Earnings Call Transcript - CTRN Q2 2022

Operator, Operator

Greetings, and welcome to the Citi Trends Second Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Wednesday, August 24, 2022. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee, Senior Associate

Thanks, Rita, and good morning, everyone. Thank you for joining us on Citi Trends second quarter 2022 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 AM 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 second quarter fiscal 2022 earnings call. Before I provide an overview of our second quarter performance and the strategic direction we are taking the business in the near-term as a result of the current challenging macro environment, it's important that we provide you with a high-level view of our customer base. After that, Heather Plutino, our Chief Financial Officer, will then elaborate on our financial results and a few other items related to our outlook. To begin, let me be fully transparent, our customers are facing one of the most challenging economic environments in history, with inflationary pressures across their household necessities, including rent, utilities, food, and gas, outpacing their wage growth. Our lowest income household bracket, those with an annual household income of $25,000 and below, accounting for approximately 50% of our customer base, have been hardest hit from these extreme macro pressures. I have personally visited many neighborhoods and talked to many customers and associates to learn just how much pressure they are feeling. Even though tough times persist, what's most important to share is that our customers believe that our store experience is more engaging than ever, and our city crew delivers on our purpose each and every day by welcoming their existing and new customers like a friend, helping them show up for whatever comes their way. With this backdrop acknowledged, what we are clearly seeing is a decline in the number of discretionary shopping visits. But when they do visit Citi Trends stores, our conversion rates are extremely strong and have been consistent week to week since the beginning of the year, plus our average basket size is holding up nicely compared to last year's record stimulus-aided spending levels. Given these trends, we are confident that our customers remain loyal to the Citi Trends brand and our assortments for the entire family continue to resonate. Having said this, we are committed to doing better and controlling what we can to meet the needs of the valued customer, which our model does quite well. Our BUY team, in particular, is on their toes, chasing extreme value trends across our six categories. Hard at work, they have identified opportunities to capture more market share, particularly in our ladies and footwear categories by adapting to changing consumer trends. Additionally, we continue to play offense by introducing new or expanded assortments that I had mentioned previously, including the continued rollout of our Q line, adding more everyday essentials to the mix, building a ladies missy size and assortment, and capitalizing on the strength of our casual men's business. Overall, we remain hyper-focused on driving healthy sales, managing inventories, and maximizing margin to improve our operating profit. On the expense side, our number one priority is to lower our SG&A expenses to align with the lower sales expectations. As the second quarter unfolded, we couldn't adjust expenses overnight, but we aggressively created a plan and have already taken action to rightsize our expense structure and build efficiencies across our business functions, assuming a lower sales base brought on by macro conditions. Let me assure you, we are taking swift and aggressive actions on approximately $10 million in expense savings for the second half of 2022, or about 7% of total SG&A expense, including a 10% staff reduction. We wish the very best to the associates impacted by this difficult decision, and truly appreciate their contributions. Overall, we are controlling what we can control, and we are on track to significantly reduce SG&A deleverage versus both 2021 and 2019 during the second half. Before I turn it over to Heather, I want to highlight a few metrics about our business during the second quarter and year-to-date. Comparable transactions versus the prior year sequentially improved 510 basis points from Q1 to Q2. Our average basket contracted only slightly by 5% against last year's outsized growth of 35% compared to Q2 of 2019. We maintained a high gross margin at 38.1% for the quarter and 38.6% for the first half. Our inventory remained in excellent shape with an average in-store dollar decline of 13% compared to 2019 and a 26% decline on a unit basis. We ended the quarter with no debt, $28 million in cash, and $103 million in liquidity. With that, I'll turn the call over to Heather, our new CFO, who I am extremely pleased to have as a member of our leadership team. She will discuss our second quarter results in detail as well as our updated guidance for the balance of the year. Heather?

Heather Plutino, CFO

Thanks, David, and good morning, everyone. I'm very honored to be part of the Citi Trends leadership team. As you can imagine, it's been a busy and productive two months since I joined in late June. I've been immersed in getting to know the business, meeting our corporate, stores, and distribution center teams, as well as our customers. I have quickly gained great admiration for the Citi Trends business model with its unique value proposition, servicing the apparel, accessories, and home needs of African-American and Latina families, and its deep commitment to making a difference in the neighborhoods we serve. I'm excited to take on the CFO role and will leverage my background and experience in retail to identify opportunities to further transform the business model as I believe the potential for growth remains significant. Now turning to our results in the second quarter and the first half of the year. As David mentioned, the macro environment remained difficult throughout the quarter, with persisting headwinds from extreme inflationary pressures impacting all of our customers, but most notably, our lowest household income cohort. The impact from inflation has been deeper and longer lasting than we expected. Importantly, our teams have remained nimble and focused, delivering strong margin in the quarter, and working tirelessly to rightsize our expense base. Our balance sheet is healthy, and we ended the quarter with ample cash, well-managed inventory, and our $75 million revolving line of credit remains unused. In addition, as mentioned in our earnings release, we expect to close a sale leaseback transaction in our Roland, Oklahoma distribution center in September, adding $36 million of cash to our balance sheet, all of which positions us well to continue to navigate this dynamic operating environment while remaining focused on our strategic initiatives. Now let's turn to specifics of our Q2 financial results. As mentioned in our earnings release, we are comparing select operating results for the second quarter and first half of 2022 and relative to the same periods in 2019, in order to provide a more normalized comparison of performance. Total sales for the second quarter were $185 million, a decrease of 22% versus Q2 '21, or an increase of 1% versus Q2, 2019. Comparable sales decreased 25% compared to last year, lapping a 26% increase in Q2, 2021 versus Q2, 2019, representing a three-year stack of 1%. Sales in the quarter were approximately 90% of first quarter 2022 sales, consistent with pre-pandemic historical results. Absolute transactions and conversion in the second quarter remained stable and consistent with Q1. Importantly, as David mentioned, our year-to-date average basket size contracted only 5% compared to the first half of 2021, a period impacted by unprecedented government stimulus assistance. Gross margin was 38.1% in the quarter compared to 40.8% in Q2, 2021, and 37.3% in Q2, 2019. Our strong gross margin results are reflective of our disciplined inventory management and product assortments that continue to strongly resonate with our core customers. With regard to the supply chain environment, we have successfully navigated inbound and outbound freight headwinds, resulting in substantial cost mitigation, with only a 20 basis point increase in Q2 2022 versus Q2 2021. While SG&A expense dollars declined 9.2% versus Q2 2021, the softer top line resulted in outsized pressure on our SG&A rate. We experienced SG&A expense deleverage of 520 basis points versus Q2 2021 to a rate of 37.0% of sales. As David noted, the management team has been working to aggressively lower our expenses aligned to our revised sales expectations, and we look forward to reducing SG&A deleverage versus last year by more than 50% for the second half of the year. Operating loss was $3.3 million in the quarter compared to operating income of $0.2 million in Q2 2019. Net income was a loss of $2.5 million in Q2 2022 compared to net income of $0.4 million in Q2 2019. Second-quarter EBITDA was $1.9 million compared to $4.8 million in Q2 2019. Finally, 2022 diluted loss per share was $0.31 compared to diluted earnings per share of $0.03 in Q2 2019, or $0.06 on an adjusted basis. Now I'll turn to some brief highlights from the first half of 2022. Total sales for the first half were $393.2 million, a decrease of 25% compared to the prior year and a 1% increase compared to 2019. Comparable sales declined by 27% versus 2021, on top of a 30% increase in 2021 sales versus 2019, representing a three-year stack of 3%. Gross margin in the first half was 38.6% versus 41.8% in 2021 and 37.4% in 2019. EBITDA in the first half of 2022, adjusted for the gain on the sale of a distribution center, was $12.1 million versus $65.1 million in 2021 and versus $19.6 million in 2019, as adjusted. Year-to-date, earnings per diluted share were $3.34, $0.12 as adjusted for the first quarter sale-leaseback transaction, compared to $4.63 in the first half of 2021 and $0.68 in 2019, or $0.76, as adjusted. Turning to our balance sheet. Total inventory at quarter end increased 26% compared to Q2 2021 and 8% compared to Q2 2019. Excluding packaway goods, inventory increased 8% versus Q2 2021 and decreased 4% versus Q2 2019. Average in-store inventory increased only 3% in dollars versus last year, a decrease of 4% in units. Average in-store inventory decreased 13% in dollars versus Q2 2019, a 26% decrease in units. We are comfortable with our level of inventory and thank the team for their continued commitment to agile, disciplined inventory management. As it relates to our buyback program, year-to-date, we repurchased approximately 331,000 shares at an aggregate cost of $10 million, leaving approximately $50 million remaining on the program. We ended the quarter in a strong capital position with $27.9 million of cash and no debt. Capital allocation remains a primary focus of our Board of Directors, and in light of the dynamic macro environment, we are carefully evaluating our cash and investments to ensure we maintain adequate liquidity. Now, turning to our guidance for the balance of the year. In light of the challenging macro backdrop, we have revised our outlook for the year and have pivoted quickly to managing and aligning our expense structure to a more normalized sales environment based on predictable historic trends. Our updated guidance, including the impact of the sale leaseback of the Roland distribution center, is as follows: We expect low single-digit increases in second half total sales compared to first half total sales. For the full year, this represents an 8% to 10% decline from the midpoint of the previous guidance of $870 million. We anticipate gross margin in the high 30s to low 40s range for the second half. We expect significantly less SG&A deleverage versus the prior year in the second half compared to the first half due to aggressive expense reduction net of incremental lease expense from sale-leaseback transactions. Finally, as David mentioned, we are prudently reducing our capital expenditures by approximately $10 million to ensure we have additional liquidity to chase opportunities as they arise, resulting in 2022 capital expenditures of approximately $22 million for the year. With these factors, we expect second half operating income to be approximately in line with the results from the second half of 2019. Year-end cash balance is expected to be approximately $85 million to $100 million, including the proceeds from the Roland sale-leaseback transaction. In summary, Q2 proved to be a challenging quarter with meaningful inflationary headwinds impacting our customers' discretionary spending. As we expect this uncertain selling environment to persist through the balance of the year, we will continue to aggressively and diligently manage inventory, control expenses, and fortify the balance sheet. Regarding the topline, I can assure you that we are getting better every day and delivering the right trends at the right value across our 617 stores. I look forward to updating you on our strategic progress on our next call. With that, I will turn the call back to David for closing comments. David?

David Makuen, CEO

Thanks, Heather. Before we wrap up, let me close the loop on the health of our core customers. As we have seen across our 76-year history, it shows us time and time again that when macro challenges subside, our customers return to Citi Trends. Citi Trends customer is local, loyal, and resilient, and we will remain dedicated to our neighborhood to serve the entire family for their apparel, home, and accessories needs in both tough times and good times, all anchored by our Citi life purpose to live bold, live proud, and respect all. As the rest of the year unfolds, we are in the process of deploying our Citi reimagination plan across our BUY and Move, sell and support functions by being hyper-focused on areas we have consistently acted on and shared with you. They are as follows: number one, our products, continuing to broaden the appeal of Citi Trends to new multicultural lower-income households in search of trend-right apparel, home, and accessories at prices that don't break the bank. Number two; our fleet, continuing to upgrade our customer experience via our CTx remodel program and by providing better tools to our store management teams to increase sales productivity. Number three; our infrastructure, including important investments in our BUY and MOVE functions that will contribute to a smarter, faster, and data-centric customer and associate solution. Number four; our balance sheet, along the strength of Citi Trends, our focus is on the here and now and applying fresh and innovative thinking to managing OpEx, working capital, and cash usage. And last but not least, number five, making a difference. Whether it's paying out our customers' layaway when they are a bit short or pitching in for families in need during these tough times, we will ensure we never lose our focus on supporting our customers and associates in the neighborhoods in which they have. We continue to believe there is significant wide space to expand the Citi Trends brand, and we look forward to reestablishing growth once the operating environment fully normalizes. We have confidence in our customer, who we know to be resilient and loyal, will allow us to return to a position of growth in time. As always, I want to thank the entire Citi Trends team, all the women and men that are the face of our brand, creators of our culture, and drivers of our customer engagement, and their hard work and endless efforts in making a difference in the neighborhoods we serve never goes unnoticed. Their passion to live our purpose is shining bright and will carry us into the future. We are now ready to take your questions. Rita, back to you.

Operator, Operator

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

Jeremy Hamblin, Analyst

Thank you for taking the question. So I wanted to start by asking about kind of the store growth. I know that there are remodels happening to the CTX format, etc. But with your CapEx budget getting cut to $22 million, wanted to get a sense for the remainder of the year openings. And then really in the context of how to think about FY 2023, given how challenging the environment is currently for your customer, does this reset your thinking on a go-forward basis to a much lower store growth?

David Makuen, CEO

Good morning, Jeremy. Thanks for joining us. Let me take a crack at your store growth question. First off, on fiscal 2022. As you're aware, we have trimmed our store growth assumptions from the beginning of the year to be a bit more prudent in this environment and also to be able to continue to open successful new stores. As we look at the rest of the year, we are going to slow our growth a bit here. We'll probably end up in the range of about 15 new stores as we close the year out. We've had some difficulty in, I'll call it, the supply chain of new stores, largely driven by landlord and building delays, things outside of our control, which has pushed some stores later. Part of it is reflected in our slightly more conservative CapEx spend to allow for some liquidity in this year to chase opportunities as noted on the call. When it comes to 2023, it's too early to comment. We have tons of great stores in the pipeline for 2023, and we're in the midst, as you can imagine, of working through our here and now plans so that we can deliver the second half as indicated in the call today. And then we'll get hard after what 2023 looks like in early to mid-fall. So more to come on what that looks like, but too early to predict.

Jeremy Hamblin, Analyst

Okay. And then in terms of the change to sales guidance and I think when we compare against 2019 now, the picture becomes a little clearer that we've just reverted to similar levels. But I did want to get a sense in terms of your more recent trends, kind of the cadence of sales over the last couple of months, and here in the first month of Q3, have you seen any improvement, or is this just kind of stabilized at a lower level than you had expected? And that's what you're anticipating on a go-forward basis given that your guidance does imply slightly better back half of the year results. But I wanted to get a sense for what you're seeing currently.

David Makuen, CEO

Sure, Jeremy, happy to add a little bit of color on that. Good question about kind of the expense and how we're thinking about the second half. With regards to the year-to-date trends, as we mentioned in one of our comments in the call, absolute transactions and our conversions have been extraordinarily consistent. The good news is, as you look at the pressures and how our lower income customers have responded, we’ve held steady. I would be worried if we had not seen stability as Q1 and Q2 unfolded. It’s been really consistent, not a lot of big ups or big downs. We believe, as you heard in the call, in having a loyal, resilient customer base, and those who have the means to return to us frequently to shop, which is a hallmark of the brand. We're just seeing an absolute lower level of footsteps in the door given the pressures faced by the low-income bracket of our target audience. As we look at the second half, we have definitely chosen after a lot of rigor and analysis as best we can—and as you know, it’s hard to predict through these times. We've indicated, as you can tell from the guidance, that it will maintain a stable level. We've got a little bit of improvement built in there, which we think is prudent given what we're seeing in the early readings of Q3. Overall, it's a stable trend, supported by strong conversion, strong basket sizes, and strong units per transaction— all the right metrics selling at the right levels of performance; we just have pressure on the traffic into stores. Does that make sense?

Jeremy Hamblin, Analyst

Yes. No, that's helpful for sure. Okay. Last one and then I'll hop out of the queue. But in terms of the sale-leaseback transaction, when taken in combination with what was done with the first DC, clearly, you guys are going to have a very strong cash balance by the end of the year. Wanted to get a sense for taking the two transactions in total. What is the annual rent cost that is going to be added by having those sold DCs, so that we can kind of think about that on an FY '23 basis? I assume that all of those dollars will flow through your SG&A line, could you confirm?

Heather Plutino, CFO

Sure. I'll hop in and take that. On an annualized basis, Jeremy, the rent expense for the two distribution center leases is just shy of $8 million. You can think about it as a 1% increase on an SG&A rate basis, assuming $800 million of sales.

Jeremy Hamblin, Analyst

Okay. Got it. And so, does that imply then the total – so in terms of the expense cuts that you've had, I don’t know how much of that’s coming out of the stores versus the DC versus corporate. But I think that would imply that actually your levels are lower, your staffing levels are lower than 2019, given the $8 million increase in your rent expense. Is that a pretty fair assumption?

Heather Plutino, CFO

There are so many puts and takes in that, Jeremy. I'd say yes. It's consistent with 2019 from a headcount perspective. There are, if you think about stores and distribution centers, we've been dealing with wage rate increases over time. So we've offset that with improved productivity. And then as we mentioned, we are aggressively attacking our expense structure in the second half of the year, which is really across the board, right? The headcount changes, like David mentioned, include everything from what do we spend on pen and paper to how do we improve further and improve productivity in distribution centers and the stores. So it's really across the board.

Jeremy Hamblin, Analyst

Got it. Well, best wishes on the second half of the year and definitely been dealt a tough hand. Thanks for taking the questions.

Heather Plutino, CFO

Thanks, Jeremy.

David Makuen, CEO

Thanks, Jeremy.

Operator, Operator

Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Please proceed with your question.

Dana Telsey, Analyst

Good morning, everyone, and welcome, Heather.

Heather Plutino, CFO

Thanks.

Dana Telsey, Analyst

David, as you mentioned about the consumer cohorts and 50% of the consumers having household incomes of $25,000 and below, what are you seeing in purchase patterns? Is there a difference in terms of the income levels given that your basket size is holding up and you're getting high conversion? And on the merchandise assortment, anything being tweaked in terms of price and value that you're on categories sell-through that you're seeing? And then I have a follow-up.

David Makuen, CEO

Hi, Dana. Thanks for joining. Great questions. In terms of the cohort specificity, it’s interesting. We’re not seeing tremendous differences in their baskets. However, there has been a slight skew towards more essential-centric baskets among the lower income cohort, e.g., they are picking up more of what's in our expanded Q line, think soaps and lotions, HBA, and even some things like batteries and such. So we're seeing a slight skew in their basket, which makes sense to us, especially as we've grown that business and sought to create more of a one-stop local neighborhood store where you can get far more than apparel. The higher income cohort, and we'll frame that as sort of in the $40,000 to $50,000 range, is showing a little to no resilience to our higher average unit retails in primarily the apparel categories. And that’s, as you know, from the last couple of years, being driven by, in most cases, changes in our quality, trends, features and benefits, embellishments and so forth, thereby enabling us to capture a bit higher average unit retails. So it's almost like there's two ends of the spectrum; the lower income cohort enjoying some of the very new assortment enhancements that we've been making over the last year, and then the higher income cohort loving what trends we're introducing. I would probably give a big shout-out to our men's business. Our men's casual business is performing well, and we're seeing increased loyalty among those customers, leading to a significant uptick in their spending with us. Well over 60% of our unit sales is priced at under $10, which has kept us squarely in the extreme value territory, especially during these challenging times.

Dana Telsey, Analyst

Great. And then CTX, I know that's been a big topic in the performance of those stores have outperformed others. As you think about CTX currently, given the inflation pressure environment, is there still a difference? And then just my other two are on the SG&A reduction path, where are we? And any outlook in terms of what you're thinking about either 2023 or what other buckets of SG&A to evaluate? And the same thing on inventory, given that obviously, you have some pack-away, how you're thinking about inventory levels as we go through the year? Thank you.

David Makuen, CEO

Absolutely. Good questions. I'll take the CTX question, and then I'll turn it over to Heather for SG&A and inventory. On CTX, we are pleased with the results that we've seen year-to-date. No real differences existed even with continued macro pressures; these stores that we've completed a Rockin' Roland remodel have presented the brand beautifully, and our associates are excited to show up to work every day to serve new and existing customers. We're getting consistent positive feedback from both customers and associates, which encourages us to continue with a handful more remodels this year due to the strong performance we've witnessed. Heather, do you want to comment on SG&A and inventory?

Heather Plutino, CFO

Sure. Dana, your question was where are we, right? As we mentioned, we have $10 million of cost reductions in the second half of the year. We've captured about 40% of that and are in line of sight for the remainder. We are working hard and diligently to capture the other $6 million, and it's been identified where we're going to find those savings. About half of the $10 million would be categorized as restructure; that is, changing programs, changing organizational structure, changing services, etc. About 10% would fall into the volume-related category, and then we'll have some one-time items in there. When we look to FY 2023, keep all of this in mind; there are some one-time items that will reset in 2023, but we are firmly dedicated to making sure that we continue to leverage SG&A into the New Year. On inventory, we do have amount of pack-away sitting in the distribution centers, which we are excited to start releasing in September in support of fall and holiday sales. We expect to see that inventory amount decrease pretty dramatically over the remainder of the year.

Dana Telsey, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom, Analyst

Hey, thanks a lot. And congrats Heather on the new responsibilities. My question is on the guidance; I'm curious if the expected gain on the Roland DC is included in your second half EBIT assumption, which I believe is to be equal to the second half of 2019?

Heather Plutino, CFO

Yeah. Great question. So I’m going to hop right in on that, David. That statement that we will be in line with 2019 is exclusive of the gain on the sale leaseback transaction. That said, it does include the impact of the lease expense.

Chuck Grom, Analyst

Okay, great. And then just on the second quarter, David, you said that things were consistent, but there’s a lot of volatility in gas prices throughout the quarter, particularly in the back half of July. When prices came down, just curious if the business changed at all? And as you think about those pressures that you highlighted, do you feel like that the plan is getting passed from higher gas prices to now higher utility prices and food? Any sense for when you walk your stores and talk to your customers?

David Makuen, CEO

Hi, Chuck, yes, good question. You'd probably recall in the last earnings call, we talked about speaking to our customers and associates in a couple of informal focus groups and what we heard then was gas was by far the biggest concern, followed by rent, utilities, and food was in fourth place. We refreshed some of that data as we saw the gas prices come down most recently. The good news is we saw a correlation—at least qualitatively—in terms of, 'Oh, gosh, what a release,' when gas prices came down in some of our midsized markets where we do a lot of volume. During that time frame, gas prices were really hurting us. When the prices came down, we did see both relief based on talking to customers and associates, and we saw some interesting sales and traffic response during that time period. It was encouraging. When we asked what else’s bothering you, any updates from the last time we spoke to you? Food definitely rose in the customers’ concerns. The food prices seem to have increased and consumers have noted that inflation iron has been difficult for them. We’ve made note of this, and we are cautiously optimistic about the future as we await how these trends will ultimately impact our sales and customers in the coming months.

Chuck Grom, Analyst

Okay, great. And then I think...

David Makuen, CEO

Yes—a question, but let me know if I didn’t clarify.

Chuck Grom, Analyst

I just didn't know if there was also some benefit from state tax holidays this year. I think across the country, roughly 50% more days than last year. I don't know if you saw maybe more amplification of the state tax holiday benefit this year. I don't know if you've had a chance to look at that data yet.

David Makuen, CEO

Great question. Yes, we have seen some positive impact from more days and in some cases, earlier days than in prior years. As we've looked at our cohorts and back-to-school time periods, we've seen some early and mid-tax free holidays produce nice gains as compared to 2019 and help improve our overall sales compared to the 2021 highs, which is very positive for us as a business.

Chuck Grom, Analyst

Okay, great. And then my last question just firstly, how you arrived at the back half - it looks like you're sort of extrapolating the three-year geo stacks from the second quarter of roughly down 5.6 into the back half of the year. Is that sort of how you got there, even though it sounds like August might be a little bit better on the top line than what the second quarter run rate was?

David Makuen, CEO

It is how we got there, Chuck, mixed with a dose of what has been our traditional quarter-to-quarter builds or de-builds prior to the pandemic. We used a blend of data points backs into history to formulate our expectations moving ahead. Those relationships, we believe, for the rest of this year, given the uncertain environment we're operating in will largely hold up—maintaining a consistent pattern compared to Q2 while enhancing our performance metrics as we prepare for Q3.

Chuck Grom, Analyst

Okay, great. Thanks very much for the color.

Operator, Operator

Thank you. Our last question comes from the line of John Lawrence with Benchmark. Please proceed with your question.

John Lawrence, Analyst

Good morning and welcome, Heather.

Heather Plutino, CFO

Thanks, John.

John Lawrence, Analyst

David, could you start off just a little bit by reminding us of the process of attracting new merchandise? I know you talked about being able to free up cash to get the available deals. Remind us how that process works. And have you been able to get that or is it just more of an effort of just getting more steps in the door rather than the newness and the freshness of a new deal?

David Makuen, CEO

Hi, John. Nice to hear from you. Great question. Both new merchandise and new customers are important, right? We're aiming to develop the most engaging assortment of the greatest values for our customers. But we're also combating this headwind of lower traffic. The priority has been on buying the right items at the right time for our customers instead of boosting incremental market dollars. We take pride in the fact that our merchants have actively driven into marketplaces to secure appealing goods for later in the year, especially considering the supply chain disruptions of late ’21 and early ’22. We’ve built a reserve of unique inventory over months, which we are ready to roll out as we approach the back-to-school, fall and holiday seasons. This inventory is significant to our model since we're able to obtain great goods through opportunistic buys at discounted rates. We are also identifying the right trends to enhance our offerings across all product categories, ensuring that we're catering to our evolving customers base. As you’re aware, we're especially eager to attract both African-American and Latinx customers within our existing and new communities so we can better meet their needs. Our team is evolving our processes to make sure we broaden our appeal to various demographics, and we're optimistic about what we will accomplish over the broader fall and holiday season. I hope that gives you insight into how we operate today.

John Lawrence, Analyst

Thank you. I have one last long-term question regarding strategy. I know you started just before the pandemic and have grown your team since then. Now, with the current macro conditions, you may need to make some changes. How do you balance long-term goals with short-term needs when it comes to potentially impacting the core of the business? I assume you've considered this, so I'd appreciate a more in-depth discussion on the topic.

David Makuen, CEO

Sure. Happy to add some color on that. I'll start by saying it was a very, very difficult decision. We generally are not a bloated organization. We usually maintain well-defined roles without a ton of layers. All of us work collaboratively to foster a culture that supports contributions from everyone. Therefore, it was difficult to analyze and make tough decisions about which roles had to be eliminated. The overall picture, though, is a balance of preserving the individuals that we need for our business, while recognizing that we're also evolving the way we work. Additionally, we're exploring methods of providing our teams with better tools through enhanced data usage, technology, and automation. Some of the changes we’re implementing require fewer employees, which is tough but necessary for efficiency. Where we stand today is, we're right-sizing for a smaller business space, realizing that as we return to growth over time, we’ll monitor how effective our improvements in infrastructure are, and we're optimistic about the enhancements we've executed thus far.

John Lawrence, Analyst

Right. Thanks for that. Good luck in the second half.

David Makuen, CEO

Thanks, John. Talk to you later.

Operator, Operator

Thank you. Mr. Makuen, I will now turn the call back to you. Please continue with your presentation or closing remarks.

David Makuen, CEO

Thanks so much, Rita. Thanks everybody for joining. Have a great rest of your summer. Talk to you next time. Bye, bye.

Operator, Operator

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