Greetings. And welcome to the Citi Trends' Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Cody McAllister with ICR. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' third quarter 2024 earnings call. On our call today is Chief Executive Officer, Ken Seipel; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section. 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 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 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, Ken Seipel. Ken?

Thank you, Cody. Well, good morning, everyone, and thank you for joining our Q3 earnings call today. Since we last spoke, as most of you have seen, I've been honored to accept the permanent role of CEO here at Citi Trends, and I'm really pleased to continue leading the company in this capacity, which will allow us to continue to implement the strategies that we outlined back in last summer that have been aimed at driving business improvement and ultimately increasing shareholder value. I also want to acknowledge the Board of Directors for providing a unique equity compensation structure that ensures my alignment with shareholder interests. Citi Trends is a unique and exciting growth opportunity. We have nearly 600 stores serving our African American customers directly within their neighborhoods. Our brand familiarity, customer loyalty, and neighborhood store locations are difficult to duplicate, which gives us a defensible moat against competition. With this solid foundation of differentiation, our future is well within our control and not dependent on external factors. Implementation and consistent execution of our redefined business strategy which includes an acute focus on our core African American customer, a strong product value proposition, with a balanced offering of good, better, and best products, more extreme value treasure for our treasure hunt experience for customers, disciplined expense management, and compelling growth plans will effectively be the driving force for creating significant shareholder value. Our business results in Q3 are an early indicator that our customers are responsive to our renewed focus and the resulting corrective measures in the business. Notably, we have seen that momentum continue into the fourth quarter with high single-digit comparable sales performance today. The strong customer response and the growing transaction count momentum give me optimism that we're on the right path and success will continue to compound as we more fully execute our strategies. Let me take you through a few highlights of our third quarter results. Starting with our top line performance. As previously announced, we delivered strong third quarter sales of $179.1 million, achieving positive comparable sales growth of 5.7%. We saw growing strength throughout the period with comparable sales improving each month, culminating in high single-digit growth in October. This performance was broad-based, driven by increased customer traffic, single-digit transaction growth, and a larger basket size. Shifting to category performance, we saw positive trends across both our apparel and non-apparel categories. Children's apparel was particularly strong this quarter, benefiting from a combination of our enhanced product assortment and improved allocation tactics, which allowed us to capitalize not only on the peak back-to-school selling period but also post-peak period, when we strategically allocated inventory into stores with sales demand to fuel growth throughout the selling season. Our non-apparel categories also performed very well, led by continued strength in our home lifestyle categories driven by strategic inventory investments and strength in our family basics and sleepwear fueled by our commitment to better inventory levels of family basics like socks and underwear. During our call in June, I mentioned we were planning to focus on improving product allocation. After spending some time reviewing the product allocation methods and systems, it became clear that there were simply too many variables for an average allocator to manage, including an overwhelming complexity of allocation methods coupled with a large amount of store choices. In short, we made it very difficult for our allocation team to be successful. We've since reduced the complexity by limiting our store clusters to three groups: simply high, average, and low-volume stores. Our allocation accuracy steadily improved during the quarter, and I'd like to acknowledge our allocation team and leadership for their hard work and commitment to improvement. Now that we have established the basics of allocation, we're turning our attention to more advanced techniques, which will include future system enhancements down the road. I expect our work in allocation to have a meaningful impact on our operating results well into 2025 and beyond. As I mentioned last quarter, we are focused on foundational and fundamental internal process improvements. Our success this quarter is a testament to these efforts as our data-driven approach has improved inventory efficiency. I'd like to acknowledge the work of our finance team for developing methods to track the retail industry standard metric gross margin return on investment, commonly known as GMROI, down to the category level for our own internal use. I was pleased with our merchants team's willingness to embrace the metric and make better product decisions to improve not only our gross margin dollars but also include the cost of handling and the cost of the overall inventory investment in their evaluation process. Again, we're just in the early stages here, with more work to do, but this benefit will continue in the future. Speaking of foundational improvements, our supply chain team has found ways to improve both transportation and distribution center efficiency, which has resulted in nearly a two-week reduction of time from vendor to store. This is a significant first step in helping us build capacity to quickly chase sales demand trends and improve our inventory turnover. I also want to emphasize the strong momentum we saw in our full-price selling performance during the quarter. Although we saw a sales benefit from remaining clearance units early on tied to the strategic markdowns we took in Q2, our full-price selling trend sequentially improved as the quarter progressed. It reflects the growing resonance of our product offering and our customers' willingness to pay full price for the increasingly compelling merchandise that we're able to offer. Another key highlight in the third quarter was gross margin expansion of 160 basis points along with solid gross profit dollar growth that outpaced our top-line expansion. The primary drivers are twofold. First, we expanded initial markets through improved product cost negotiations, a muscle we're further developing combined with growing sales penetration of our higher margin categories. Second, we registered improved shrinkage rates in stores inventoried in the quarter with a consulting partner, where we identified several favorable opportunities that have implemented specific administrative and process actions that enable us to better monitor and manage both internal and external factors. We expect these new tactics to have a meaningful improvement in their shrink measures going forward. Turning to the drivers of SG&A in the period, we also mentioned our November 18 pre-announcement. We incurred strategic costs related to efforts aimed at driving future top-line expansion and enhanced profitability. We initiated a comprehensive Customer Insights Study to gain quantitative and ethnographic insights into the drivers of purchase decisions. The study has delivered new insights that will fuel decision-making processes and enhance our store experience in 2025 and beyond. We incurred costs to improve operational processes, including new strength improvement measures that are driving notable improvements, along with enhancements related to the effectiveness of our operational systems and the development of KPIs to drive the business. We engaged consultants to help evaluate customer shopping patterns in our store, aiming to improve the shopping experience and inform both our merchandising and store remodel strategy. In total, we estimate approximately $1.6 million in ancillary expenses incurred in Q3. I consider these costs one-time in nature and important to stabilizing our foundational operational practices in preparation for long-term growth. Before passing the call over to Heather to review our financial results in more detail, as well as our upwardly revised outlook, I'd like to reiterate the pillars of the foundation laid out for the future and express how we are executing with clear vision and passion around the organization. First, we have redefined our company's focus toward our core African American customer, who represents the majority of our trade area in around 90% of our stores. This renewed focus will enable our merchandising teams to secure a more refined product assortment that resonates most adeptly with our core demographic. We're beginning to see the results of these efforts, and I'm encouraged by our early outcomes. Second, we are reinforcing our product value proposition with a balanced assortment of good, better, and best product categories across all of our categories. For our lower-income customers on a tight budget, we're shifting our strategy to offer an increased selection of goods priced under $5 with visible signage to emphasize our value proposition. This is driving both traffic and basket size, which were key drivers of our third quarter results. Third, we are offering more treasure by securing branded deals from various sources that represent extreme values. We've recently strengthened our buying team with an experienced off-price specialist actively identifying compelling opportunities in the market. Our entire buying team is now sourcing opportunistic deals. We've secured numerous compelling deals, including an exciting branded footwear buy that's hitting the shelves and resonating well with our customers. It's driving viral word-of-mouth marketing and positioning us well for the remainder of the holiday season. We've already seen strong and growing trends in November, adding to our confidence in our actions. Longer-term, we expect this off-price treasury segment to become a significant growth area for the company and eventually contribute 10% or more of our sales mix at above-average margins. Fourth, we focus on consistent execution across all areas of the business from product procurement to logistics to store execution. While consistency is defined over time, I am pleased with the internal enhancements we've made to date that will allow for more consistent execution of our model in the quarters and years ahead. Lastly, we will continue to diligently manage expenses, providing for a good flow through of sales to profit as we execute our core strategies. Now I'll turn the call over to Heather to review financial points from Q3 and a few comments related to the fourth quarter. Heather?

Thank you, Ken, and good morning everyone. First, let me add my congratulations to the many teams across the organization for the hard work that drove our third quarter results. I am encouraged by the positive trends that are beginning to develop across the business, particularly the mid-single-digit comparable store sales growth in the quarter and the 160 basis points of gross margin expansion. We continue to implement the strategies Ken laid out, creating new opportunities for top-line expansion by quickly executing a refreshed inventory assortment with high-demand brands and a more balanced approach. While there is still much work ahead, our initiatives, along with our strong balance sheet, are positioning Citi Trends to return to profitable growth. Turning now to the specifics of our third-quarter results. Total sales in the quarter were $179.1 million, with comparable sales increasing 5.7% compared to the prior year period. The comp increase was driven largely by improved customer traffic and mid-single-digit transaction growth as we introduced our new, more strategic product selection and employed better allocation methods. Importantly, comparable store sales gained momentum as the quarter progressed, delivering sequential improvement month-over-month. That momentum has continued through the fourth quarter to-date, positioning us well for the holiday season. The markdowns taken in the second quarter certainly helped our Q3 sales results, particularly in September and August, contributing about 2 points of comp sales growth in Q3. That said, it's important to note that full-price sales were up versus last year in each month of the quarter, and we delivered our best comp performance in October as we exited our clearance event and delivered freshness to the stores. By the end of the third quarter, the markdown product was significantly sold through. As discussed in earlier calls, we've updated our processes to support more in-season markdowns, ensuring that our inventory aging is well managed. In fact, inventory aged 7 months or older made up only 3% of Q3 end-of-period inventory, a significant decline from prior quarters. During Q3, we closed four stores as part of our ongoing fleet optimization effort, bringing our quarter-end store count to 593, with CTx stores representing approximately 23% of our fleet. Gross margin dollars were $71.2 million, representing an increase of 3.9% compared to the prior year period. The gross margin rate was 39.8%, a 160 basis point expansion compared to the third quarter last year. The primary drivers of this year-over-year margin expansion were higher initial markup and lower shrink levels. As a reminder, we implemented several shrink mitigating tactics in Q1 and Q2, including upgraded store talent, updated equipment, revised policies, increased leverage of exception reporting to quickly identify issues, and a third-party restitution program. As Ken noted, we are addressing other opportunities called out by a consulting partner. While we're happy to see some improvement in Q3, we remain focused on improving shrink and driving toward a baseline rate that is more in line with our historic performance. As we've said before, this journey will take time. Moving to SG&A. Adjusted SG&A expenses totaled $74.6 million in the quarter, an increase of $3.7 million versus last year. About $2 million of that is from the store and corporate merit increases we put in place in Q1. The balance of the increase compared to last year, as well as the increase to prior quarters, was driven by a number of strategic costs aimed at driving future growth, which Ken detailed in his remarks. To be clear, although considered one-time in nature, those expenses are included in reported SG&A and were not adjusted out. We expect these work streams and their related expenses to be completed in the fourth quarter. Now, turning to the balance sheet. We continue to maintain a healthy financial position with a strong balance sheet, including no debt at the end of the quarter, no drawings on our $75 million revolver, and $39 million in cash. With liquidity of approximately $114 million, we can sufficiently fund our business initiatives. Our Board of Directors has recently approved the resumption of our share repurchase program, leveraging our existing $50 million authorization. We expect to begin repurchasing shares in the fourth quarter, utilizing a modest amount of our cash on hand to do so. Share repurchases will be part of our overall capital allocation strategy, along with funding operations and continuing to make investments to drive future growth. Total inventory dollars at quarter-end decreased 1.7%, made up of a refreshed assortment with new and exciting offerings. The market for quality product remains strong, and our teams are able to source off-price and regular products that excite our core customers and drive traffic. Many of our newest treasures are arriving in stores just in time for the holiday selling weeks ahead, and they're creating quite a buzz with our associates and customers. Now turning to our outlook. We are increasing our expectations for the second half of the year as follows. We now expect second half comparable store sales to be up low to mid-single digits year-over-year compared to our previous guidance of flat to up low single digits. Total sales for the second half are expected to be flat to down slightly due to the 53rd week last year and store closures. Second-half gross margin is expected to be approximately 39%, consistent with our prior outlook. Second-half EBITDA is expected to range from $1.5 million to $4 million above our prior outlook of $0.5 million to $2.5 million. We expect to end fiscal 2024 with approximately 590 stores consistent with our prior outlook. Finally, we expect to end the year with $60 million to $65 million in cash, within our prior outlook. Our updated year-end cash includes capital expenditures in the range of $14 million to $18 million, slightly higher than prior outlook on the pull forward of certain investments to drive 2025 improvement. While we don't provide quarterly guidance given the significant changes in our business model and the dynamic nature of our growth pattern, plus where we are in the fiscal year, we want to offer some thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up low to mid-single digits, with total sales down mid-single digits due to the 53rd week last year and closed stores. Q4 gross margin is expected to be in the range of 39% to 40%. SG&A in the quarter is expected to be approximately $76 million, including the final leg of the strategic expenses described earlier, plus store payroll to support higher sales and longer operating hours during the holiday season. Q4 EBITDA is expected to be in the range of $5 million to $7 million. Before I turn the call back to Ken, I want to reiterate how encouraged I am by the positive results we delivered in the third quarter. There's a renewed sense of focus and energy at Citi Trends as we follow Ken's leadership to make foundational improvements across the organization, addressing processes and creating disciplines as needed to pivot the business and position Citi Trends for improved financial performance. As I said earlier, we still have a lot of work to do. We will continue to push forward with our refined strategy and we look forward to updating you on our progress in upcoming calls. With that, I'll turn the call back to Ken.

Thank you, Heather. Well, in closing, I remain energized and optimistic about the future of Citi Trends. Our third quarter results are an indicator of the work we've done to create a solid foundation and set the company up for long-term success. In my time here, I've enjoyed working with our talented and highly engaged employees, and I look forward to further progress as we improve business performance and significantly increase shareholder value. With our acute focus on the core African American customer, intense leverage of competitive advantages, disciplined focus on operational improvements, and strategic investment in growth initiatives, I am confident we can build on our positive momentum and deliver a strong finish to fiscal 2024 and well beyond. Our holiday season is off to a great start, and I want to extend my thanks to the Citi Trends team for planning and executing such a great start to the holiday period. I want to wish all of our team members and shareholders a very happy holiday season, and I look forward to updating you on our fourth-quarter results in the new year. With that, I'll turn the call over to our operator Melissa to facilitate questions.

Thank you. Our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Congratulations, Ken, on the appointment, and congratulations to the team on the improved results. I wanted to start by just coming back to the improved sales trend. I think I heard that the start of Q4 here in November was up high-single-digits on comps. So I wanted to understand just in terms of the guidance for the quarter, if there's an element of conservatism in the low-single to mid-single-digit guide for the quarter, or if there are some aspects to what you're going to lap in December and January that lead to a bit more conservatism?

Thank you, Jeremy. I'll answer at a high level, and certainly my other preliminary details. First off, November was exceptional compared to what we were expecting as we put new and fresh product out. The business took off, and we're really pleased with customer response in November. Now, regarding the conservatism, there's a lot of holiday season ahead yet through December. The company had a reasonably good December last year in terms of comp performance. We're also against a tougher comp and appreciate the calendar shifts that are ahead. So, we're being a bit cautious about what December might bring, but still very optimistic around the overall Q4 numbers. Heather, would you add anything to that?

I think you nailed it, Ken. Jeremy, we will not be mad if that winds up being a conservative guide. I don't think you would be either. But to Ken's point, November was exceptional. Nothing really to comment on for the compare throughout the quarter. December, again, as Ken mentioned, was decent last year. What I'll add is there is probably more opportunity for us than usual in January. The comp last year was particularly soft due to a weaker tax refund season. So, we're set up and will capitalize on all sales opportunities. We're pleased with the way we started; many days are ahead.

Great color. Just to clarify, a little more color on December. What portion of your Q4 sales comes in December? Is that roughly 40% of the quarter, or maybe even slightly more?

It's slightly more, Jeremy. I'd give it about 50%.

Yes. Okay, fantastic. I want to come back to the investments you're making and maybe hone in on the shrink portion of those investments as well. It sounds like you've got a plan in place. You're getting some help from a third-party on some strategy to improve that. Where is shrink in terms of kind of the impact, or the drag on your margin today versus where it might have been five years ago? What's that gap we're looking to close? Is it 50 basis points, is it something more like 100 basis points? Any color you might be able to share on that. Secondly, what's the timeline for getting it back to what you'd consider a normalized level?

Yes, no, thanks for the question. I'll start and then Ken, you can fill in where I leave off. On your question about the headwind on a full-year basis, I would assign it somewhere between 50 and 70 basis points of drag compared to historical levels. On a quarterly basis, it's a little less. For Q4, compared to last year, it was about a 40% drag. I don’t think I’m stating that right. Hold on. No, it was actually an improvement from last year, sorry. It varies quarter-to-quarter. But on the full year again, it's a little less than a point. The fact that we're mentioning so many initiatives shows how focused we are on this issue. We are leaving no stone unturned. We have teams searching for every opportunity to improve shrink, and the addition of this consulting firm is to ensure we aren’t missing something. This is a detailed issue requiring attention at all levels of the organization, and we expect to see improvement modeled into 2025.

That's great color. Let me shift gears here and talk about your store fleet. Ken, as you’ve had a chance to explore the details a bit, you had some closures in Q4. You've still got some conversions to CTx format that are going to happen over coming years. How should we think about the store fleet on a go-forward basis? Should we expect the store fleet to continue to shrink until we feel confident we’ve scuttled the underperforming locations? Or is there a time when you'll have some momentum in the business and reopen the growth path for this story and potentially add locations?

Yes, for sure. Good question. Moving forward, I see the fleet in two ways. One, the refresh and remodels. About a third of our stores are not yet remodeled into the new CTx format. However, we still have a significant number of our higher volume stores to remodel. As we enter 2025, you can expect us to initiate a fairly aggressive remodel and refresh program, bringing our fleet up to standard. Where we've done remodels, we've seen higher than average comparable sales, so we are confident about customer response. Simultaneously, we're conducting studies in various markets, and we'll be resuming new store growth. We had to stabilize our business model, and that is beginning to take shape. We're examining key markets to command market share and some will be new. You can expect a return to growth in 2026 and beyond, with some starting in 2025. Regarding closures, it’s normal to clean and relocate stores to keep a fleet healthy. We will do lease maintenance where required and shift out of poorly performing locations. However, we have an aggressive growth strategy in mind now that we’re stabilizing our business model.

That's great color. Thank you. Just one clarifying question on the remodels. What's the range of cost in remodeling into the CTx format of store, and what's the average?

Yes, the range of costs. You'll recall Jeremy, that we reduced our CTx remodel cost by about half. Initially, the remodel was about $250,000 on average, but in 2023, we revised our remodel package, so the range is about $85,000 to $130,000. The average is around $110,000.

Great. Congratulations and best wishes during the holiday season.

Thank you, Jeremy.

Thank you, Jeremy.

Thank you. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Hi, thanks, guys. A lot of initiatives I can ask specifically about SG&A, etc., but I'll encompass it all in one question. What is the right long-term EBITDA margin for this business? Prior to COVID, it was between 5% and 6%. We won’t think about the COVID years, probably not relevant, but obviously much lower now. Ken, where do you see long-term EBITDA margins for this business?

Good question, Mike. As I joined the business, one of our primary goals is to return our EBITDA back to those historical levels you mentioned. We see a path even beyond that. You can indeed think of those historical levels, 5% to 6%, as part of our near-term plans.

Okay. To follow-up on that, and as part of that, looking at the SG&A specifically, if you pull out the one-time expenses, I think you were at about $73 million this quarter. Next quarter you think you'll be at around $76 million. In the past, quarterly SG&A was usually around $70 million. I get why it might be permanently higher because of inflation, etc. But is that $73 million? It sounds like it's probably somewhere between $73 million and $76 million. What do you think the long-term quarterly SG&A should be for this company?

Yes, Mike, I’ll take that one. $70 million was our run rate in 2023. Recall that in our Q4 call, we talked about increasing that rate for merit increases putting it in the $72 million to $73 million range. For the go-forward, I would say $73 million per quarter is a good earmark, flexing up accordingly to sales flows quarter-to-quarter.

Mike, I might add to that. One thing about the SG&A base is it's highly fixed. As we grow, we should see some significant leverage. Just appreciate that the number Heather mentioned is correct, but remember the good leverage on that as we grow our top line.

Yes, that's the whole idea. Just trying to figure out what that fixed cost number is, and then we can figure out the leverage. I'll ask this one. Ken, you've had a lot of turnaround experience in various places. Can you compare this to some of the other turnarounds you've led? What’s different, what's easier, what's harder? What have you learned from past turnarounds that you're applying here?

Yes, for sure. The quick notes: Common is getting the company refocused on the core customer, understanding who that is, and adjusting the assortment accordingly. This time, the unique factors include operational foundational practices that were broken or disconnected, requiring significant work. But the team's effort to tackle these issues to run a consistent business model has been commendable. The positive surprise has been the quick response from customers to our changes. Customer traffic typically takes time to shift, but due to our neighborhood locations and strong brand affinity, we've seen a rapid response. That's why I'm energized by our November performance, indicating a solid step forward in our strategies.

Awesome. Great. Appreciate the call.

Thanks, Mike.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Seipel for any final comments.

Thank you, everyone. We appreciate your time and interest in Citi Trends today and wish everyone a very happy holiday season. Thank you and goodbye.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.