Earnings Call Transcript - CTRN Q3 2023

Operator, Operator

Greetings, and welcome to the Citi Trends Third Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, November 28, 2023. I would now like to turn the conference over to Ms. Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee, Senior Associate

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' third quarter 2023 earnings call. On our call today is our Chief Executive Officer, David Makuen; 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 at www.cititrends.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 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 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 Makuen. David?

David Makuen, CEO

Thank you, Nitza. Good morning, everyone. And thanks for joining us today on our third quarter fiscal 2023 earnings call. I will begin our call with highlights of our third quarter performance. Heather Plutino, our Chief Financial Officer, will then elaborate on our detailed financial results and our outlook. Then we'll open the call for your questions. In the third quarter, our team continued to advance our strategic initiatives while navigating a very challenging selling environment and controlling the controllables, like we always do. We successfully managed the middle of the P&L as we registered a strong gross margin of 38.2% and kept operating expense dollars essentially flat compared to the prior year. That said, our third quarter top-line performance did not meet our expectations, with sales held back more than we expected by the ongoing challenging macroeconomic backdrop. Our primarily low-income customer base, consisting mostly of families earning $45,000 and less per year, is being very selective and purchasing much closer to need as they navigate higher costs of living, a buying pattern further impacted by unseasonably warm weather throughout the quarter. Our third quarter comp sales decline of 6.2%, while similar to the prior quarter's run rate, did benefit from the intentional inventory rebuilds that I referenced during our Q2 earnings call. In particular, rebuilds in Home, Men's, Big Men's, and Beauty were embraced by customers, thanks to significantly better inventory levels, enhanced assortments, and better values than last year. Additionally, our Ladies business benefited from excellent preseason trend forecasting that showed up in one of our best assortments ever. As the quarter unfolded, we experienced strong and consistent in-store conversion, signaling that many components of our trend right assortment for all ages continue to resonate with our customers. Our total sales were held back equally by stubborn traffic and basket trends. Contributing to these trends was meaningfully warmer weather throughout most of the quarter across a large portion of our fleet. Additionally, in our latest research, it's clear that rent, utilities, food, and gas are still real issues for our customers, who top out at about $55,000 annual household income, with 50% of customers earning $25,000 or less per year. Our back-to-school and back-to-college business felt this pressure as parents and students bought less during a volatile financial environment, coupled with persistent heat waves that kept kids in shorts and short sleeves far longer than normal, therefore curtailing historically strong selling of Fall goods. Even though we fell short of our quarterly expectations, we continued to play offense. We began testing a more robust marketing strategy in a few markets to drive traffic and deeper customer engagement from current lapse to new customers, and we are very pleased with early test results and are planning to have digital and radio marketing play a bigger role in our future. Additionally, our remodels in the quarter contributed strong sales lifts, more evidence that when we refresh our store experience in established markets, our customers' excitement translates to better traffic and basket trends. Lastly, our focus on inventory and margin management in the face of discretionary sales headwinds continues with a steady hand at the wheel, ensuring we flow to stores the appropriate amount of newness 2 to 3 times per week. With many important selling days ahead of us, I am pleased to report that we've experienced improved top line momentum fourth quarter to date. Our customers are loving our Ready. Set. GIFT! campaign, supported by a timely setup of our holiday floorset and a wide offering of gifts, including great toys, mega Bluetooth party speakers, the most amazing fragrance gift sets, all the cozy a person could want, and of course, so much trend right clothing accessories and home for all ages, all at incredible values. We are also ready with must-have fits to help our customers show up to their holiday gatherings with style and confidence. We know for sure that our customers show up in stores for the big moments in their life and this holiday will be no exception. Our stores and staff are energized, and we feel really good about our jaw-dropping prices and appropriate inventory position. Notably, this year's extra selling day between Thanksgiving and Christmas and resulting super weekend is perfect for last-minute shopping, a hallmark of our customers. I'm confident we are well positioned to win the holiday season, and we look forward to updating you on our progress during our fourth quarter call. Importantly, the strength of our balance sheet with total liquidity of $135 million at quarter end with no debt provides us the necessary flexibility to navigate the dynamic consumer environment while maintaining our focus on our strategic initiatives as we seek to create long-term shareholder value. I'd like to take a moment to express my gratitude to our teams for their unwavering dedication in serving our African American and multicultural families across the United States in the heart of their local neighborhoods, making them feel welcome each and every time they visit, particularly during the busy holiday season. Before I pass it on to Heather for a review of our third quarter results and a discussion of our outlook, I want to quickly review the steps we are taking to improve our top line performance. During the quarter, we made significant progress against our four strategic initiatives. To remind you, they are: first, driving comp stores productivity; second, managing inventory and maximizing margin; third, controlling SG&A expenses and leveraging our balance sheet; and fourth, executing technology enhancements. In addition to these initiatives, we are taking decisive actions to drive top line sales for the remainder of 2023 and into the first quarter of 2024. Examples include: first, marketing testing. As I mentioned, during the third quarter, we began testing a more robust marketing strategy in a few select markets. Early results are promising, and we have advanced this marketing effort to approximately 20% of our fleet for the holiday season, the first time in Citi Trends' history. Next up, optimizing inventory. We are still bullish regarding the ongoing benefits of building optimal inventory levels for specific categories that offer unique items and upsides at the best values. Many of these categories, such as Home, Big Men's, and Beauty were not rebuilt during last year in spring. So we're excited to see continued momentum during holiday and continued traction when we turn the corner into 2024. Third, delivering a differentiated store experience. We are laser focused on improving our in-store experience. This includes heightened attention towards visual merchandising, accentuating newness, and putting together head-to-toe looks. In essence, creating a specialty store buy with an everyday emphasis on style, quality, and affordability. Our customers think of us as a guide or approach, providing all ages with today's trends at totally gettable prices. Lastly, in the list of quick, decisive actions, improved Spring '24 setup, we are looking forward to the Spring selling season. And from a product standpoint, we are highly focused on flowing newness on a regular basis while delivering our Spring assortments to our warmer weather stores earlier than last year. Our decision to launch Spring assortments earlier was influenced in part by our new ERP system launched in the early portion of the third quarter. This is a significant upgrade from our previous ERP system and allows for more dynamic analytics, product allocation, and assortment planning. Our teams across the organization are benefiting from this new and exciting tool. Looking ahead to next year, we believe the new ERP system will gradually improve our planning and allocation functions and lead to more precise allocations of the right product to the right store at the right time. As you can hear, we are not standing still. We have highly engaged loyal customers that shop us frequently for curated items made for them, trends, fashion, and basics for way less spend and lots of complementary accessories, home, and impulsive items that they just can't resist. I have met with customers during the last quarter in the heart of our most important neighborhoods, from Jackson, Mississippi to Birmingham, to Tuscaloosa, to Jacksonville, to Savannah, to Charleston, to Atlanta and beyond. And I can assure you that our customers love their Citi Trends. Our job is to deliver goods aligned to their trend-based wants and needs at values that fit within their budgets. It's what we know how to do for our core African American customer base. With that, I'll turn the call over to Heather. She will discuss our third quarter results in detail as well as our outlook. Heather?

Heather Plutino, CFO

Thank you, David, and good morning, everyone. As David mentioned, our third quarter results were softer than expected, given the difficult macro environment that continued to pressure our customers, coupled with unseasonably warm weather. The quarter was highlighted by a healthy gross margin of 38.2%, flat to the second quarter, continued expense control, and inventory that remained in good shape throughout the quarter as we made progress on improving in-stocks in targeted merchandise categories. We finished the quarter with a strong balance sheet that provides us with the financial flexibility to continue navigating the current uncertain environment. Importantly, we are very proud of our team's execution against our strategic initiatives that will continue to drive our business forward as we focus on driving profitable growth ahead. Turning to the specifics of our third quarter financial results. Total sales for the quarter were $179.5 million, a decrease of 6.7% versus Q3 2022. Strong shopper conversion throughout the quarter once again served as proof that our assortment is resonating with our customers. Basket, while still under pressure versus last year, showed trends consistent with the second quarter. Third quarter comp sales decreased 6.2% compared to last year. Gross margin remained strong in the third quarter at 38.2%. While flat to the prior quarter, we did see contraction versus prior year, driven primarily by higher freight expense as we moved more cartons through the network. The decline to last year was also impacted by higher shrink with a small group of stores accounting for most of the impact. Through cross-functional collaboration, we remain keenly focused on minimizing the impact of shrink. SG&A expense dollars remained well controlled and flat to prior year at $69.7 million for the quarter or $70.8 million as adjusted. Lower sales in the quarter drove adjusted SG&A deleverage to a rate of 39.5% of total sales. Operating loss was $6 million in the quarter or $7.2 million as adjusted compared to operating income of $31.6 million or $2.4 million as adjusted for the impact of a sale-leaseback transaction in Q3 2022. Net loss per share was $0.47 or $0.56 as adjusted versus diluted earnings per share of $3.02 or $0.24 as adjusted in the third quarter of fiscal 2022. During the third quarter, we closed five stores and remodeled seven stores, bringing our total store count at the end of the quarter to 606 and our year-to-date remodel count to 15 stores. Now, turning to the balance sheet. Total inventory dollars at quarter end increased 0.9% versus Q3 2022 as we stock the stores for the holiday season and continue to rebuild certain categories. We remain comfortable with the level and makeup of our inventory as we enter the holiday gift-giving season. As David mentioned, our stores are geared up to delight customers with our Ready. Set. GIFT! campaign. Additionally, we are pleased with the buying environment as we procure attractive merchandise for Spring 2024 for our value-seeking customers. Finally, we ended the quarter with $135 million of liquidity, made up of approximately $60 million of cash, no borrowings under our $75 million revolving line of credit, and no debt. Now turning to our outlook. As we've discussed in prior earnings calls, our previous guidance assumes improvement in the second half of the year, driven primarily by our initiatives, plus slight economic relief for our customers. While we still believe in our initiatives, what we've learned is that our customers remain under more pressure than our expectations assumed, are shopping closer to need, and are reducing their average spend per basket. We now believe that this dynamic will continue for the low-income families that we serve through the balance of the fiscal year. As a result, we are updating our outlook as follows for fiscal 2023: Total sales for the year are expected to be down mid-single digits compared to fiscal 2022; full year gross margin is still expected to be in the high 30s; full year EBITDA is expected to be in the range of $1 million to $7 million; full year capital expenditures are expected to be in the range of $17 million to $20 million; and year-end cash balance is expected to be in the range of $80 million to $90 million. While we don't give quarterly guidance, given where we are in the year, let me help clarify what this revised annual guidance implies for the fourth quarter. Fourth quarter total sales are expected to be approximately flat to up low single digits versus Q4 2022. As a reminder, the fourth quarter this year includes 14 weeks compared to 13 weeks last year. Comp sales for the quarter, which are measured on a 13 to 13 week basis, are expected to be in the range of down mid-single digits to flat to last year. EBITDA is expected to be in the range of $9 million to $15 million in Q4. In closing, there is no doubt that this is a difficult selling environment and that our customer is under pressure. While we aren't satisfied with our top and bottom line results in the third quarter, we remain focused on our strategic initiatives while carefully managing our expenses and inventory investments. Doing so will allow us to continue navigating the current environment alongside our loyal customer base and, in the longer term, will fuel our ability to drive the full earnings potential of this important brand. With that, I'll turn the call back to David for closing comments.

David Makuen, CEO

Thanks, Heather. As a brand and a company, we're really proud of our connection to our neighborhoods, employing and serving true locals with a high-quality experience. During our 77 years of operation, our differentiated positioning in markets where others aren't, including the vast majority of stores located within 5 miles or less of our core customer, has fueled our ongoing presence in more than 250 amazing neighborhoods in 33 states. Importantly, our strong and expanding partnerships with our vendors continue to supply our customers with a compelling merchandise offering that drives our customers' loyalty and continued engagement, even in a challenging environment. As we look ahead, we will continue to execute against our key strategies in support of our Citi Life purpose, which is to live bold, live proud, respect all. Perhaps most vital is our ability to help our customers show up for whatever comes their way and bring opportunities to life at prices that don't break the bank. We continue to be excited to drive the full potential of our brand as we focus on driving long-term profitability and shareholder value. Before I turn the call over to the operator, I want to again extend my gratitude and appreciation to our Citi Trends team. It is their execution that drives our strategy forward and reinforces my confidence and excitement in our future. Happy holidays to all. We are now ready to take your questions. Over to you, Frank.

Operator, Operator

Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

Jeremy Hamblin, Analyst

So I wanted to start by getting an understanding of the cadence of comps that you saw throughout the quarter. You noted on the August call that July was the best month that you had in Q2, and I wanted to get a sense, given that you missed your own expectations. Does that imply that was September worse than you expected or October worse than you expected? Can you provide a little bit more color? And then also just to get a sense for what you're seeing thus far in Q4 on a same store sales basis?

Heather Plutino, CFO

I will address part of that question. The cadence of comps in the third quarter was quite consistent. The variations between the months were relatively narrow and aligned well with the overall results from the second quarter. While July was our best month in the second quarter, the performance in the third quarter was similarly tight and in line with the overall second quarter results. When we analyze those months more closely, it becomes clear that abnormally warm weather impacted our sales; when the weather was not as favorable, comps improved. We've noticed persistent challenges with traffic and basket trends throughout the quarter due to the factors we mentioned earlier, such as continued pressure to buy only what customers needed. This aligns with what we've discussed in previous earnings calls: the necessity of purchases often relates to weather changes for our customers, not exclusively for special occasions. For instance, during back-to-school season, parents focused on buying only what their children needed. If kids were returning to school in hot weather, they would wear the same summer clothes, which we noted affected our sales for the fall season significantly throughout the quarter.

David Makuen, CEO

On the Q4 question, yes, I mean, the headline really is like we stated in our release, improved momentum has been really encouraging, driven by a really timely setup of our gift presentation kind of within the context of our Ready. Set. GIFT! holiday campaign. We were in boxes by late October, meaning in our stores with the right assortment, that's driving the momentum. And we've seen some decent weather snaps throughout some, not all, of November. And so that's all contributing to the improved momentum, giving us a nice run into the rest of the quarter. So we're excited about what we're seeing.

Jeremy Hamblin, Analyst

So just coming back then to what you saw in Q3. So if comp trends were relatively steady, then you were expecting more of an acceleration on comps than what you got and you think maybe that didn't happen because of weather or maybe was a macro maybe more of a factor? Just trying to understand the difference between your expectation and the end result.

David Makuen, CEO

I believe both factors were significant, Jeremy. As we mentioned during the Q2 call, we entered the back-to-school season in a strong position, much like the setup I referenced for Q4. We had confidence in our offerings, values, and the variety across all age groups. However, what impacted the quarter was the weather and the macroeconomic conditions, which were more challenging than we expected. As we've stated before, we cannot predict the macro environment; we can only estimate if it will improve or worsen. In this instance, it presented considerable challenges. One key metric we've shared previously is that our conversion rates remain exceptionally strong. For customers who have the means to shop, we maintain a high conversion rate, which has been consistent for the past 24 months. However, as Heather pointed out, we are facing persistent traffic issues along with basket pressure, making it more difficult to secure every dollar spent. We are achieving conversions and transactions, but basket pressure remains a challenge. It's influenced by both the unusually hot weather and broader economic factors. While I can't provide exact percentages, both elements are definitely being felt.

Jeremy Hamblin, Analyst

I want to return to the guidance for Q4. Is it suggesting a decline of 1 to 4 percent in comparable sales? That's essentially what I understand your expectations to be. There is also some added complexity due to the extra week in Q4.

Heather Plutino, CFO

Well, comp again, is on a 13 to 13 week basis. So that's the cleanest way to look at it, Jeremy. And as I mentioned in the prepared remarks, we are expecting down mid-single digits to flat in the quarter from a comp perspective.

Mike Baker, Analyst

I have a few follow-up questions. For the fourth quarter, does the guidance of a decline in the mid-single digits to flat suggest an improvement as the quarter progresses? Additionally, could you remind us of the monthly comparisons for the fourth quarter of last year? Are these comparisons becoming easier or harder? If you're anticipating an improvement, I assume that since shoppers are purchasing closer to their needs than last year, sales are expected to increase as we approach the holidays. I'd like to confirm that.

Heather Plutino, CFO

The Q4 guidance anticipates improvements, moving from mid-single digits to flat compared to the down 6 we experienced in Q3. Looking at the monthly forecast, it’s clear that the timing within the quarter is significant. November is crucial due to the lead-up to Thanksgiving, where we expect strong sales, particularly because of the merchandising initiatives that David discussed. Our customers tend to shop on the Wednesday before Thanksgiving to prepare for their events, which is an important day for us. As we approach Christmas later in December, that period also becomes key. The focus is indeed on the timing within the quarter. Furthermore, compared to last year, we saw a holiday season that did not meet expectations, providing us with opportunities for improvement. I don't see any significant headwinds or tailwinds; just room to enhance our performance. David, do you have anything to add?

David Makuen, CEO

Yes, Mike, I think the last thing I'd add, good to hear from you, is these rebuilds that we've been talking about give us some added fuel for the quarter. And so there's nothing really abnormal from a lapping perspective I'd call out, but I would give you confidence and it gives us confidence that there's a bunch of what I'd call added firepower to Q4 that weren't kind of in the mix last year as strong as we would have wanted them to be. Example, our Home business was weaker last year than this year from an inventory quality and value standpoint. So we believe we're much better positioned in that very high indexing holiday category, because we embed in that category our gifts and our toys and our throws and all the things that people gift. So that's what gives us good confidence in being able to improve our trend from Q3, as you can tell, and as it's framed in the guide.

Mike Baker, Analyst

A couple of more questions. One, within the gross margin commentary, nothing on markdowns or clearance or anything like that. Can you just give us a sense as to full price selling or if with sales being a little bit weaker this quarter, is there any kind of markdown risk or how that may have impacted gross margins on a year-over-year basis?

David Makuen, CEO

I'll address that, Mike. Essentially, Heather pointed out shrink and freight, which we've managed effectively, as you can tell from her earlier response. These were the main factors contributing to the slight decrease in gross margin. From an inventory markdown perspective, the team has executed well in making timely adjustments. It's been somewhat challenging, particularly since Fall merchandise has been selling slower than we prefer, especially in Q3. However, we are responding appropriately at the right moments instead of delaying our actions. Overall, there was nothing significant to report in Q3; it aligned with our expectations.

Heather Plutino, CFO

And in line with prior year.

Mike Baker, Analyst

One more, if I could. The new marketing initiatives. Any more color on that? What kind of sales lift is it driving? And what's the cost associated with that? Your SG&A has been pretty consistent around $70 million a quarter. Does that go up because of the marketing initiative or do you have to see the comps work out before you invest in that? Just how should we think about that dynamic?

David Makuen, CEO

First, regarding our test base for Q3, it's too small to matter in terms of SG&A, so there's no need for concern there. However, what the test revealed is our ability to attract both new and returning customers. We observed increases in traffic and conversion, which was encouraging, and there was a slight uptick in basket size per customer, indicating that we can engage our audience in well-established markets. I want to emphasize that these tests took place in longstanding legacy Citi Trends markets, primarily African American and diverse communities, where we aimed to evaluate our strategies. We are seeing positive trends, which led us to expand our efforts to about 20% of the chain for Q4. This figure is not large and is included in our SG&A. What excites me is that we are planning to implement more of these strategies in Q1, and I’ll provide more details on that soon. We are optimistic about re-engaging lapsed customers and encouraging existing ones to shop more frequently during and after the advertising exposure period. There's more to share, but we're really excited about the potential for improving our top line.

Mike Baker, Analyst

But just to be specific, is there any reason for an increase in SG&A, particularly in marketing? What kind of dollar investment is included in that SG&A for marketing?

David Makuen, CEO

We don't release that level of detail, Mike. But I can tell you that we are self-funding it from our expected SG&A budget for Q4. It's not a significant amount that would disrupt the overall SG&A.

Heather Plutino, CFO

70 range is still fine.

Operator, Operator

Our next question comes from Chuck Grom with Gordon Haskett.

Chuck Grom, Analyst

I just wanted to follow up on Mike's question, just on the quarter-to-date. You talked about a lot of improvement and you're not alone, a lot of retailers called that out at this point. I'm just curious if you guys are in that range, that down mid-single digits to flat. And I believe your holiday comp last year was down 17.5. So I just wonder if you could just confirm that for us.

David Makuen, CEO

Yes, we won't divulge an exact number, but what I can leave you with, Chuck, is that it is within the negative 5 to negative 1. So it's certainly shown improvement versus our run rate for both Q2 and Q3. And we're cautiously optimistic about December being a strong month, based on some of the answers I provided, more firepower from the inventory quality and availability standpoint, even better values than last year. And this phenomenon that we've seen largely all year long where our customers are so tied to these family moments. So we're excited for what's to come. I think the one wildcard, which I know you study a lot, Chuck, is weather. We've definitely seen, as you've heard and can ascertain to our Q3 comments, that our customers are more than they used to be sensitive to the weather, in part tethered to their economic status. They're just holding off until they really need something. So I would asterisk Q4 a little bit with if weather goes the wrong way, there will be an impact. But at the same token, we know that particularly in the last two weeks of December, our customers come out in droves, whether it's 70 or 20 degrees out, and we're ready for them. So that's how I describe kind of the back half for the rest of the quarter.

Chuck Grom, Analyst

And then just looking ahead to Spring, I wondered to see if you guys could talk about the opportunity from the new ERP system and the product and inventory product you're going to be rolling out in terms of the newness that you referenced as one of the four sales drivers for next year. So if you maybe just dive into that a little bit more.

David Makuen, CEO

I think, A, our ERP system went live end of August, as we told everybody it would. And we've been learning and using adapting to the new system, which is pretty normal, call it, change management. And at the end of the day, what we're discovering is it's going to deliver on many of the commitments we made to all of you starting back in the last first quarter of this year. And I'll highlight a couple, Chuck, because it relates directly to your Spring question. First off, we've got much deeper analytics. I've been touting this ever since we announced our plans to do a new ERP system. And the analytics are powerful and insightful and enable far better action. Second, we're able to really dissect and define our chain differently. I've mentioned in this call prior that we've been more accustomed to peanut buttering a lot of our allocations across the chain. And our chain is pretty dynamic. We've got stores that are really hot, we've got warm, we've got kind of cool, and then we've got cold within our 600-plus stores. And they all need a little bit of love from an allocation standpoint based on the climate. And so this system allows us to get at a much finer level of detail around all of that and allow us to better allocate back into the demand that we see in those different climates, as an example. So our allocation would be number three, being more precise and accurate about where things go at what time. And so that's a perfect lead into setting up our warm and hot stores, which we have a lot of, it's well over 40% of our fleet. We can be more accurate in sending them the right goods that they'll more likely adopt in as early as late December or during as early as late December and certainly into January and February. So what this all leads to is it sets us up for the tax refund season in mid to late February. And we're excited to comment on that because we're pretty bullish on all of the things we're doing across that list of four items, Chuck. It's going to have marketing, it's going to have different inventory optimization, it's got to have better experience, and it's going to have more appropriate product for the climates that we serve. So a lot of that will be additive, we believe, in contributing to a strong Q1 of '24 as we look into the future. Does that make sense?

Chuck Grom, Analyst

Yes. No, it totally does. It seems like a big opportunity. My last question is for Heather. I'm just looking at the '24. And just in the scenario that the comps stay, call it flat to down, just the opportunity to get EBIT margins, not EBITDA, EBIT margins back in a positive territory. Can you just maybe speak to that opportunity? And then as a follow-up, how should we be thinking about new store growth in '24, the number of CTX remodels, which are clearly good? That's my final question.

Heather Plutino, CFO

We're not revealing anything really about '24 right now. But in the spirit of being helpful, it really is all about top line, right? So I know you asked that we say that comp performance stays the same, but that's not our plan. Our plan is that top line improves. And as we've talked about many times in the past, that's the real juice here. You get the top line going, the flow-through to get that EBITDA margin and EBIT margin is there. We have very limited variable expenses relative to other retailers. We believe we have a healthy margin. So the flow-through is really strong. So I'm going to tell you that really it's all about the top line. And that's why driving comp store productivity always is number one when we talk about our strategic initiatives. And then new stores, it's too thin to say what we're going to do with new stores in 2024. But I will say that remodels, you know that we like our remodel cadence, we like what we see from remodels. We get a nice lift, mid- to high-single-digit lift after the remodel. It's important to us, it's important to our store associates and it's important to our customers, right? They get excited about what have we done to refresh their Citi Trends store, and that buzz is real and it shows up in the top line, again, our most important lever, top line. So more to come on '24, but that's what we're thinking right now.

John Lawrence, Analyst

David, I don’t want to overemphasize the weather issue, but since the stores are located in the South, is it correct that when you analyzed the planogram in relation to the weather, you found that you only had about 10 to 14 days of merchandise that was aligned with the weather conditions during the quarter?

David Makuen, CEO

John, you're referring to kind of an estimate on the number of days, weeks in the quarter that was more suitable to sell Fall goods, is that what you're asking?

John Lawrence, Analyst

Yes, that's correct.

David Makuen, CEO

You're not far off. And we made this comment in the prepared remarks. The weather impact was felt across the entire quarter. I mean, we had stores in the heart of our chain in Louisiana, Texas that were 10, 15, 20 degrees hotter for prolonged periods of time with zero rain, people were staying inside, et cetera, et cetera, or just wearing short sleeves and shorts all day long. And so when the weather snapped, which you got your math generally right, John, it was a couple of weeks maximum that snapped, and we saw an appropriate, almost immediate bounce back to a much better trend than the quarterly trend. And that's what prompted me to share that comment in the last question from Chuck in that the sensitivity is even more heightened. But I really believe that's brought on by a lot of macro, too. But the weather is certainly not helping to be in our favor.

John Lawrence, Analyst

My observations in stores showed that the NBA and NFL hoodies didn’t start selling well until the first week of November when the weather turned. Once it became appropriate for the season, they sold quickly and became the hottest item in the store. Can you help clarify if I’m understanding this correctly? When customers feel the need to buy a hoodie, does that influence them to make additional purchases in the store for their homes and other items due to that need?

David Makuen, CEO

John, thank you for your continued support in our stores. Regarding your second question, I don’t have much to add to your observations. We are very confident in our product selection. Our ladies' assortment is currently more on trend than anything I have witnessed during my time here, and I could say the same for other categories as well. The men's section is another shining example. We are excelling with team and branded apparel, and we have an excellent selection tailored for the African American customer. Our inventory is well positioned. You’re right; when the weather turns, customers flock to our stores, causing our conversion rates to increase even from already elevated levels. It’s true that all categories benefit; guys don’t just come in for men’s items but also explore and purchase various products, adding to their baskets, similar to moms and young singles from Gen Z and millennials. We monitor this activity closely, and your insights are spot on. As we progress into Q4, I’ll connect this with my comments for November. We're entering a crucial period as we just wrapped up Black Friday and our events surrounding it, and we are transitioning into a strong gifting phase. We've lowered prices on many items, with reductions of $3, $5, and $10 on like-for-like products. Our team has excelled in addressing the pressures our customers face, presenting compelling options within our assortments that offer unbeatable value. We believe this will enhance customer engagement and continue to boost our conversion rates, helping to fill shopping baskets for the remainder of the quarter.

John Lawrence, Analyst

Just the tough subject, and I'll leave it alone, but the shrink situation. I know, as you're indicating you're all over it. But is there any parts or any stores that have gotten significant or difficult enough that you might consider closing?

Heather Plutino, CFO

We're not there yet with shrink, and I appreciate your question. While other retailers have made tough decisions based on their environments, we have bigger factors to consider if we decide to close a store. Shrink is something we are very aware of, especially in places like Memphis. Although external issues occur, we're not experiencing the same level of smash-and-grab incidents as others, and we hope that continues. We do deal with smaller incidents occasionally, but it's not widespread. Our focus is on what we can control. We emphasize controlling the controllable. To manage shrink effectively, we ensure we have the right team members who care about the Citi Trends family and utilize reporting to help us. We also collaborate with local law enforcement to understand our environment better. In summary, shrink is not driving our decision to close stores.

John Lawrence, Analyst

And last question for me. David, you've mentioned the rebuilds. A few months ago, you talked about opportunities for freshness and new brands in the toy sector. I assume that continues to be the case across the platform?

David Makuen, CEO

I'm talking about gifts, and you're absolutely right, a good memory. We saw an opportunity to get into the toys business earlier, like I mentioned in my comments, set it up earlier for the customer to consider and gravitate to. And we have a little thing called layaway, and layaway is a meaningful part of our sales during Q4. But what the customer does is they come in, in October to even the first couple of weeks of November and they go, oh, that's a pretty cool African American Barbie play set, as an example, or that's a really cool remote control race car. I'm going to put that and a bunch of other stuff on layaway and come back and get it in December. And so we rely pretty importantly on that, I'll call it, pre-consideration, I'm going to put it in layaway. I'm going to put a little down payment on it, and I'm going to pay it off, pick it up in time to put it under the tree in December. So you're absolutely right, rebuilding and getting those, I'll call it, layaway friendly businesses out on the floor earlier is really germane; it's a part of the intentional rebuilds that we've been doing. So we're looking forward to a good toy-selling season as a result.

Operator, Operator

Mr. Makuen, there are no further questions at this time. I will now turn the call back to you.

David Makuen, CEO

Thanks, Frank. Thanks, everybody, for joining us today. Have a great holiday. See you at the next one. Bye-bye.

Operator, Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.