
No.
Not yet.
Too early to kind of go down that road we were.
Fortunate to have the liquidity going into the pandemic and we're able to draw down on the revolver in Florida strong cash position as we navigate through this early stage of recovery, So havent haven't addressed that yet.
Okay and then.
Lastly in terms of.
See in EMEA.
Sure some really really.
Good inventory bit brands.
That the customer would it would.
Well you.
We'll start the stores have never had a traffic problem.
And if you have to make brands that always always due to self world.
So are you seeing normal bundles of given sort of dislocation.
In retail and clothing.
We grew able to get your hands on and we're excited about.
For the rest of the.
Great question, Eli, Yes, I think at a high level I tell you that there are great opportunities in the marketplace being presented to the Citi trends buying team and we're chasing whats right for the customer and our business and our price points. So you nailed it theres, some dislocation going on and where I can tell.
Well, you and assure you were active in the marketplace securing the deals that are that are good for us.
Okay.
And then last question I hope that continue to speak with you guys you know as it goes forward.
But last question is.
Relate to.
Where do you think.
No what do you have to get turns to I mean, clearly you won't get turns as much as traditional off price retailers, but where are you going to get turns due to get operating margins in the mid single digit range.
Where do you think gross margins can go there can you go about 40.
On a normalized basis.
Let me say it this way.
There's a lot of financial upside for the brand and.
Probably cuts across a lot of different line items within RPL margin of course be a huge factor, but I think there overall is some room for margin expansion.
As we.
Take this journey for the certainly rest of the year with some of the product opportunities that you mentioned in front of US and then give me a little bit time to spend a little more time on all of your topics that my question posed we're going to just know Eli wrote a check our financial.
Our results really seriously and on the on the data driven guy and we're going to we're going to wrap our arms around how can we lever.
Right and you sales certainly as the opportunity, but also lever a lot of expenses that we can in order to produce.
The higher profits would put so more to come on that but thanks for your questions you like good to hear from you.
Alright, thanks, guys.
Have a great day stay safe.
We have no further questions at this time I would now like to turn the call back over to David Mcewen.
Tina. Thank you so much I think we're ready to wrap up for the day again, thanks to everyone, who joined our first quarter Twentytwenty earnings announcement.
Please stay safe and healthy and we'll see you next time for Q2 take care now.
That does conclude the conference call for today, we thank you for your participation and I thought you. Please disconnect your lines.
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