Earnings Call Transcript - CTRN Q2 2025

Operator, Operator

Greetings, and welcome to the Citi Trends Second Quarter 2025 Earnings Conference 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. It is now my pleasure to introduce your host, Nitza McKee, Senior Associate at ICR. Thank you. Please go ahead.

Nitza McKee, Senior Associate

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends Second Quarter 2025 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 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-Ks and other subsequent filings within 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, Ken Seipel. Ken?

Ken Seipel, CEO

Thank you. Well, good morning, everyone, and thank you for joining us today on our second quarter earnings call. I'm pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation remains guided by a clear three-phase framework designed to deliver sustainable profitable growth. First, Phase One is Repair, that's restoring our fundamentals and establishing a strong foundation. Phase Two is our Execute phase, embedding consistent best practices and driving reliable performance. And we are going to be entering in the future Phase Three, which is Optimize, leveraging new systems and expansion capabilities to accelerate our growth. These three phases create the foundation for a disciplined approach to capture the near-term and long-term opportunity of growth for Citi Trends. Now turning to our results. In the second quarter, we generated strong comparable sales growth of 9.2%, marking our fourth consecutive quarter of mid to high single-digit comp sales growth. Year to date, we delivered year-over-year comp growth of 9.6%. And I'm happy to report that sales momentum consistent with our first half top-line trends has continued into the back-to-school season. This August, we will be representing thirteen consecutive months of comparable store sales growth. Gross margin dollars have increased meaningfully, achieving our highest rate performance in the last several years. As our buying teams have fine-tuned assortments for our core customers, we've experienced faster sell-throughs of regular-priced product, reduced markdowns, and improved operational controls for shrinkage and transportation rates. Our SG&A was slightly deleveraged in the quarter due to the inclusion of incentive compensation for the consistent financial performance of our employees. It's been quite a few years since the company achieved its bonus targets. So I'm excited to add performance-based bonuses back to our financial profile. Excluding the new performance bonus incentive compensation, our SG&A leveraged in the quarter and leveraged year to date consistent with our guidance. Our top line continues to grow to be broad-based and healthy. Transaction growth has consistently accounted for the majority of our sales gain, which validates the strategic advantage of our neighborhood locations. Additionally, we saw growth in units per transaction while maintaining stable average unit retails. Our performance was consistent across climate zones, regions, and store volume deciles, which underscores the breadth of improvement across the business. Our turnaround is rooted in a clear and unwavering focus on the needs of our African American customer, who is at the center of everything we do. Neighborhood-based locations remain a differentiated advantage with proximity and word-of-mouth serving as powerful traffic drivers. We continue to strengthen this connection by elevating the cultural relevance of our assortments, refreshing the shopping experience to better align with our brand voice, and investing in customer engagement. Work is underway to design and implement a CRM and loyalty platform that will deepen interaction with our most frequent shoppers, thus enhancing long-term customer value. Our product performance in Q2 was broad-based and balanced across apparel, non-apparel, family basics, home and lifestyle, and children's categories. In all categories, customers responded well to elevated fashions and expansion of brand name apparel. Women's plus and big men's apparel had strong performance and both remain early-stage businesses with significant runway ahead. Men's delivered improved results as trend-relevant assortments and improved in-stocks on basics resonated with customers. In Children's, a cornerstone of our business, we've continued strong year-over-year performance. Our customers continue to respond to extreme value deals on well-known brands at exceptional prices as we continue to build capabilities to expand this important segment of our strategy. Looking ahead in product, we've made good progress in improving our three-tiered good, better, and best product assortments, but we are still in early stages. The majority of our initial initiatives, which include better in-stocks on basic products, accelerated growth of women's plus and big men's sizes, expansion of the consumables category, and the addition of extreme value products, have had good early success. We see significant growth runway ahead as we continue to fulfill consumer demand in all these categories. In addition, our merchants have identified several growth opportunities through assortment refinement as we learn more about our customers. For example, our men's team is working to develop an expanded and more refined assortment for young men. We believe we are under-serving this trendy, value-oriented consumer. Young men's will complement the already strong men's classic and core business. In our women's apparel, customers are responding to the increased offering of trendy Missy-sized products. Missy products broaden the availability of style and size for women and complement the strong offering of junior products. Customer reaction to our best trendy products has been strong, giving us confidence there's more demand to address. This has led us to add a trend director to identify emerging trends and guide curation of product assortment. We were fortunate to find an accomplished trend director with a successful track record of trend curation at well-known brands in the industry. I believe the elevation of trend in our men's and women's assortments will be additive and supportive to our merchant teams and resonate strongly with our customers. From an operational standpoint, we made continued progress on our initiatives in the second quarter. Foundational improvements in preseason product planning, in-season allocation execution, and supply chain speed have enabled us to support a 9.2% comp growth while operating with 5.7% less in-store inventory than last year. Working capital optimization provides liquidity and flexibility to react quickly to emerging trends and deal opportunities while also enhancing gross margin. Our stores continue to make strides in improving neat, clean, and organized shopping experiences for customers. We've implemented improved in-store navigation signs and updated presentation standards to make shopping experience easier. Our supply chain remains stable with progress against productivity and steam goals. Looking ahead, we're in the process of implementing improved work processes throughout the distribution centers and implementing special handling areas to assist us in overall processing speed and capacity to grow extreme value products and family footwear. I look forward to sharing more on this initiative on future calls. Test results for our new AI-based allocation system have been well above expectations, allowing us to more accurately allocate products based on individual store demand, which has in turn increased sales and improved inventory turns. We are in the process of implementing AI-based allocations to all categories with expected completion in mid-September in time to impact holiday. We are currently in the early stages of developing a complementary AI-based merchandise planning system that we hope to have ready for early 2026. Again, we'll keep you updated on our progress. Retail is detailed, and execution without measurement is just simply guesswork. That's why our use of KPIs and dashboards for all key functions is critical. The visibility provided helps our team stay on track, identifying where we're hitting the plans and where we need more attention. The combination of simple, repeatable processes supported by operating procedures and KPIs makes us confident that we'll be able to drive continual operational improvement for years to come. A few comments on tariffs: As evidenced in our results, we are successfully navigating the ever-changing tariff landscape. In fact, we've found the off-price products deal-making environment to be very robust and advantageous. My direction to the team is to be aggressive, remain flexible with ample liquidity. Our strategy is working. We intend to play our game and win at our game. Now I'll turn the call over to Heather to discuss the financial performance. Heather?

Heather Plutino, CFO

Thank you, Ken, and good morning, everyone. I'm excited to have the opportunity to walk you through the details of our second quarter and first half results as well as our improved outlook for the year. Before I do that, let me echo some themes from Ken's comments. The transformation of Citi Trends is underway and is driving significant improvement in both top and bottom-line results. As I've said in previous calls, there's a new energy at Citi Trends, and the results we get to share with you today are proof that our team's hard work is paying off. Turning to the specifics of second quarter results. Starting with the top line, Q2 sales were $190.8 million, up 8% compared to Q2 2024, with comp store sales growth of 9.2%, our fourth consecutive quarter of mid or high single-digit comps. We delivered high single-digit comps in each month of the quarter and saw growth to last year in each of our retail metrics: traffic, basket, and conversion, as the impact of our revised merchandise assortment, including off-price deals and more branded extreme value products, continues to resonate strongly. As Ken mentioned in his remarks and similar to our first-quarter results, second quarter top-line improvement to last year is a story of consistency. We saw consistent results across climate zones and across store volumes, and we drove consistent broad-based strength across most product categories. We produced a 40% gross margin rate in the quarter as planned, our highest Q2 rate since fiscal 2021, and an 890 basis point expansion versus Q2 last year. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open-to-buy for our revised product strategy. The effect of lapping that event, net of the in-season markdown cadence established last year, significantly improved year-over-year markdown expense. We also drove decreased shrink expense in the quarter as a result of ongoing cross-functional efforts plus the lap of an accrual adjustment last year. Our broad-based Q2 margin rate improvement was also impacted by higher selling margins due to increased full-price selling and a favorable mix of higher margin products, while maintaining our sharp price value equation throughout the store. Finally, we saw improvement in cost of freight from favorable contract rates put in place last fall. Second quarter adjusted SG&A expense totaled $78.9 million compared to $72.1 million in the prior period. The increase to last year was driven by higher incentive compensation accrual on improved business performance and store and distribution center expense to process higher sales. As we shared with you in our last call, we reinstated incentive compensation accruals in 2025 after incurring very minimal bonus and equity expense in the last three quarters of fiscal 2024, causing a bonus-to-no-bonus comparison in the second quarter. On a rate basis, Q2 adjusted SG&A was 41.3% of revenue, 50 basis points higher than the 40.8 rate in Q2 last year. The rate increase was driven entirely by this year's incentive compensation accruals. All other SG&A leveraged by approximately 150 basis points in the quarter, reflecting continued disciplined cost controls and the impact of improved top-line results. It's important to note that for the first half of the year, total adjusted SG&A, including incentive compensation, leveraged about 90 basis points to last year. Adjusted EBITDA for the quarter was a loss of $2.6 million in line with management expectations and an increase of $14.6 million versus Q2 2024 results. In the quarter, we sold our 72,000 square foot building in Savannah, Georgia, realizing a gain on the sale of approximately $11 million, which is included in reported net income and reported EBITDA but is excluded from adjusted results. We will maintain our presence in Savannah, having leased a new smaller office space not far from the building we sold, giving our teams a fresh new space for continued collaboration. During Q2, we remodeled 19 stores, ending the quarter with 28% of the fleet in an updated format. We also closed one store in the quarter, bringing our total store count to 590 locations. Before turning to the balance sheet, let me provide a few details on our performance in 2025. First half comparable store sales were 9.6% with a two-year comp stack of 10.3%. First half comps were driven by approximately 6% increase in transactions. Adjusted first half EBITDA was $2.8 million, an increase of about $21 million to last year. EBITDA growth was driven by $29 million of incremental sales, 480 basis points of gross margin rate expansion, and 90 basis points of SG&A leverage. Now turning to the balance sheet. Total inventory dollars at quarter-end decreased 12.9% compared to last year, with average in-store inventory down 5.7%. Our success in driving high single-digit sales increases with less inventory reflects our focus on improved inventory efficiency through higher churn, plus improvements in supply chain speed. We remain pleased with our inventory level, composition, and freshness. At the end of the quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver, and $50 million in cash. Now turning to our fiscal 2025 outlook. Based on our first half results, our confidence in the continued effectiveness of our turnaround plan, plus recognition that the macroeconomic environment remains uncertain, we are pleased to update our outlook for 2025 as follows: With the strength of sales in the first half of the year, we now expect full-year comp store sales growth of mid to high single digits, above our previous outlook of mid single-digit growth. We now expect full-year gross margin expansion of approximately 210 basis to 230 basis points versus 2024, slightly above previous outlook due to improved inventory efficiency and initial progress on our planned supply chain improvement. SG&A is expected to leverage in the range of 60 to 90 basis points versus 2024, consistent with our first half trend and an improvement to our previous outlook. Note that this is inclusive of the build of the incentive compensation accrual. To be clear, we now expect full-year SG&A expense of approximately $310 million, an increase in EPS guidance due to costs to process and support higher sales and a higher bonus accrual on better business performance. With these updates, we now expect full-year EBITDA to be in the range of $7 million to $11 million, an increase to previous outlook. This revised guidance is $21 million to $25 million above fiscal 2024 results. There is no change to our expected effective tax rate of approximately 0% for the year. We now expect to open three new stores, close three stores, and to remodel approximately 60 locations in the year. Finally, full-year capital expenditures are now expected to be in the range of $22 million to $25 million. Before I turn the call back to Ken, I'll reiterate that we are very proud of our Q2 and first half results and the meaningful progress we've achieved so far. Our teams remain focused on continuous improvement, with full recognition that there are still significant opportunities ahead of us. We still have processes to refine and areas to optimize as we continue the transformation of our business. The consistency of our performance over the past four quarters gives me confidence that we're building something durable and that our disciplined approach to driving shareholder value will continue to deliver results. With that, I'll turn the call back to Ken.

Ken Seipel, CEO

Thank you, Heather. Before we open the call to Q&A, I do want to share a few thoughts about our longer range of growth for Citi Trends. Looking forward, we are preparing for store expansion growth. We expect to remodel approximately 50 stores per year and expand square footage in the mid single-digit range. We have engaged a third-party analytics team to assist us with dissecting the demographics, psychographics, and geo proximity location of our current customers right down to the individual household level. These insights, coupled with a robust financial pro forma, will greatly improve our accuracy and real estate site selection, leading to improved new store return on investment performance. We've identified several MSAs that are attractive expansion opportunities for Citi Trends in 2026 and beyond. Long range, our goal at Citi Trends is to achieve $40 million or more of EBITDA in 2027. This will be driven by consistent single-digit sales growth, gross margin dollar expansion, leveraged SG&A, and new store expansion. Each initiative within our value creation plan is supported by clear accountability, key performance indicators, and execution rigor. Our leadership team is highly engaged in building out the detailed plans to execute and is fully committed to making these plans a reality. In summary, Citi Trends has delivered four consecutive quarters of comp growth underpinned by transaction increases, broad-based product strength, and disciplined execution. Our strategy is working, our operational capabilities are advancing, and our customer connection is strengthening. But there's still a lot of work to do. We have processes to refine, we have categories to optimize, and more systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value, and expand our role as a leading neighborhood retailer for African American families. I want to say thank you to our Citi Trends team for their discipline, dedication, and great results, and thank you to our shareholders for your continued confidence and support. With that, I'll turn the call back over to the operator for questions. Donna?

Operator, Operator

Thank you. The floor is now open for questions. Our first question today is coming from Michael Baker of D.A. Davidson. Please go ahead.

Michael Baker, Analyst

Okay, great. Thanks. Hopefully, you can hear me. I wanted to ask about great quarter, thanks. One question, one follow-up. Let's first just talk about the expenses and the incentive comp and how that plays out going forward? And just sort of how should we think about expenses on a quarterly basis? I think the math implies about $78 million in SG&A for each quarter in the back half on average. Is that the right run rate going forward as we think about 2026 and 2027?

Heather Plutino, CFO

Hey, Mike. Hear you loud and clear. A question on SG&A, sure. $78 million per quarter, I think that's exactly right. The thing that I will remind you of though, that's a good average per quarter, but Q4 ticks up about 3% versus Q3 because of holiday sales. So just kind of think about that as you calendarize. As we go forward into 2026, we haven't conveyed that yet broadly. I can help you with modeling in our follow-up call.

Michael Baker, Analyst

Well, I guess I don't want to waste my follow-up on this, but let me ask two more if I could. One, just thinking about that and the gross margin outlook, what's the right sort of incremental margin flow through on incremental sales? I understand there's a lot of noise this year, particularly as you cycled some things last year, but more about 2026 and 2027. How do we think about incremental margins?

Heather Plutino, CFO

Yes. So we've mentioned before that our goal is 20% to 25% EBITDA flow through, which we define as the change in EBITDA over the change of sales versus the prior year. This particular fiscal year is a little choppy because of some odd compares in the last year period and the build of the incentive compensation this year. So if you try to normalize that, then you end up at about 25%, certainly in the back half of the year of 2025. But that's what we're looking at going forward is 20% to 25% profit flow through.

Michael Baker, Analyst

Got it. All right. If I could sneak in one more. I'm intrigued by the trend director, I think you called her, or fashion creative director or him. I guess I don't know if it's her. Any examples of what you're learning from that new hire? How we think that might show up in terms of what the merchandise looks like?

Ken Seipel, CEO

Yeah, a couple of things on that, Mike. Thanks for the question. Since she's joined, she's really been acutely focused on interpreting and understanding the consumer voice. More importantly, the current landscape around the consumer. We've been able to gain insights by taking what I call the voice of the consumer and starting to translate that into tangible style and tangible trends. We've been looking at all the emerging things that are happening culturally around, and it's pretty difficult to sift through all the noise out there, but she's done a nice job of distilling it into a handful of key focus trends. This allows our merchants to go to market with very specific filters on curating against these trends. We're starting to see some of that show up, and I gave props to our men's team earlier. They've done a nice job of embracing this concept right out of the gate, receiving good results in addition to their core programs. These two things coming together give us a sense that we're onto something, and I believe that you'll start to see the results of better, more accurate, and more thoughtful curation as we get into Q4. I'm really excited about where we're headed there.

Michael Baker, Analyst

Awesome. Great. Appreciate the time.

Operator, Operator

Thank you. The next question is coming from Jeremy Hamblin of Craig Hallum. Please go ahead.

Jeremy Hamblin, Analyst

Thanks, and congrats on the impressive results. I wanted to get into the commentary about, it sounds like the momentum has really continued here in Q3 even as you're lapping much, much tougher compares. I wanted to see if you can provide a bit more color on what's driving that sustained momentum? I know you talked about broad-based execution in Q2. Are you seeing more branded deals potentially driving the sustained strength for a more well-rounded assortment? Any color you might be able to share on that would be helpful.

Ken Seipel, CEO

Yes. Sure, Jeremy. Thanks for the question. It literally is all of the above. We've continued to refine starting with preseason planning capabilities. We've put a good roadmap out there for winning in Q3 by determining what we need to do to get Q3 off to a good start from a back-to-school perspective. That was supported with very thoughtful plans from all of our merchant teams. We do something in a category review process where we're putting stakes in the ground on what categories can grow. We're backing that up with finances and the amount of receipts required to support those ideas. It's basic, but I think we're doing it better than ever, being disciplined about it. The bottom line is you can have a good plan, but then it comes down to execution. Our teams have done a tremendous job in the market, uncovering better products and styles. An example is our team embracing the brand True Religion, which is resonating across the board with our consumers in multiple categories. We're beginning to see a much better curated product assortment. I would also mention that our field teams have greatly improved their execution of moving freight from the backroom to the floor. We are executing a combination of all things effectively. It's humbling to realize how far we've come, and there's still much work to do, but in summary, it's all about the strategic execution coming together.

Jeremy Hamblin, Analyst

Very helpful. I wanted to shift gears then and talk a little bit about the store base. So you've increased the number of remodels from 50 to 60 that you planned for this year, and I think it sounds like 50 on an ongoing basis. As you plan to get back into a unit growth mode, should we be thinking that FY 2026 is a mid-single-digit type unit growth? If you could just share some of the economics behind how much the remodels cost, what type of lift you're getting from them, and then what you expect kind of the new store economics to be on new openings on a go-forward basis?

Ken Seipel, CEO

For sure. I'll give you some of the strategy and have Heather fill in some of the color on the results there for you. Yes, we adjusted and added a few more remodels this year due to strategic reasons. We added some stores in our Jacksonville market and Columbia, South Carolina market to complement a couple of new store openings we have in those areas. We plan to refresh the brand across the entire market. Our new stores will open in October, and the remodels will be completed by then. On a new store growth perspective, we expect to get into mid-single digits. We already have a number of sites identified for 2026, which will be between twenty-five and forty new stores, with at least twenty-five in that mix. We are also identifying attractive MSAs for expansion. In terms of return on investment, we are applying rigorous financial metrics. Think of our new store growth as a triangle: one side being site selection and demographics, another being the market site itself, and the third being financial rigor to ensure high ROI.

Heather Plutino, CFO

Yes, I'm going to start with a remodel, if you don't mind. You asked about remodel expense and results. Our remodel expense was cut in about half last year. We are averaging between $85,000 to $130,000 per location, with the remaining remodels for this year averaging around $100,000 per store. These are high-volume stores averaging $1.9 million per store. We continue to see sales lift when remodeling stores, which varies by market, but we are confident we are receiving good returns. It's vital that we consider the market presentation when undertaking remodels to drive excitement. For new stores, we are applying financial metrics to ensure we’ve got the right returns. Our goal is to average $1.45 million per store, with expectations for mid-teens flow-through to support full chain performance.

Jeremy Hamblin, Analyst

That's great color. If I could sneak in just one more. Ken, in the last call, you mentioned some supply chain initiatives aimed at reducing the number of days in the supply chain. I wanted a quick update on where that initiative stands. Thank you.

Ken Seipel, CEO

Yes, Jeremy. We are in the early stages, but we have taken out low-hanging fruit. Think of the supply chain as having three parts: vendor to distribution center, in DC processing, and DC to store. We've improved transportation routing and speed of pickup significantly. We have also sped up DC to store deliveries via an updated routing with our UPS carrier, resulting in significant time savings. Our current focus is on improving receiving characteristics. I mentioned our AI-based system that will save time in our receiving process, which should help optimize our efforts. We're at different stages of implementation but expect most ideas to be in place by Q3, leading to better optimization in Q4. It's a work in progress with much more to be done.

Jeremy Hamblin, Analyst

Thank you so much for all the color. Appreciate it.

Ken Seipel, CEO

Thank you for the question, Jeremy. I appreciate it.

Operator, Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Seipel for closing comments.

Ken Seipel, CEO

I want to thank everyone for joining us today. We look forward to keeping you updated on our progress. Goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.