Q2 2020 Citi Trends Inc Earnings Call
Greetings and welcome to the second quarter 20 earnings conference call. During the presentation, all participants will be in 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 foreign your telephone if anytime during the conference you need to reach an op.
Operator, Please press star zero.
As a reminder, this conference is being recorded Thursday August Twentyth 2020, I would now like to turn the conference over to needs and Mckee Senior Associates. Please go ahead.
Thank you Dina and good morning, everyone. Thank you for joining us on Citi trends second quarter 2020 earnings call on our call today is our Chief Executive Officer, David Mccuin, and Vice President of Finance, Jason Masha.
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 in the company's website under the Investor Relations section at Www Dot Citi trends dotcom.
You should be aware that prepared remarks today may 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 be statements do not guarantee future performance. Therefore, you should not place undue reliance on the state.
We refer you to the company's most recent report on form 10-K, and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward looking statements.
I will now turn the call over to our Chief Executive Officer, David Mcewen David.
Thank you Jeff good morning, everyone.
And thanks for joining us today.
It is a pleasure to be speaking with you on my second earnings call, the new CEO Citi trends.
I hope that you all see well.
The second quarter Twentytwenty shouldn't true unlike any other.
Closing challenges that required our entire team.
That you're doing things differently.
And being in bashers it change.
To begin.
Overnight, she continues to impact plus and the retail landscape with unprecedented ways.
Navigated through this crisis, our top priority.
It's been in continues to be health and safety of our associates.
Our customers and the communities we serve.
As of July 18th 2020.
We opened all of our stores, except for our store on Lake Street in Minneapolis.
Which was damaged during the civil unrest that ensued over the memorial day weekend.
You've done such stimulated a nationwide.
Moved all of us at Citi trends to pick a special interest in doing our part.
To address the indelible racism in our communities across the country and advance the cause of Justice and racial equality.
Operating stores predominantly black communities, we have a longstanding commitment to provide a safe and welcoming place for our customers and associates.
Well there are differences and diversity is.
Our respective in celebrated.
Now more than ever.
Hi, guys that is the time to speak up for our neighbors and stand together with others to support the fight.
Against racism.
And supported these efforts effective June 2020.
So to transform the city cares council made up a diverse set of individual that will create and oversee initiatives of change.
His counsel will define how Citi trends will take action.
And contribute to elevating humanity.
Through a place that piece and inclusion.
So that families of color experience quality.
In addition, we will rebuild in Minneapolis.
The same commitment weve shown there for the past decade.
Our city trend store in Minneapolis.
And with the crossroads of an international diverse community.
That will be stronger than ever.
We opened with a pop up this week.
And we'll follow that the beautiful store in time for this years holidays of Christmas and Quanta.
Before I jump into our business update.
I wonder what once again pause and take a moment just think our leadership team and associates for their unwavering dedication to the business and our communities throughout this crisis.
The outpouring of support.
As well as their collective grip.
And determination throughout our fleet reopening is nothing short of amazing.
I reiterate what I've said on our first quarter call.
Our people are the heart and soul of Citi trends.
Flexibility and agility of our people over the past few months is a true testaments.
The unique and powerful winning culture, we have built at Citi trends.
I am honored.
This great organization.
And I'll buy and I'm immensely proud of all that we've achieved in the face much adversity.
Moving onto the topics to be discussed during today's call.
I will first update you on our healthy quarter and financial position highlighting the Swift actions, we took to bolster our strong pre coated 19 balance sheet.
I will then discuss the safe and successful reopening of our store fleet, providing insight into the record results, we achieved and highlights and insights into how we are evolving our operating model.
Sure I use of data driven insights I will update you on the four notable pattern in customer behavior. We identified during the initial reopening of our stores and I will discuss a few new emerging patterns, we plan to lean into and capitalize on over the coming months.
I will provide an update on the business dynamics, we are seeing in these early innings of our third quarter.
Next I will turn it over to Jason Marschner, Our Vice President Finance, who will briefly review our second quarter results.
Finally before opening the call to your questions I will reaffirm the pillars of our long term strategic plan.
Which when the country normalizes.
Place us back on our plan to increase earnings per share at a compound annual rate of 20% to 25%.
During the height of the pandemic, we took the size of actions to bolster our financial position, including but not limited to proactively drawing down $44 million under our revolving credit facility.
Temporarily suspending our quarterly cash dividend beginning in the second quarter.
And appropriately reducing our inventory receipts.
These prudent decisions allowed us to aggressively and Opportunistically purchase sought after goods as we reopened our stores, which in turn Schroeck topline sales, resulting in strong second quarter cash generation ending the period with more than 147 million in cash and investments.
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We began reopening stores with reduced operating hours on April 24, and by July 18.
All 574 of our stores across 33 states safely riocan with the proper social distancing NPP.
Including required mass squaring for all our store team members and strongly suggested mass squaring for our customers.
Customer response to our Reopenings exceeded our expectations.
We ended the second quarter.
The strong positive comparable store sales increase of.
32.2% and we opened stores from their respective reopened dates.
And an impressive total sales increase of 18.2%.
We attribute these results should the strength of our brands and on trend Assortments.
Our value proposition and the federal government stimulus that was present throughout the quarter.
Importantly, we achieved strong sales growth by selling high quality inventory.
Primarily at full price.
Which resulted in a record.
Second quarter gross margin of 41.2%.
390 basis points above last year second quarter.
We also ended the second quarter and an extremely clean inventory position.
Down 28.4% to the prior year, allowing us to enter the third quarter in a very favorable open to buy position.
Our business model has proved to be resilience. During these uncertain times and the experience we provided the communities we operate in resonated in ways that effectively.
Reset many of our operational metrics.
This includes ending the quarter with significantly lower weeks as supply.
Russia than ever and merchandise receipts and a workforce that return with energy and excitement to serve our customers.
What's important to recognize that our stores sit and shopping centers that are vital to the black Hispanic and melting pot towns in neighborhoods across America.
We consider our unique in store experience that showcases broad product choice for the entire family within an extreme value framework.
To be quote unquote essential for our moderate to lower income underserved customers.
Thanks to the overwhelming loyalty of our customer base, we're optimistic that our model will continue to build on our success to date with year over year improvements in key operational metrics, including but not limited to inventory churns gross margin and expense leverage over time.
As I mentioned during our first quarter earnings call using data driven insights are buying team identified for notable patterns and customer behavior, which we named welcome home.
Bomb, it's too small.
Mom and dad break time.
And relax just hang out.
Successfully leaned into these behavioral patterns during the second quarter, delivering broad based strength across several categories.
Including home decor kids shorts, and Tees lingerie intimate apparel fragrances leggings and slide.
As we look forward to the second half, we're devoting attention to be extended from home thread that runs far deeper than w. FH or work from home.
Continuing our insights driven momentum.
Devoting a incremental attention to how our families.
He asked age entertain from home L. FH lounge from home.
SSH school from home.
FH play from home and G.S. age Jim from Hall, among many others by providing bombs died daughters.
An extended family members with appropriate solutions to live.
What will be a new lifestyle during the second half throughout the country.
These solutions, which will emerge in the third and fourth quarter will be driven by fresh receipts coming from Doug.
Of new vendor relationships that were established during the second quarter I am, particularly impressed by our buying teams ability to expand into new categories such as patch.
He asked age blog from home cosmetic sets for young first time Buda users an enormous selection of masks.
Home fitness and sought after brands that span the range of retro cool some must have current trends lastly, our team is agile and adept at proactively chasing opportunities as they arise and thus far.
You've been able to react quickly to merchandise availability.
Sinks, well with our customers needs and wants.
Now for an update on how we are planning the third quarter with two and a half weeks into the fiscal Twentytwenty third quarter, we're navigating through macro changes in consumer landscape, including unpredictable and non traditional back to school timing and learning methods.
And the ongoing uncertainties stemming from the Kobin 19 pandemic.
As a result, our customer traffic as measured via comparable store transactions in the first two weeks of August.
Has been soft.
While it's still very early in the quarter. We encouraged we are encouraged by the stability of our non back to school related businesses and the increase in average basket size relative to the same weeks of the prior year.
We believe once we are beyond the traditional back to school selling season.
Customer traffic trends will normalize.
We're estimating a fiscal 2020 third quarter comparable store sales range of negative mid single digits to flat along with continued margin expansion building a momentum through the second quarter. This estimate is subject to potential consumer marketplace volatility due to the Coburn 19 pandemic and change.
As to the consumer landscape described above and therefore may change as the quarter progresses.
I will now turn the call over to Jason Masha, There, who will discuss our second quarter financial results Jason.
Thank you David.
Total sales in the second quarter increased 18.2%.
To $216.2 million.
Including a comparable store sales increase of 32.2%.
For reopened stores.
We achieved a record gross margin rate in the second quarter of 41.2%.
An increase of 390 basis points compared to 37.3% and the second quarter of 2019.
The increase was primarily due to strong full price selling and fewer markdowns.
SGN, a expenses decreased by more than $5 million.
Or 8.5%.
Fair to last year's second quarter.
As a percentage of sales SGN, a expenses decreased to 26.7% from 34.5%.
Due to both the total dollar decrease.
And the leveraging effect from higher sales.
This decrease in SGN, a expenses was primarily and payroll expense.
As a result of associate furloughs and reduced operating hours.
Combined with decreases uncertain variable and semi variable expenses.
In addition expenses reduced due to government credits.
Related to paying our associates, while our stores were closed.
Although these reductions were mostly offset by incremental costs to provide pp.
To ensure a safe and healthy working environment.
Now to the bottom line.
Our net income was $19.9 million for the quarter.
Compared to $377000 last year.
Earnings per diluted share was $1.90 phone.
Compared to three cents last year.
Now to our current liquidity position and inventory levels.
As David noted during the first quarter, we drew down $44 million on our revolving credit facility.
And we entered the second quarter with cash and investments of approximately $108 million.
As a result of our strong second quarter cash generation and tight controls over expenses in capital spending.
We ended the quarter with cash and investments of approximately $147 million.
As to inventory.
As David noted we ended the quarter in a very clean inventory position down 28.4% compared to this time last year.
The decrease was primarily driven by our customers incredible response to our offerings as we reopened the chain starting in late April.
In addition.
Prior to the Cobot 19 pandemic, we were making progress on strategic efforts to optimize our inventory levels.
In order to improve turns and stay more liquid for off price buying opportunities.
As we continue to emerge from this pandemic.
We remain confident in our current liquidity position.
While it is hard to predict performance trends for the coming weeks and months.
We remain very disciplined and our approach to running the business, while controlling expenses and spending capital wisely to support our growth.
Due to the continued uncertainty surrounding the cobot 19 impact.
We're not providing further guidance at this time.
Now I will turn the call back to David for closing comments.
David.
Thanks, Jason.
None of this would have been possible without our stores teams.
I could not be more proud of our associates simplified our brand values to their agility and flexibility to ensure we provide a safe and healthy environment.
Our our associates and for our customers to shop it.
As we open the couple of quick business.
Their commitment to putting safety first in all of our actions reflects the responsibility and accountability, we have towards that communities in which can serve and conduct business as we continue to navigate through this pandemic, we are evolving and adapting our operating model and I feel confident we emerge.
From this crisis stronger and better equipped to grow our business.
Now a few words on our long term strategic plan, let me first reiterate that we remain committed to achieving our stated goal 1 billion in sales as we navigate the current times in the country returns to a version of normal our vision remains the same.
So you trends aspires to be a leader in the value retailing space on a few multi category value price to tell its focused primarily on the African American market.
Provide a differentiated assortment of basics fashion trends and sought after brands.
Compelling prices in unique and compelling shopping environment.
We see a path to return to executing our plan to increase earnings per share on a compounded annual growth rate of 20% to 25%.
The pillars of our plan remain anchored on the following.
Number one merchandise.
Optimizing our apparel and non apparel assortment with newness trends brands and extreme value, resulting in increased margins faster turns and lower inventories.
Number two supply chain.
Improving supply chain throughout.
And.
Improving supply chain throughputs with a focus on lowering processing cost and speeding up deliveries to stores.
Number three stores pursuing real estate suite improvement opportunities driven by new store growth and Remodels and number four.
Data.
Leveraging data and technology to create a culture insights driven decision, making centered on the customer.
Key operational functions to drive enterprise performance.
Our second quarter performance has furthered my confidence.
We operate a unique scalable model when that has embraced by our loyal customers.
We get back to our customers through our steadfast commitment to our company's values.
What I will highlight in today's call is.
Customer obsessed.
Which simply means we commit to putting our customers at the center of all our decisions.
We do this every day.
Every week and every month of the year.
During the second quarter of the outpouring of customer support was humbling and something we're so thankful for.
I have personally been in many stores since reopening and nothing has made me smile more.
Hi, My math.
At the positive attitude.
I energy attributes.
And let me tell you shopping skills bar customers.
They love.
Action.
Friends basics and everything in between.
Within our apparel accessories and home categories.
It's because of this customer loyalty Citi trends celebrates the role of the store.
A brick and mortar experience that is alive and well.
To fuel our stores, we have the financial strength.
And a high energy team with the growth mindset.
That will propel so the trend brands for many years to come.
With that.
We are ready to take your questions.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you will hear a three Tom Tom to acknowledge requests. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three lines.
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Our first question comes from the line of Alex Silverman with special situations Fund. Please go ahead.
Hey, good morning congratulations.
Wondering can you spend a a couple of minutes on what we think will drive third quarter gross margins how much of that is related to lots Mark downs, how much of it is related to.
A different mix with higher margins can you just walk us through that.
Sure Alex Thank you for the question.
At a high level, what I would take you through is for the second half were optimistic that we may have a really strong assortment.
That is predicated on.
Supporting the trends that I highlighted on the call.
And what's really broad best tracks on initial markup across most of our categories. Thanks to some terrific efforts by our buying team. So I would tell you that there's no one or two special aspects of the assortment it's really.
Anticipated margin expansion across many of what's in our current store.
In terms of markdowns, we remain committed to being really disciplined about markdowns.
And trying to keep goes to a minimum as we buys smarter will improve turns on celebrate selling house.
And I think overall.
Some of those things right, we'll get that Sly, we'll move and we'll we'll see some margin expansion versus last year.
Okay. That's helpful on and then in terms of back to school.
In some of your markets.
There there through back to school at this point are you seeing a change in patterns in those markets.
Good question about back to school.
Like many of us in the retail landscape, we're experiencing headwinds and I'll I'll.
Say it this way we look at our chain with a lot of discipline in terms of those stores in markets that fall in the early back to school timing of.
Schools than we look at mid back to school timing. So early early August mid August as you can imagine and then we look at late stores, which is later August even a little bit after labor day for some stores and so as we look at those different tranches. The short answer is yes, we're starting to see some some interesting.
Come back trends following the lacking if you will have the early back to school timing them by comment around.
Stability in our non back to school related businesses speak to that as well, we're not we're seeing some recovery in our traffic.
Particularly that early group since we're kind of getting passed it.
And that that's encouraging.
And that it but over the couple of days, but.
Let's see.
And then last question you guys are trying to buy.
No sort or restructure a business in the middle of a storm.
So it's hard for us to look at SG M&A.
And tell what.
The result of temporary.
Changes, along furloughs and such and what is the result of.
Changes made by you guys on a structural basis, how should we think about SGN a on a go forward basis.
On a on a permanent basis.
Thanks for that question.
I can't sharing specifics around second half when I can say is that what we learned Alex during Q2 was enormous and in terms of insights around the business.
Frankly related to the actions, we did take relative to the pandemic, but also unrelated no.
What I got here or there hadn't been enough study yet of all of our SGN a variables. If you will it and we commenced those year, regardless of the cover 19 pandemic, but of course, the pandemic celebrated the need to both the understand the.
The dynamics better.
Use data to inform how can we do things differently, how can we to your point operate and more efficient productive manner. So I would tell you that we put all that into a blender and what's coming out our some really important learnings that we do believe we can carry forward during a more normal state of of operating.
In hours being cold stacked and all that good stuff.
Second point I'd make is we're still very much operating within like you said.
The storm that clouds about lift.
We're being very very rigorous and disciplined around every distribution today regarding cost you know everything problem.
Who we hire and how we operate things and gosh looking under every rock determine.
How we can further provide leverage even when were to your point opened fully and being being in a period of more normalcy. So.
Take that away as it's it's.
Hi high focus of ours and our teams are devoted to make a difference in that area.
Great and then really my last question, which is were you in terms of building.
Out your merchant in buying team.
We have in terms of our merchant buying team up in New York, and I'll and I'll add planning and allocation because they're very important partners to the buyers I would tell you that we have terrific team.
I would say that were built out in a way that allowed us to navigate through the early innings of the pandemic, which required significant muscle and attention towards.
Canceling orders and hunkering down and then obviously turning the chain back on required those teams to jump back into the foray in and do what they do best So led by Lisa how our GM and we have a terrific team all hunker down into the New York, New Jersey, Connecticut area.
Doing their thing visiting vendors and parks.
Proving product be zoom show rooming and so on so honestly, we're we're approaching it.
Pretty much invested accounted business as usual and I think you can see in the results in Q2.
Their efforts paid off handsomely.
Got it thank you very much.
You're welcome Thanks, Alex I have a great day Stacy.
Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please go ahead.
Good morning, David in team nice to see the improved results. So certainly that you delivered.
Talk about the extended from home offering that it's going to go beyond just work from home what categories do you see adjusting the merchandise mix to what is the impact that you see on margins and given what's happening with back to school, how you evaluating holiday to begin with in 2020. Thank you.
Hi, Dana Thanks for a jump on that day, great Great question.
Address your first question the from home trend is is so deep and I named probably six or seven and we and just you know we probably have a dozen to them that we work on.
Charlie and make sure we're satisfied customers.
Needs and wants in the from home.
Realm, but I'll give you a high level thoughts certainly our non apparel business is something we're really leaning into those areas include as I mentioned briefly entering a brand new business called pets since I believe.
Acquiring a dog <unk> cat or lizard and other animals is probably like top three with pools and bicycles and so we felt we need to during that bell on so we launched a pet business.
Two weeks ago.
Team took about four weeks to get it together amazing and it's in our chain just like that so that's one example, I.
Yes, I did name at SH for that but Thats, certainly I don't know cuddle from Palmer or you know.
From home.
Other examples would be home decor being to that big time topped with that.
Kitchen.
Uplifting wall art that speaks to our African American clientele, all the above.
I would call it lifestyle needs and I briefly referred to it but Jim from home, which is fitness we've got a.
The partnership with a company that is.
Producing Holly Barry.
Why the fitness products with blown out Holly's a terrific role model for our customers and we love her as a partner that's terrific.
And then we look at things like.
Kids and frankly millennials are streaming from home fact, right on my at home desk here is one of our new streaming kits. So it's really about what they're doing from an activity standpoint, I would tell you. It spans from older Gen XE to younger and older millennials all the way up to good old Gen X.
And we're trying to frankly develop cohorts a along those lines and then the merchants map products to those cohorts.
Included in that they get all the credits brilliant and they're doing it every day on your question about.
Holiday.
She really from to give you any details of any great subs and but I would tell you as I mentioned in the call. This emerging from home aspect on this idea of cozy income per spending more hours in your home than we probably would ever imagine will drive a unique and compelling assortment for holiday we know.
I'm the on the other big.
End of.
The holiday period I was in one of my favorite in retail and I think I can speak for our team. We're all looking forward to two core setting up great store.
Biovance amazing displays of goods that resonate with our customer.
I can't wait to approach that time good.
Thanks for your questions.
Thank you.
You're welcome.
Our next question comes from the line of Brian along with strong foreign capital. Please go ahead.
Hi, Thanks for the time got it.
Graduations on a good quarter when it.
The working capital days and then.
Specifically inventory and payables so to pull them inventory do you have enough inventory to satisfy demand or do you think that partially contributing to the softer back to school that you've seen and then second how much do you expect working capital to be a use of cash in threeq to Fourq you as you rebuild inventories so how much.
It's pretty if they come back into the system, given such strong to queue. Thanks.
Yes.
Thanks, Brian good questions certainly touching on some of our operating model.
The high level from an inventory is it enough perspective, what I'd tell you. This we entered the pandemic, meaning we will in Q1.
Posting some good starts were up about a 3.1 comp as previously disclosed and we're working diligently on.
And overall strategic imperative, reducing inventories both in stores as well as our distribution centers and what we recognized steps last March and upon my arrival.
In the CEO suit that we've got really offer we had a really big opportunity to settle down.
Frankly, too high we to supply and to slow and churn.
And while we had a terrific blueprints work on that for the next 12 to 18 months.
Pandemic brought about Swift the change on with an outsized performance in Q2, thanks to a customer loyalty metrics. We we now see the light.
The the light of operating this business no supply low inventory so isn't enough I.
I think it remains to be seen we're turning it well.
You heard me state, we're selling coal price, so we're buying smarter with selling through at the price that we always hope to their core rely on less from Mark Downs, we're reducing our age exposure of course as a result.
And I think overall, we're going to see some buildup.
But.
Same token our customers love the Chicago aspect of our experience. So this idea of pivoting from too much too just right and then shipping it to the right starts the right time is something that we're feeling experiencing positive matter right now.
So I so no yeah, we'll we'll monitor it will be surgical will strike a good balancing act as we ended the second half to support our second half plans in terms of by working capital and use of our liquidity or cash.
As you know, it's a game of generating cash through good sales and then funding that receipts required to do those sales and I I, we don't see any major headwinds right now.
As an asterisk concourse attached to it.
Based on like I mentioned in the call. There are still many uncertainties and things could change. So we've got up we've got a state that but then of the day, we're going though.
To be prudent in how we buy inventory per my earlier comments.
By smarter by little less here in there so that we concern well and exit quarters clean and have enough open to buy liquidity the pipe in the next.
Great and then a follow up on your gross margin commentary I was encouraged by the second quarter performance and that go forward commentary can you suddenly life, though on whether you are implying gross margin simply just up year over year in and third quarter or is that more of a.
The building momentum comment related to the magnitude of improvement that you saw in the second quarter, such that gross margins could be up even more sequentially than they were in the second quarter.
Good question, let me clarify.
Comment is simply meant to state that we expect to be better than lie.
Okay speculation I Didnt know speculation on on how much are how close it is at the Threeninety. We did in Q2, but just simply learning from our Q2 rigor and disciplines.
Can we achieve an upward trend versus our lives Q3, and we think we can.
Understood. Thanks, and then.
I understand it's a pretty dynamic environment right now so no near term expectations, but what is it that you need to be before you start returning that's pretty big cash flow to shareholders again through buybacks.
How many quarters of stability, what what is sort of a guide posts you're looking for before you start thinking about cash return again.
Good question I'll, probably have to keep that fairly brief as where we're not able to comment too much on that but at a high level. We're still operating within the supply of uncertainties. So we're still on pause mode with respect to your questions on that topic and we'll monitor it.
We are monitoring it and discussing internally what makes most sense, but I would tell you it's going to be little bit of time, and so we return to kind of that version of normal in terms of share repurchase and dividends or whatnot, but know that it's a it's very much on our gengos I think it's well no. The real balancing act is when.
We ended the economy in the United States gets to a period of a bit more normalcy and stability macro level will be able to better comment on that and and work internally to be able to come back to others with a plan.
Great. Thank you and then last one for you.
Should we assume that you're running within your sales plan right now quarter to date or is it the kind of thing since back to school of up to a slow start that you that your guidance improves or on sort of reflect the improvement through the quarter as we get passed back to school. Thanks.
Sure. Thanks Bye.
The high level not one is we're seeing soft traffic as I commented on in the first couple of weeks early innings in the third quarter and what we expect to see is at that traffic will moderate to to more normal levels, a year on year and with that will come.
A bit more of a moderation in sales trends so.
Like any quarter about starts a little soft.
Do you expect.
And some some momentum.
Prove especially as we lap some those back to school dates.
Perfect. Thank you so much.
Thanks, Brian have a great day Stacy.
We have no further questions at this time I'd now like to turn the call back over to David Mcewen.
Thank you Gina Thank you everybody for joining us today stay safe and healthy and we'll see you next quarter Bye bye.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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