Citi Trends, Inc.
Q1 2020 Earnings Call Transcript

Published: 28 May 2020

[Operator:]

Greetings, and welcome to the First Quarter Earnings Conference Call. . I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

[Nitza McKee:]

Thank you, Dina, and good morning, everyone. Thank you for joining us on Citi Trends First Quarter 2020 Earnings Call. On our call today is our Chief Executive Officer, David Makuen; and our Vice President of Finance, Jason Moschner. Our earnings release was sent out this morning at 6

[David Makuen:]

Thank you, Nitza, and good morning, everyone. As the new CEO of Citi Trends, it is a pleasure to be speaking with you this morning, and I hope you are all safe and well. We are in unprecedented times, and COVID-19 has had a tremendous human impact and an impact on our economy and the retailing landscape. Throughout this crisis, our top priority has been and continues to be the health and safety of our associates, our customers, and the communities we serve. We, like many others, have made some difficult but prudent decisions throughout this pandemic to ensure that Citi Trends remains in a strong financial position and is poised to exit this crisis, well positioned for a safe recovery and long-term growth. I would like to take a moment to thank 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 of Citi Trends, and alongside many other priorities in their own personal lives, they rose to the challenge of balancing life 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 on to the topics to be discussed during today's call. I will first discuss how we are safely and prudently navigating through COVID-19. I will review our reopening strategy, which is well underway, and I will provide an update on the early results we are seeing quarter to date. Next, I will turn it over to Jason Moschner, our Vice President of 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 have taken to ensure the safety of our associates and customers, preserve capital, and bolster our financial liquidity. In response to the growing pandemic in New York City, we closed our corporate office on March 13 and instituted work-from-home policies. On March 20, 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 27, we temporarily closed our 2 distribution centers and our corporate office in Savannah, Georgia. We made a difficult decision to furlough substantially all of our store and distribution center personnel and about 40% of our corporate staff. We temporarily reduced cash compensation for the Chief Executive Officer, senior executives, and Board members by 15% to 25%. We created a COVID-19 response team focused on business continuity that develops 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 rent for 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 of 2021. We temporarily suspended our quarterly cash dividend beginning in the second quarter, and we appropriately reduced our inventory receipts.

[Jason Moschner:]

Thank you, David. Total sales in the first quarter decreased 43.4% to $116 million, including a comparable store sales decrease of 44.5%. The decrease in sales was due to closing all 574 of our stores from March 20 until April 23, at which point we began to gradually reopen our stores. I want to reiterate David's comments that we had good momentum in the quarter prior to the onset of COVID-19, with comparable store sales positive 3.1% through the first week of March. However, as the pandemic set in, we began to see a decrease in the number of transactions, leading up to the closure of our stores.

[David Makuen:]

Thank you, Jason. At Citi Trends, we are a community-based retailer in primarily midsized 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 in-store experience. And in the words of our social media followers, "Don't sleep on Citi Trends or you'll miss out." None of this would have been possible without our stores teams. I could not be more proud of our associates who exemplified 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 reopen the company for business. And our commitment to putting safety first in all of our actions reflects the responsibility and accountability we have towards the communities in which we 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 will emerge from this crisis stronger and better equipped to grow our business. Before we wrap up and take your questions, I'd like to share a few thoughts from my first few months as CEO. First off, I am so excited to lead this great brand towards our stated goal of $1 billion in sales. As 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 the extreme value-retailing space, one of few multi-category off-price retailers focused on the African-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 and a high energy team with a growth mindset, Citi Trends is prepared to return to executing on many initiatives that will build a stronger foundation and set us up for scaling our unique model in the years to come. We intend to make meaningful progress of our long-term strategic plan, including number one, maximizing real estate opportunities, including opening three new stores during the first quarter of fiscal 2020 and 3 new stores in the second quarter, with the potential to open up to 14 total new stores this year; number two, making improvements in supply chain freight costs and four-wall efficiencies; number three, reducing inventories, increasing margins and increasing churns, while delivering a highly appealing assortment of always-fresh merchandise for the entire family; and lastly, addressing select technology enhancements to improve efficiencies and productivity. The company anticipates that as the country normalizes and assuming no further complications from the COVID-19 pandemic that it will return to executing on its 3-year strategic plan to increase earnings per share at a compounded annual growth rate of 20% to 25%.

[Nitza McKee:]

Okay. Operator, we're ready for questions.

[Operator:]

. Our first question comes from the line of Eric Beder with SCC Research.

[Eric Beder:]

Congratulations on weathering this COVID virus. You've opened a lot of stores. Obviously, it's somewhat of a crazy time. Did you take the opportunity to look at those stores? I'm sure you did. And were there any changes you decided to make in those 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 reinvent the stores a little bit?

[David Makuen:]

Eric, it's David. Thanks, and good question. Well, really how it panned out is, we as you know, and most of retailers throughout the U.S. 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 kind of stay away from those stores and kind of let them sit for a little bit after the height of the pandemic passed. And as we returned to our stores and opened them back up, really what we spent all of our time on was making sure the PPE, the personal protection equipment, was in place, all of the safety measures for customers was in place including masks for our associates to make the 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 haven't, heretofore, 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 back up pretty much like the store looked prior to the closure from a merch and fixturing standpoint. And we've continued to monitor things. As you can imagine, we're -- every group of stores we open, we learn something new. But I would tell you, the overall learnings are, we've been very consistent across the different clusters of stores we've opened from a performance standpoint and from an adherence to all the new standards standpoint. So we're proud of the teams. We're following daily protocols to clean the stores thoroughly every time we open and close, and we're really pleased with what we're seeing out there. Thanks for your question, Eric.

[Eric Beder:]

When you look at -- I know you guys don't do right now online. Has this led you to maybe rethink how you want to handle online? And I know a lot of this is treated as a treasure hunt of the store and the prices of the product, but is there a place in it, maybe going forward in the future down the road for online sales?

[David Makuen:]

Eric, it'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. I would tell you, overall, it's just too early to even think about online. And the beauty of our business is, and you 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 our buying team had 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 have a tremendous density of customers within a short drive, and in fact many walk or bike to our stores. And we think it's kind of the year of the store, quite frankly. You've been pent-up in your home, you’ve got cabin fever, and you want to get back out and enjoy shopping again. And the truth is, is the majority of our public in the United States loves going into stores, and we are, as you know, 100% a store 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 e-commerce at all. I'd rather celebrate our fleet, build more stores and take advantage of the really unique treasure hunt we offer to the unique target customer we cater to.

[Operator:]

Our next question comes from the line of Elan Danon with Danon Capital.

[Elan Danon:]

Welcome aboard, David.

[David Makuen:]

Thank you, Elan.

[Elan Danon:]

So, I want to start off with -- I'm kind of following this company for a while. Any -- David, in your sense, any changes to the store in terms of merchandising that you want to implement versus kind of what the prior strategy was over the last 5, 6 years, which was kind of derisking some of the inventory, carrying more basics, also minimizing still some of the national brands? Just curious to your thoughts on merchandising and how you want the store footprint to look.

[David Makuen:]

Sure. That's a great question. And I would tell you, merchandising and our assortment is really the lifeblood of the brand, and we're fortunate to have Lisa Powell on board. She joined us last fall as GMM, and 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 figure it out, and that's exactly what our buying team is doing. And what 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 of basics, fashion, trend, and sought-after brands, and we're going to continue to work on that mix as a team. And those are the very things that our customer need and want. They're pairing in their closet the basic tees, the basic undergarment with a fashion top; they might pair a fashion top with a 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 may be -- key difference is, we're 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 wisely, go out and find the right brands and nonbrands 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 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 if we do those 2 things really well, the customer will vote and we'll be off and running.

[Elan Danon:]

And is the merchandise we see in the floor now, is that part of Lisa and her team's efforts?

[David Makuen:]

Yes. The merchandise that's selling through right now is absolutely part of Lisa and her team's efforts. And they're based on our positive momentum. During our reopening, they're feverishly buying more and seeking out that right mix according to those sort of four buckets I mentioned, basic, fashion, trends and brands, and they're all over it. It's great. Great to see a lot of energy coming from her team to fulfill what the customer is calling for.

[Elan Danon:]

Great. And then in terms of when you can return to buying back stock given how cheap the stock is and has been, do you foresee -- do you have a timetable on that? Or are you restricted from drawing down the revolver? Or how is that?

[David Makuen:]

The simple answer would be no time frame yet. We're in this period of recovery. We feel for the country, we feel for the people that have been affected by COVID-19. And I would tell you, Elan, we're just taking it slow right now. We've had to reopen a chain, which is no small feat, bring back thousands of people, and 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 ground for the rest of Q2, and then we'll turn our heads towards the second half. But we'll certainly keep your question in the mind and -- when we look at things a little further down the road. Jason, do you want to add anything on that?

[Jason Moschner:]

Sure. I'd add. I mean, absolutely. It's a wait and see approach right now as we emerge from the pandemic, but I would reiterate that we are absolutely committed to returning to our strategy to return capital to shareholders in the form of share repurchases and in the dividend. That's part of our long-term strategy that we have communicated, and it is our plan to get back to that, but just too early to tell at this point.

[Elan Danon:]

Got it. And then in terms of -- have you had conversations with some of your landlords in terms of rent reductions?

[David Makuen:]

Yes. We are in active conversations. Landlords are so important to us. And our real estate current holdings, if you will, through our leases and our future real estate vision is just critically important to the growth of Citi Trends. And so we are in active negotiations with nearly all of them. And hats off to our small but nimble real estate team, and they're out there, figuring out what makes most sense landlord by landlord, and we'll get to a good place with all of them.

[Elan Danon:]

Got it. And then in terms of possibly monetizing the DCs. I mean, some of your large shareholders have had success with other companies they're involved with in monetizing some of those noncore assets. Any thoughts there?

[David Makuen:]

I believe you said monetizing the DCs, if I heard you correctly.

[Elan Danon:]

Yes.

[David Makuen:]

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 our revolver, and we're in a strong cash position as we navigate through this early stage of recovery. So haven't addressed that yet.

[Elan Danon:]

Okay. And then lastly, in terms of, you should see, I mean, I'm sure some really, really good inventory, good brands that the customer would -- the stores have never had a traffic problem. And if you have the right brands, it always -- they always seem to sell through. So are you seeing an abundance of, given some of the dislocation in retail and in clothing, that you're able to get your hands on and excited about for the rest of the year?

[David Makuen:]

Great question, Elan. Yes, I think at a high level, I'd tell you that there are great opportunities in the marketplace being presented to the Citi Trends buying team. And we're chasing what's right for the customer and our business and our price point. So you know that there's some dislocation going on. And we're -- I can tell you and assure you we're active in the marketplace, securing the deals that are good for us.

[Elan Danon:]

Okay. And then last question, and I hope to continue to speak with you guys as it goes forward. But last question is related to where do you think -- what do you have to get turns to? I mean, clearly, you won't get turns as much as a traditional price retailer. But where are you going to get turns to get operating margins in the mid single-digit range? And where do you think gross margins can go there? Can they go above 40% on an annual basis?

[David Makuen:]

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 our P&L, margin, of course, being a huge factor. But I think there overall is some room for margin expansion as we take this journey for, 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 of time to spend a little more time on all of your topics that last question goes. We're going to -- just know, Elan, we're going to take our financial results really seriously. And I'm a data-driven guy, and we're going to wrap our arms around how can we lever right and use sales certainly as the opportunity, but also lever a lot of the expenses that we can in order to produce higher profit throughput. So more to come on that, but thanks for your questions, Elan. Good to hear from you.

[Operator:]

We have no further questions at this time. I would now like to turn the call back over to David Makuen.

[David Makuen:]

Dina, thank you so much. I think we're ready to wrap up for the day. Again, thanks to everyone who joined our first quarter 2020 earnings announcement. Please stay safe and healthy, and we'll see you next time for Q2. Take care now.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.