Q2 2019 Earnings Call
Greetings and welcome to the CPR in Q1 9 earnings Conference call.
During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session.
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As a reminder, this conference is being recorded today Thursday August 22 2019.
I would now like to turn the conference over to Mr. meet some Mckee senior Sofia.
Please go ahead.
Thank you our earnings release was sent out this morning at 645 am Eastern time, if you have not received the copy of the release. It is available on the company's website under the Investor Relations section at Www Dot Citi trends Dot com.
You should be aware that prepared remarks made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Management may make additional forward looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements.
We refer you to the company's most recent report on Form 10-K , and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those described in the forward looking statements I will now turn the call over to our President and Chief Executive Officer, Bruce Smith Bruce.
Thanks, Lisa good morning, everybody and thank you for joining us today.
Also on the call is our Chief Financial Officer, Stuart Clifford and our senior Vice President of merchandising Kristina short.
The second quarter progressed, our sales trends began to improve.
And I'm pleased to report that the momentum has continued early in the third quarter.
Despite a slow start to the second quarter, our comparable store sales decrease of 1.2%.
Was it the more favorable end of our guidance.
The non apparel part of our business consisting of accessories and home merchandise continued to grow.
And while apparel sales decline the trend was better in the latter part of the second quarter and there's also continued to show improved performance early in the third quarter.
We continue to strategically reallocate more inventory dollars towards the growing non apparel lines.
Which will gain in importance as we approach the holiday season, when non apparel gift items resonate with our customers.
Although we are shifting inventory dollars from apparel to non apparel, we still believe that we can improve recent apparel sales trends during the back half of the year.
Particularly considering that considering that we will be comparing results to a period of time last year. When we have some specific ladies apparel fashion misses.
It's important to note that we were very pleased with our efforts in the second quarter to improve inventory turns and maintain inventory liquidity.
We entered the third quarter in a very clean and high quality inventory position.
As reflected in a 5% reduction in inventory levels, including a 14% decline in comparable stores inventory.
Now I'll turn the call over to Stuart to provide additional details on the results before I discuss future plans and expectations.
Thanks, Chris.
Total sales in the second quarter increased to half a percent.
$283 million.
Comparable store sales decreased 1.2% in the quarter.
The decline in comp store sales during the second quarter was reflected in a 1.5% decrease in the average unit sale.
And a reduction in transaction counts of more than 1%.
Partially offset by an increase in the number of items per transaction of nearly 2%.
And looking at comp store sales for the individual merchandise categories.
The home Division again led the way with a 5% increase on top of an 11% increase in last years second quarter.
Accessories were up 4% in this years second quarter.
Well they were up 3% in the second quarter of 2018.
Sales in the ladies division were down 2% after being up slightly during the same quarter last year.
Comp sales in the men's division were down 5% after increasing 5% in the same quarter last year.
And children's comps were down 6% after increasing 3% in last years second quarter.
In the first half of the year total sales decreased 1.3%.
While comparable store sales were down 2.9%.
Gross margin in the second quarter was down 200 basis points due primarily to the need to take more markdowns in light of the decrease in comparable store sales.
For the first half of 2019 gross margin is 160 basis points lower than in the first half of 2018.
As DNA expenses continued to be very well controlled increasing only 1.1% in the second quarter compared to last year's expenses, Despite a higher store count and normal inflation.
As a percent of sales second quarter, SGN expenses increased 30 basis points to 34.5% from 34.2% in the second quarter of 2018, due primarily to the de leveraging effect that declining sales has on the expense ratio.
For the first half of 2019.
SGN expenses when adjusted for $1 million of proxy contest expenses incurred in the first quarter.
Were virtually flat with the first half of 2018.
Net income in the second quarter of 2019 was point $4 million or three cents per diluted share.
Compared to $3.2 million or 24 cents per diluted share in last year's second quarter.
For the first half of 2019 net income was $8.2 million.
Or $9.1 million when adjusted for proxy contest expenses.
Compared to 14, and a half million dollars in last year's first half.
Earnings per diluted share were 68 cents in the first half of 2019.
Or 76 cents when adjusted for proxy contests expenses.
Compared to a dollar eight in the first half of 2018.
Finally.
A reminder, about a change that is having a significant impact on our balance sheet.
As we discussed on our first quarter earnings call.
Following year end, we completed the adoption of the new lease accounting standard using the transition method, which applied the standard as of the effective date.
Consequently, our 2019 balance sheet has $153 million and new right of use assets.
And $160 million, a new lease liabilities.
Not shown on last year's balance sheet.
Now I'll turn the call back over to Bruce.
Thanks Stuart.
And looking forward as we strive to improve our apparel fashion and execute shifts in the overall mix between apparel and non apparel. We are working with our board of directors, including Peter Sachs see special advisor to the CEO on a number of strategic initiatives.
Part of this work involves a survey of 13 100 respondents who were either familiar with it were had made a purchase at Citi trends.
Our goal was to gain insight into a number of things, including merchandise preferences retailer preferences frequency of visits and other information.
We do think the survey results will be valuable as we move forward in building strategies to better meet the needs of our customers.
In addition, the strategic initiatives include a review of our organizational structure.
Designed to ensure that we have adequate resources and that those resources are focused on our priority areas.
Also we are performing an analysis of our systems infrastructure.
To ensure that I T is prepared to fully support the merchandising and other needs of the business.
And from a real estate perspective, we are considering a variety of strategic opportunities, including remodeling relocating or expanding our existing stores.
And opening new stores, including in predominantly Hispanic markets.
We are off to a good start thus far in the third quarter with a comparable store sales up 4%. During the first two plus weeks of August despite going up against a 9% increase in the same period a year ago.
Considering our recent sales trends.
Together with the shift in merchandise mix more towards the growing non apparel areas.
And our favorable inventory position, we expect comparable store sales to increase 1% to 3% in the back half of the year.
Leading to earnings per diluted share in a range of $1.30 to $1.50 for the full year.
Now Leila will open it up for questions.
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One moment please for the first question.
As a reminder, ladies and gentlemen to queue up for question. Please press one for.
Our first question comes from the line of Mike Morales with Walthausen and company. Please proceed.
Mr. Morales. Your line is open. Please go ahead with your question.
Well ask that you please verify you're on mute button.
Oh I will continue with the next question Mr. morale is in order to ask a question. Once again. Please press one for our next question is from the line of Eric Beder with FCC Research. Please go ahead.
Good morning, Bruce Congratulations.
Thanks, good to hear from Eric.
Great could you talk a lot about the share repurchase plan and kind of how it's doing I'd say guys, who are low the shares back.
You can still consider kind of where the stock is right now worthy of beer being Rick.
Utilizing gas on that.
Yes, as you know we have over the past four years now returned about $100 million to our shareholders in the form of repurchases and dividends. So it is an important part of our capital allocation.
We've said historically that as long as we're over $80 million in cash and investments that we will return cash to the shareholders and that has worked out well for us.
And yes, we continue to buy in the second quarter bought about twice as much as we bought in the first quarter. So year to date, we're at four and a half million dollars.
Of purchases and we have around $5 million left under the current authorization.
Great. When you look at you mentioned the Spanish market I know you guys had been working on that how is the Spanish market.
A little different than some of the core markets you have right now and how desirable do you view that market.
Yeah, you know.
The demographic is probably actually larger than the traditional demographic that we are serving so it is it is an important opportunity for us there are nuances of serving that customer.
That we have learned through our stores that serve a combination of traditionally.
African American and Hispanic customers we have.
I think it's 36 stores that already have at least 40% of the population within three miles of them being Hispanic so we're already serving that customer to an extent today.
The new stores that we're opening up art in markets, where it is 90% to 100%. Hispanic and so there are some different things in merchandising that we're lucky that we have to do some of it involves sizing.
Some of it involves fashion versus core.
And some of those things so those are those the high points.
Great and last question, so you've seen it's been a little bit tough to figure out with some of the inventory shifted you've been doing kind of how.
The categories have been changing have you seen in some respects.
I kind of permanent shift to reduction in apparel and how should we thinking about going forward.
The split between the products and if it drives any particular margins with that.
Sure so.
As far as what we've seen and what we expect to execute going forward at today about 60% of our businesses apparel.
So 40% non apparel and that has grown over the past six or seven years. It was probably in the low twentys non apparel was probably in the low Twentys. If you went back six or seven years ago. So it's been a consistently growing area for us we have made the Merck we've made merchandise shifts along the way to facilitate that the non apparel lines and what we've said is that we will continue to do that and.
Looking long term or I should probably say mid term.
I think that.
Getting to 50% apparel versus non apparel is is not out of the question not sure that we would ever go higher than that because it is still important to be in apparel store in these neighborhoods that we operate in.
But we certainly think there's some runway there to continue to take the non apparel piece up.
Great.
Good luck for the holiday season.
Thank you.
The next question is from the line of John Lawrence Private Investor.
Please go ahead.
Yes, good morning, guys.
Want to John .
Yes could you comment just a little bit I know you've had some initiatives on the transportation and some other.
Sort of initiatives underway, you give us a little update on.
Digging through the numbers and how some of those are progressing.
Yes, so as I mentioned I guess it was last quarter, we have been working.
With a consulting group on both the inbound inbound and the outbound sides of freight.
To this point, we have made a lot of progress on the inbound side, particularly renegotiating contracts with our suppliers and some new suppliers or transporters.
That has gone extremely well.
It really hasn't shown up in the numbers, yet because the new contracts.
Were not effective until early in the second quarter and freight inbound freight in the second quarter go straight into inventory because we have to capitalize about one quarter's worth of freight costs. So as that benefit rolls out in the third quarter, we will see some benefit in freight in expense.
The freight out pieces lagging the freight in piece, but we're still working on a number of things in that area, including a new transportation management system and then also.
A strategy to reduce the the outbound cost.
Great. Thanks, and is it too early have any of the Hispanic store has been opened yet.
Yes, we've opened two.
Both of them opened in the second quarter. So it's still early in.
We probably won't give any store by store information just for competitive reasons, but I will tell you from what we've seen from the first two openings that that we want to continue to.
To test that market and in fact have a third store.
That's coming up later this year.
Great and last question.
From my standpoint when.
When you start when did the when does it easy comparisons really start with that women's business was it mid third quarter or was it earlier than that that.
That that when that business really turn soft.
Yes. It was really later in August and then through the rest of the quarter. So it was little bit over two months of the quarter.
Great. Thanks, Good luck.
Yes, Thanks John .
Mr. Smith, there are no further questions on the phone lines at this time, so I'll turn the call back to you.
Okay. Thank you everybody for joining us today and as always I'm available for one on one calls if you want to talk to me later this week. Thanks.
That does conclude the conference call for today, we thank you all for your participation and we ask that you. Please disconnect your line.