Q2 2022 Citi Trends Inc Earnings Call
Greetings and welcome to the Citi trends second quarter 2022 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.
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As a reminder, this conference is being recorded Wednesday August 24th 2022.
I would now like to turn the conference over to Nitza Mckee Senior Associate. Please go ahead.
Thanks, <unk> and good morning, everyone. Thank you for joining us on the Citi trends second quarter 2022 earnings call on our call today is our Chief Executive Officer, David Mckeown, and Chief Financial Officer, Heather Pacino. Our earnings release was sent out. This morning at 645, a M. Eastern time, if you've not received a copy of the releases avail.
On the company's website under the Investor Relations section at Www Dot Citi trends Dot Com you should be aware that prepared remarks today made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 management May make additional forward looking statements in response to your questions.
These statements do not guarantee future performances. 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 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 Mcewan David.
Thank you Peter good morning, everyone.
And thanks for joining us today on our second quarter fiscal 2022 earnings call.
Before I provide an overview of our second quarter performance and the strategic direction. We are taking the business in the near term as a result of the current challenging macro environment.
It's important that we provide you with a high level view of our customer base.
After that.
Chino, our Chief Financial Officer will then elaborate on our financial results and a few other items related to our outlook.
To begin let me be fully transparent.
Our customers are facing one of the most challenging economic environments in history.
<unk> pressures across their household necessities, including rents utilities.
Gas.
Outpacing their wage growth.
Our lowest income household bracket those with an annual household income of $25000 and below.
Accounting for approximately 50% of our customer base.
Been hardest hit from these extreme macro pressures.
I personally visited many neighborhoods and talk to many customers and associates to learn just how much pressure the offshore.
Even though tough times persist.
Most important to share that.
Our customers believe that our store experience is more engaging than ever.
And our city crew delivers on our purpose each and every day.
Welcoming our existing and new customers like a friend, helping them show up for whatever comes their way.
With this backdrop acknowledged.
We're clearly seeing a decline in the number of discretionary shopping visits.
But when they do visit city Charles stores, our conversion rates are extremely strong.
They've been consistent week to week since the beginning of the year.
Our average basket size is holding up nicely compared to last year's record stimulus spending levels.
Given these trends we are confident that our customers remain loyal to the Citi trends brands and our assortments for the entire family.
<unk> the resident.
Having said this we are committed to doing better in controlling what we can to meet the needs of the valued customer, which our model does quite well.
Our bi team in particular.
Sure.
Im their toes chasing extreme value trends across our six cities or categories.
Hard at work they have identified opportunities to capture more market share, particularly in our ladies and footwear cities by adapting to changing consumer trends.
Additionally, we continue to play offense by introducing new or expanded Assortments that I had mentioned previously.
The continued rollout of our queue line.
Adding more everyday essentials to the mix building.
Building, a ladies misuse sides of the assortment.
And capitalizing on the strengths of our casual men's business.
Overall, we remain hyper focused on driving healthy sales managing inventories and maximizing margin should improve our operating profit.
On the expense side, our number one priority is to lower our SG&A expenses to align with our lower sales expectation.
Second quarter unfolded, we couldnt adjust expenses overnight, we aggressively created a plan and have already taken action to right size, our expense structure and build efficiencies across our business functions, assuming a lower sales base brought on by primarily macro conditions.
Let me assure you we are taking swift and aggressive actions on approximately $10 million in expense savings for the second half of 2022.
Or about 7% of total SG&A expense.
Clothing, a 10% staff reduction.
We wish the very best.
Associates impacted by this difficult decision.
Truly appreciate their contributions.
Overall, we are controlling what we can control and we are on track to significantly reduce SG&A deleverage versus both 2021 and 2019 during the second half.
Before I turn it over to Heather.
Want to highlight a few metrics about our business during the second quarter and year to date.
Comparable transactions versus the prior year sequentially improved 510 basis points from Q1 to Q2.
Our average basket contracted slightly by 5% against last year's outsized growth of 35% compared to Q2 of 2019.
We maintained our high gross margin at 38, 1% for the quarter and 38, 6% for the first half.
Our inventory remains in excellent shape than average in store dollar decline of.
13% compared to 2019, and a 26% decline on a unit basis.
We ended the quarter with no debt.
$28 million in cash and $103 million in liquidity.
With that I'll turn the call over to have our new CFO , who I am extremely pleased to have a member of our leadership team.
She will discuss our second quarter results in detail as well as our updated guidance for the balance of the year.
Okay.
Thanks, David and good morning, everyone.
I'm very honored to be part of the Citi trends leadership team and as you can imagine it's been a busy and productive few months since I joined in late June I've been immersed in getting to know the business meeting, our corporate stores and distribution center team as well as our customers.
Quickly gained great admiration for the Citi trends business model with its unique value proposition servicing the apparel accessories and home needs of African American and Latinx family and a deep commitment to making a difference in the neighborhoods we serve.
I'm excited to take on the CFO role and will leverage my background and experience in retail to identify opportunities to further transform the business model as I believe the potential for growth remains significant.
Now turning to our results in the second quarter and the first half of the year.
As David mentioned, the macro environment remain difficult throughout the quarter with persisting headwinds from extreme inflationary pressures impacting all of our customers, but most notably our lowest household income cohort.
The impact from inflation has been deeper and longer lasting than we expected.
Importantly, our teams have remained nimble and focused delivering strong margin in the quarter and working tirelessly to rightsize our expense base.
Our balance sheet is healthy and we ended the quarter with ample cash well managed inventory and our $75 million revolving line of credit remains unused.
In addition, as mentioned in our earnings release, we expect to close a sale leaseback transaction and our Roland Oklahoma distribution Center in September , adding $36 million of cash to our balance sheet.
All of which which positions us well to continue to navigate this dynamic operating environment, while remaining focused on our strategic initiatives.
Now, let's turn to the specifics of our Q2 financial results.
As mentioned in our earnings release, we are comparing select operating results for the second quarter and first half of 2022 relative to the same periods in 2019 in order to provide a more normalized comparison of performance.
Total sales for the second quarter were $185 million, a decrease of 22% versus Q2, 'twenty, one or an increase of 1% versus Q2 2019.
Comparable sales decreased 25% compared to last year lapping a 26% increase in Q2 2021 versus Q2 2019, representing a three year stack of 1%.
Sales in the quarter were approximately 90% of first quarter 2022 sales consistent with pre pandemic historical result.
Absolute transaction and conversion in the second quarter remains stable and consistent with Q1.
Importantly, as David mentioned, our year to date average basket size contracted only 5% compared to the first half of 2021.
Syria to impacted by unprecedented government stimulus assistance.
Gross margin was 38, 1% in the quarter compared to 48% in Q2, 2021, and 37, 3% in Q2 2019.
Our strong gross margin results are reflective of our disciplined inventory management and product Assortments that continue to strongly resonate with our core customers.
With regard to the supply chain environment, we have successfully navigated inbound and outbound freight headwinds, resulting in substantial cost mitigation with only a 20 basis point increase in Q2 2022 versus Q2 2021.
Well SG&A expense dollars declined nine 2% versus Q2 2021, the softer topline resulted in outsized pressure on our SG&A rate.
We experienced SG&A expense deleverage of 520 basis points versus Q2, 2021 to a rate of 37.0% of sales.
As David noted the management team has been working to aggressively lower our expenses aligned to our revised sales expectations and we look forward to reducing SG&A deleverage versus last year by more than 50% for the second half of the year.
Operating loss was $3 3 million in the quarter compared to operating income of zero point $2 million in Q2 2019.
Net income was a loss of $2 5 million in Q2 2022 compared to net income of zero point $4 million in Q2 2019.
Second quarter, EBITDA was $1 9 million compared to $4 8 million in Q2, 2019, and finally Q2 2022 diluted loss per share was 31 cents compared to diluted earnings per share of three cents in Q2 2019 or so.
On an adjusted basis.
Now I'll turn to some brief highlights from the first half of 2022.
Total sales for the first half were $393 2 million a decrease of 25% to prior year and a 1% increase to 2019.
Comparable sales declined by 27% versus 2021 on top of a 30% increase in 'twenty, one sales versus 2019, a three year stack of 3%.
Gross margin in the first half was 38, 6% versus 41, 8% in 2021 and 37 four.
4% in 2019.
EBITDA in the first half of 2022 adjusted for the gain on the sale of a distribution center was $12 1 million.
Versus $65 1 million in 2021 and versus $19 6 million in 2019 as adjusted.
Year to date earnings per diluted share of $3.34.
<unk> as adjusted for the first quarter sale leaseback transaction.
Compared to $4 63 in the first half of 2021 and 68 in 2019 or 76 cents as adjusted.
Turning to our balance sheet.
Total inventory at quarter end increased 26% to Q2, 2021 and 8% to Q2 2019.
Excluding pack away goods inventory increased 8% versus Q2, 2021 and decreased 4% versus Q2 2019.
Average in store inventory increased only $3, 3% in dollars versus last year, a decrease of 4% and unit.
Average in store inventories decreased 13% in dollars versus Q2, 2019, a 26% decrease in units.
We are comfortable with our level of inventory and thank the team for their continued commitment to agile disciplined inventory management.
As it relates to our buyback program year to date, we repurchased approximately 331000 shares at an aggregate cost of $10 million, leaving.
Leaving approximately $50 million remaining on our program.
We ended the quarter in a strong capital position with $27 9 million of cash and no debt.
Capital allocation remains a primary focus of our board of directors and in light of the dynamic macro environment, we are carefully evaluating our cash and investments to ensure we maintain adequate liquidity.
Now turning to our guidance for the balance of the year.
In light of the challenging macro backdrop, we have revised our outlook for the year and have pivoted quickly to managing and aligning our expense structure to a more normalized sales environment based on predictable historic trends.
Our updated guidance, including the impact of the sale leaseback of the Rollin distribution center is as follows.
We expect low single digit increase.
And second half total sales compared to first half total sales.
For the full year. This represents an 8% to 10% decline from the midpoint of previous guidance of $870 million.
We anticipate gross margin in the high 30 to low Forty's range for the second half.
We expect significantly less SG&A deleverage versus prior year in the second half compared to the first half due to aggressive expense reduction net of incremental lease expense from sale leaseback transactions.
Finally, as David mentioned, we are prudently, reducing our capital expenditures by approximately $10 million to ensure we have additional liquidity to chase opportunities as they arise.
Resulting in 2022 capital expenditures of approximately $22 million for the year.
With these factors, we expect second half operating income to be approximately in line with the results from the second half of 2019.
Year end cash balance is expected to be approximately $85 million to $100 million, including the proceeds from the <unk> sale leaseback transaction.
In summary.
Q2 proved to be a challenging quarter with meaningful inflationary headwinds impacting our customers' discretionary spending.
As we expect this uncertain selling environment to persist through the balance of the year, we will continue to aggressively and diligently manage inventory control expenses and fortress balance sheet.
Regarding the top line I can assure you that we are getting better every day and delivering the right trends at the right values across our 617 stores.
I look forward to updating you on our strategic progress on our next call.
With that I will turn the call back to David for closing comments David.
Thanks, Heather before we wrap up let me close the loop on the health of our core customers as we have seen across our 76 year history.
It shows us time, and time again that would macro challenges side, our customers return to Citi trends.
<unk> customer is local.
Loyal and resilience.
We will remain dedicated to our neighborhood to shorten their entire family.
Apparel home and accessories needs through the tough times and good times, all anchored by a city light's purpose to move bold Luke crowd.
Oh.
As the rest of the year unfolds, we are in the process of acquiring or city re imagination pointed across our buy sell and support functions by being hyper focused on areas. We have consistently asked at all and shared with you.
They are as follows.
Number one.
Got it.
Continuing to broaden the appeal of Citi trends through new multicultural lower income households.
Search of trend right apparel home and accessories at prices that don't quite goodbye.
Number two.
Our fleet.
Continuing to upgrade our customer experience via our CTX remodel program.
By providing better tools to our store management teams to increase sales productivity.
Number three.
Power infrastructure.
Completing important investments in our buy and move functions.
That will contribute to a smarter.
Foster and datacenter customer and associate solution.
And before our balance sheet.
Long as strength with Citi trends are focuses on the here and now and apply a freshman in your thinking.
Managing opex working capital and cash usage.
And last but not least number five making a difference whether it's paying out of customers' layaway when they are a bit short.
We're pitching in for families in need during these tough times.
It will ensure we never lose our focus on supporting our customers and associates in the neighborhoods in which they live.
We continue to believe there are significant white space to expand this into transplant and we look forward to reestablishing growth once the operating environment fully normalizes.
Confidence in our customer.
We know to be resilience memorial will allow us to return to a position of growth in time.
As always I want to thank the entire Citi trends team all of the women and men.
Face of our brand.
Readers of our culture and drivers of our customer engagement.
Their hard work and endless efforts are making a difference in the neighborhoods we serve never goes unnoticed.
And to live our purpose is shining bright.
Carry us into the future.
We are now ready to take your questions.
Peter back to you.
Thank you thank.
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One moment please for the first question.
Our first question comes from the line of Jeremy Jeremy Hamblin with Craig Hallum Capital Group. Please proceed with your question.
Thanks for taking the questions. So I wanted to start by.
By asking about kind of the store growth.
I know that Theres remodels happening to the CTX format et cetera, but you know with your Capex budget getting cut to $22 million wanted to get a sense for the remainder of the year opening and then really in the context of.
How to think about FY 'twenty three given how challenging the environment is currently for your customer does this reset your thinking on a go forward basis too.
Much lower store growth.
Good morning, Jeremy Thanks for joining us.
And let me take a crack at your store growth question.
First off on fiscal 2022 as Youre aware.
Trimmed our store growth assumptions.
From the beginning of the year to be a bit more prudent in this environment and also to be able to.
You need to open successful new stores as we look at the rest of the year.
Are going to slow our growth a bit here will probably kind of end up in the range of about 15 ish new stores.
As we close the year out.
We've had some.
Difficulty in I'll call. It the supply chain of new stores, largely driven by our landlord in billing delays things outside of our control, which has pushed some stores later and then part of it is reflected in a slightly more conservative capex spend to allow for some liquidity.
In this year to chase opportunities as noted on the call. When it comes to 2023, it's too early to comment we have tons of great stores in the pipeline for 'twenty three and we're in the midst as you can imagine of working through our hearing now plans. So that we can deliver the second half as indicated.
Our call today, and then we'll get hard after what 23 looks like.
The early to mid fall so more to come on on what that looks like but too early to predict.
Okay.
Then in terms of the change to sales guidance and you know.
I think when we.
Compare versus 2019 now the picture.
Comes a little clear that.
Just reverted to similar levels.
But I did want to get a sense in terms of your more recent trends kind of the cadence of sales over the last couple of months here.
First.
You know a month of Q3 have you seen any improvement or is this just kind of it's stabilized at a lower level than you had expected and that's what you're anticipating on a go forward basis.
Given that you.
It does imply slightly.
Slightly better back half of the year results, but wanted to get a sense for what youre seeing currently.
Sure Jeremy happy to add a little bit of color on that good question about kind of them.
And how we're thinking about the second half.
With regard to the year to date trends as we mentioned in one of our comments in the call.
Absolute transactions and our conversion.
Extraordinarily consistent and so.
So I think the good news.
As you look at the Crushers and Howard are our lower income.
Sure.
The refining and aware.
Harold.
So I would I would your word.
Stabilization or way.
Q1, and Q2 unfolded, it's been really consistent not a lot of big ups or big Downs.
So we believe as you heard on the call. This idea of having a loyal resilient customer and those that have the means to come back on a regular basis and sharp relatively frequently which is a hallmark of the brand.
It's definitely been the case.
We're just seeing an absolute lower level of <unk>.
Footsteps in the door given the pressures on the in particular, the low income bracket of our of our total target audience.
As we look at the second half we are definitely.
Shows and after a lot of the rigor of analysis as best we can and as you know it's hard to predict.
Through these times.
You've sort of indicated as you could tell in the guide that.
It's going to kind of maintain that stable level, where we're not sure as most retailers arent whether.
Whether it will improve drastically or not but we've got a little bit of improvement built in there, which we think is prudent.
Given what we're seeing in a little bit of early Q3 read but overall.
It's a stable trend.
Supported by a strong conversion strong basket strong repeat all of that.
Any metrics right.
<unk>.
From a performance, but it's just that with that pressure on track for that.
Number of people coming in the door because that makes sense.
Yeah, No that's helpful for sure.
Okay last one and then I'll hop out of the queue.
In terms of the sale leaseback transaction.
When taken in combination with <unk>.
What was done with the first D. C. Clearly you guys youre going to have very strong.
Cash balance.
At the end of the year wanted to get a sense for taking the two transactions in total.
What is the annual rent cost.
He's going to be added.
Bye bye, having though got it.
So D CS.
So that we can kind of think about that on in FY 'twenty three basis I assume that all of those dollars flow through your SG&A line.
Could you confirm.
Sure I'll hop in and take that.
On an annualized basis, Jeremy the rent expense for the two distribution center leases.
Is just shy of $8 million.
So you can think about it as a 1%.
Ah.
On the SG&A rate basis, assuming $800 million of sales.
Okay got it and it's been so yep.
Does that imply then that the total.
So in terms of the expense cuts that you've had.
How much of that is coming out of the stores versus the D C versus corporate.
But I think that would imply that actually your levels are lower your staffing levels are lower than 2019, given the $8 million.
Increase in your rent expense is that a pretty fair assumption.
Yes.
And there's so many puts and takes in that Jeremy.
I'd say.
It.
Yes, it's it's a there is.
I would call it consistent with 2019 from a head count perspective, there is a if you think about stores in D. C. We've been dealing with.
Wage rate increases over time, so we've offset that with improved productivity.
And then as we mentioned we are aggressively attacking our expense structure in the second half of the year, which is really across the board right. There's there's head count changes like David mentioned.
We're into everything from what do we spend on pen pen and paper to how do we improve further improve productivity and D. C is in the stores. So it's really it's across the board.
Got it well best wishes.
On the second half of the year and definitely been dealt a tough hand. Thanks.
Thanks for taking the questions.
Thanks, Sharon and experiment.
Thank you. Our next question comes from the line of Dana Telsey Telsey Advisory Group. Please proceed with your question.
Good morning, everyone and welcome Heather.
Thanks, David.
David as you mentioned about the consumer cohorts and 50% of consumers having household incomes with 25000 and below what are you seeing in purchase patterns is no differences in terms of the income levels given that your basket size is holding up and youre getting high conversion and on the merchandise.
Anything being tweaked in terms of price and value that you're offering or category sell through that you're seeing and then I have a follow up.
Hi, Jamie Thanks for joining good great great questions.
In terms of.
The cohorts specificity its interesting were.
Not seeing tremendous differences in their baskets. However, there has been a slight skew towards more of the central centric basket amongst the lower income cohort D. G. They are picking up more of what's in our expanded queue line.
Soaps, and lotions, and H B, a and even some things like batteries and such so we're seeing a slight skew on their basket, which makes sense to us, especially as we've grown that business and shocked.
Sought to create a bit more of a one stop local neighborhood store, where you can get far more than apparel.
And then I would say that the higher income cohort.
Is.
The frame that as sort of the 40 to 50 carriers, we're seeing quite a bit of new customer influx in that income cohort and they are showing a little to no resilience to our higher AUR in primarily the apparel cities and that's.
As you know from our last couple of years, but driven by in most cases changes in our quality trend features and benefits embellishments, and so forth and thereby enabling us to capture a bit higher AUR. So it's almost like there's two ends of the spectrum.
The lower income cohort enjoying some of the very new assortment enhancements, we've been making over the last year.
And then the higher income cohort.
Loving what trends were putting down and I would probably give a big shout out to the guy are guy as I mentioned, the strength of our men's casual business as he is just rocking with us.
And we're enjoying his his loyalty and a pretty big increase in his.
Jason and devotion from his wallet to us so that's a little bit about the cohorts.
On on pricing and category mix and so forth.
The good news is you know.
Well over 60% of our unit mix is well under $10 in our store. So we have never through these last two and a half interesting and different tiers and it could have predicted.
Really wavered from being extreme value and so that that unit factoid that I shared with you, it's pretty powerful and even a big portion of the 60% is under seven Bucks. So that's great to see that our merchants are maintaining a strict adherence to the value equation.
During these tough times, so that's kind of from a pricing standpoint, and then on the category mix fronts.
It's been really nice to watch the box presents a slightly different look from a category mix standpoint, and I'll point out a couple of things some of which I already mentioned, but the expansion of our queue line is not to be missed significant.
Creating incremental sales in the box offsetting some softness throughout the rest of the box.
We're seeing a distinct.
Set of.
Indicators as we continue to test and roll are more I'll call it multicultural positioning out to the marketplace.
As you remember, we've talked about adding more of our latinx friendly assortment to the box.
We have not stopped out at all in fact, we're playing offense in that area and we are appealing to more and more multi cultural customers within our current fleet.
Been around for a while and also with the new stores built in the last two to three years. So that's another example of whats working so there are many great pockets I will give the fund one we never carried wide with shoes and that business will be pretty significant for us this fiscal year, because we got our arms around doing that.
And our customers responded in drone.
Based on having a shoe that will fit.
Or a bit better for the optic she's purchasing from Citi trends. So just some examples and like during the call where we played offense.
Despite our lower sales expectation.
We're fortunate enough to be able to have the liquidity and a great team.
To chase the right trends and then I'll give a nod to.
What I said during the call are doing better in footwear and ladies.
We think we have distinct opportunities to expand our footwear usage occasions that we kind of paused a bit during the pandemic yours, and we're ready to roar back into some usage occasions that we have not been a part of so to speak and then on the ladies front, it's really been a master class in.
Catching up with in responding to the most current trends.
Example, wear to work.
And a slight change we're seeing in kind of the casualization of apparel that's different from what we saw during the pandemic here. So all of that's in motion and we're seeing really good traction.
Great and then CTX I know that's been a big topic in the performance of those stores have outperformed for.
Others and do you think about CTX currently given the inflation pressured environment.
Is there still a difference and then just my other two are on the SG&A reduction path, where are we and any outlook in terms of what you're thinking about either 23 of what other buckets of SG&A to evaluate and same thing on inventory given that obviously you have some pack away how do you think.
Inventory levels as we go through the year.
Jim.
Absolutely good questions I'll take the CTX question, and then I'll turn it over to Heather for SG&A inventory, but quickly on CTX. We are so pleased with the results that we've seen year to date, so no real differences, even despite continued macro pressures these store.
Or is that we've completed a rock and roll and we couldnt be more pleased with how they present the brand how our associates get so excited about showing up to work every day to serve a host of new and existing customers, who continue to say what to do with my old Citi trends, but I love the new ones.
So we're seeing and hearing just great feedback and we're going to do a handful more this year because of the strong performance we've seen year to date.
Heather you want to speak to SG&A in inventory.
Sure. So Dan to your question was where are we right. So yes.
Yes, as we mentioned we have yeah, yeah, we have a $10 million of cost reductions in the second half of the year.
We've captured.
Call it about 40% of that and are in and line of sight for the remainder piece right. So we are working hard diligently aggressively you can't kept peppering upwards in here to capture the other $6 million and that's been identified.
Where we're going to find those savings.
Going after it and banking it.
In the P&L.
We will absolutely get it done what I will tell you when we think about FY 'twenty three.
About half of the 10 million I would put in the category of restructure right. So.
Changing program changing.
Our organizational structure, changing services et cetera, et cetera, 10% I'd put in the beam related category.
And then there are some one time in there right. So if we think about it going into 2023 I'd just I would keep all of that in mind right. There are some one time items.
That will reset in 'twenty three but we are firmly dedicated in making sure that we continue to lever SG&A into the new year Youre.
Your question on inventory and how to think about I think your question was how to think about pathway going forward.
Yeah. So we do yes, we do that.
I have a.
An amount of pack away sitting in the D fees that we are very excited to start releasing in September in support of fall and holiday sales that will start to see that amount come down pretty dramatically over the balance of the year.
Got it thank you.
Got it.
Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, Thanks, a lot and congrats on the new responsibilities.
My question is on the guidance.
I'm curious if you expect the gain on the Rolling DC is included in your second half EBIT assumption, which I believe is for it to be equal to the second half of <unk> 19.
Yeah, Great question, So I'm going to hop right into all of that David that statement that we will be in line with 2019 is exclusive of the gain on the sale leaseback transaction that said it does include the impact of the the lease expense.
Okay. So it excludes the gain and any sense on what you think the gain will be another proceeds are going to be about $36 million.
We're still working that number Chuck I think it's a little early to share that.
Okay, Great and then just on the on the second quarter David.
You said that things were consistent but there's a lot of volatility in gas prices throughout the quarter, particularly in the in the back half of July and and when prices came down just curious if the business changed at all and as you think about those pressures that you highlighted do you feel like the baton is getting passed from.
Higher gas prices to now higher utility prices in food any sense for when you when you walked stores and talk to your customer.
Hi, Chuck Yeah. Good question and you probably recall in the last earnings call, we talked about speaking to our customers and associates and a couple of informal focus groups and what we heard that was gas by far was the biggest concern.
Hollowed by rent utilities, and actually food was in kind of a fourth place.
We kind of refreshed some of that data as we saw the gas prices come down most recently and the good news is we saw a pretty good at least qualitative correlation in terms of Oh gosh, what are released gas prices coming down, particularly in some of our mid sized markets, where we do a lot of <unk>.
Volume and where are we saw.
Cut or heard I should say most of these.
These gas prices it is really hurting us so.
Quickly on that one.
When the gas prices came down we did.
Both relief based on talking to customers and associates and you know.
There's a lot going on and when they were coming down because it sort of during back to school and can pay days, but overall, we did see some interesting.
<unk> response and traffic response too.
Or or during the time period of gas prices coming down so that I think we're we're cautiously optimistic that that could.
A nice little tailwind provided they stay down.
Then we asked of course are coming down what else is bothering you any updates from last time, we spoke to you and food definitely rose you know I think the reality of.
Food wasn't using up much at all.
Maybe it was even gone up a little bit indicative of our neighborhoods and then grocery stores, they shop, and which typically passing on pricing.
Actually to the consumer.
<unk> heard food ryzen their kind of importance looks.
There's some gives and takes there but having the number one reason that was given the margin come down definitely is a good side and the <unk>.
Good development, So I think we're gonna cautiously.
A third of that over the rest of the quarter and the half year.
You'll see how it shakes out.
Okay, Great and then.
Good question, but let me know if I did.
Yeah, I just didn't I just didn't know if there was also some benefits from state tax holidays. This year I think across the country roughly 50, 50% more days.
Then last year I don't know if you saw maybe more amplification of the state tax holiday benefit to share I know, if you've had a chance to look at that data yet.
Yeah.
Great question, Yes, we have.
We have seen some positive impact from more days and in some cases earlier days than three years.
So as we've looked at our cost.
Cohorts of back to school time period grouping. So early back through mid late shall we call them.
We've seen some early and mid tax free holidays produce some nice gains as compared to.
19, and helped by the 21 high so to speak so well.
We're liking what we're seeing so in those days.
Okay, Great and then my last question would just be.
How you arrived at the back half you are it looks like you're.
I'm sort of extrapolating the three year Geo stacks from the second quarter of roughly down five six into the back half of the year is that sort of how you got there even though it sounds like August it might be a little bit better on the top line than what the second quarter run rate was.
That is how we got there Chuck maybe with a dose of what has been our traditional quarter to quarter builds or D builds prior to the pandemic.
That's that that kind of threw a bunch of declines into the blender.
Got to the kind of relationship that I'm sure you'll kind of back into in terms of.
Really the absolute volume compared to two <unk> compared to one.
As well, but those relationships, we believe for the rest of this year given the uncertain environment, we're operating in.
We'll kind of largely hold up.
Q2.
Quite a bit of more stabilized way be about now than in Q1 volume.
Matt.
Ordinarily well to history. So we use some of that in addition to the geometric stuff to get to this.
Okay, great. Thanks, very much for the color.
Thanks have a great one.
Okay.
Thank you our last question comes from the line of John Lawrence with Baird. Please proceed with your question.
Good morning, and welcome welcome Heather.
Thanks, John .
David could you start off just a little bit, but reminding us of the process.
Attracting the new merchandise.
You've talked about being able to.
Free up cash to get the available deals.
Remind us how that process works and.
Have you been able to get that or is it just more of them.
Of an effort of just getting more steps and the door rather than the newness and the freshness of a new deal.
Hi, John it's nice to hear from you.
Great question.
Both are important right, where we're aiming to develop.
The most engaging assortments that the greatest values for.
For our customers, but we're also trying to entice.
Kind of combat this headwind of lower traffic.
I would tell you the priority given our maniacal focus on expense conservation. The priority has been on really buying the right stuff at the right time for the right customer more so than putting incremental dollars into the market, but we just don't have that luxury yet.
So back to what we've been focusing on.
I'd take you back to the beginning of the year.
<unk> that our merchants during the supply chain disruption period late 'twenty.
<unk> 21 in early 'twenty, two we're all aware of they drove into those marketplaces pretty aggressively.
To pick up very attractive good.
Meant to sell later in the year, so as Heather commented on.
We're.
Possessing.
Possessing really nice pack away inventory of that.
Build built during November December January .
Now we are literally thing.
Starting August for because that will take place through November December to deliver back to school fall and holiday and Thats, So germane to our model because what's what's in that pack away.
Really great values.
Mix of products that we don't always get our hands on right given our given our model. These are kind of opportunistic buys. So that's one part of our process and it's literally coming out of our buildings as we speak going into our 600 plus stores and we're liking what we're seeing and then the rest of their day, so to speak or really spent on identifying.
The rate trends that we can get across men's women's kids accessories home footwear and the like.
And making sure we ladder back to our customer.
The customer is nicely evolving for us, meaning we're including more than our African.
African American players.
And we're adding.
More and more apparel palm et cetera that appeal to a broader audience, namely.
Phoenix, we have somatic.
Our current.
Communities and neighborhood and that we're so pleased to serve but we can serve them better.
Squarely falls under kind of back to your question of the process.
Evolving our process pretty rapidly I would tell you we're ahead of schedule.
And we are going after it with full vigor to broaden the appeal of the brand as we buy the good suitable for now really two large audiences African Americans.
Populations. So we're excited about that.
As we move forward.
We're pretty excited about what we have for the rest of the back to school or fall and holiday and gift giving.
Round out the year, so that's how it works mechanically.
And I think.
We'll see some good things going forward hope that answers your question.
Great. Thanks, and one last longer term question just strategic.
I know you started right before the pandemic are you built the team up all of that.
And now macro conditions sort of dictate.
Making some changes how do you balance that looking long term versus short term as far as.
Cutting into the muscle of the business or.
And I'm sure I'm sure you've thought about that but just sort of a deeper dive there just a little bit.
Sure happy to add some color on that and I'll start by saying.
It was a very very difficult decision. We in general are not a bloated organization.
In general have very defined role we have.
Not a ton of layers.
All work very very collaboratively to get a culture that supports contributions from all levels. So it's very difficult to study and make make very hard decisions about which wells would be eliminated.
The overall picture, though John is definitely a picture of balancing.
The individuals that we really need for this business to tick.
But also recognize that we are evolving how we work. We're also evolving what we provide to our teams in the form of data technology and automation to name a few.
So.
What we're going through as a product of as you've heard us speak about investing in data and technology. For example that we'll make certain functions more efficient and productive and unfortunately.
It may require a few less people, which is tough on the people front, but but nonetheless will enable us to operate that particular function with less head count over time, So where we are today is doing the appropriate right sizing for our smaller business.
Space and.
And then of course, as we look to the future and returned to a position of growth over time.
We will evaluate and monitor and we will also have a much better handle on how effective our systems and improvements and infrastructure.
And we're nothing but optimistic about those improvements as we've done a couple already this year with huge success and we're already seeing benefits associated with them that allow us to be more productive so.
Short winded it would be we're balancing it you're absolutely right.
Being cautious, but but at the same point.
We had no choice, but to take certain actions to rightsize our expense structure.
Alright, thanks for that good luck in the second half.
Thanks, John talk to you later.
Sure.
Thank you Mr. Mcewan I will now turn the call back to you. Please continue with your presentation or closing remarks.
Thanks, so much thanks, everybody for joining have a great rest of your summer talk to you next time bye bye.
Thank you that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
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