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Citi Trends (NASDAQ:CTRN)
Q4 2017 Earnings Conference Call
March 16, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends Fourth-Quarter 2017 Earnings Conference Call. During the presentation, all participants will be in the listen-only mode. Afterward, we will conduct a question-and-answer session.

[Operator instructions]. As a reminder, this conference is being recorded Friday, March 16, 2018.I'd now like to turn the conference over to Tom Filandro, managing director at ICR. Please go ahead, sir.

Tom Filandro -- ICR Managing Director

Thank you, Beatrice. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you've not received a copy of the release, it is available on the company's website under the investor relations section at www.cititrends.com.

You should be aware that prepared remarks 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, Bruce Smith. Bruce?

Bruce Smith -- Chief Executive Officer

Thanks, Tom. Good morning, everybody, and thank you for joining us today. Also on the call to participate in the question and answer session are our two vice president-general merchandise managers, Christina Short and Brian Lattman, and our newly named chief financial officer, Stuart Clifford.The momentum built by the Citi Trends team in the first three quarters of the year continued throughout the fourth quarter as we capped off a successful year on a number of fronts. First and foremost, comparable-store sales increases were strong in the quarter and in the full year.

Importantly, we registered growth across all comp metrics including transaction counts, average number of items per transaction, and the average unit retail. In addition, all five of our major merchandise categories contributed to the sales improvement. These results confirm that our merchandising strategy of consistently delivering fashion-right, value-priced merchandise, and both the apparel and non-apparel offerings is resonating with our customers across all lines of business.Expenses were well-controlled throughout the company, which, combined with the increase in comparable-store sales, provided significant expense leverage. Inventory levels were also effectively managed, resulting in an improvement in our inventory turnover rate.

And we successfully opened 20 new stores and relocated or expanded 10 existing stores. The company's performance led to an increase in our cash and investment balances to $105 million at year-end. Our strong operating performance and financial strength, together with our board of directors' confidence in the business and their commitment to appropriately returning excess capital to shareholders, led the board to authorize another share-repurchase program in the amount of $25 million.Now, I would like to review the details of our financial results for the fourth quarter and full year. Comparable-store sales increased 5.6% in the fourth quarter and 1.5% for the full year.

The full-year comp-sales improvement reflected an increase in the number of customer transactions of 2.5%, an increase in the number of items per transaction up 2%, and a slight improvement in the average unit retail. It's important to note that this is the first time in 10 years that the average unit retail has increased over the previous year. The improvement in the number of customer transactions and units per transaction continues a trend where we have now had six consecutive years in which we registered growth in both metrics. And looking at comp-store sales for the various merchandise categories during the fourth quarter, the home area increased 11% on top of a 29% increase in 2016's fourth quarter.

This was the 18th consecutive quarter of double-digit growth in our home business. The ladies business was up 7% in this year's fourth quarter after increasing 3% in the same quarter last year. The men's area was up 6% on top of a similar increase in last year's fourth quarter. And children's sales were also up 6% in the fourth quarter of 2017 after being down 1% last year.

Finally, accessories, which include footwear, were up 3% following a 2% increase from last year's fourth quarter. For the full year, home led the way with a 21% comparable-store sales increase, followed by men's and accessories, each at 5%, ladies at 4% increase, and kids at 2%.Gross margin in the fourth quarter 2017 was flat compared to the same quarter last year. For the full year, gross margin decreased slightly, about 10 basis points due primarily to higher freight cost. However, we delivered full-year gross profit dollar growth in excess of 8%.During the fourth quarter, we continued to significantly lever SG&A expenses, lowering our expenses as a percent of sales to 30.9% from 31.6% in last year's fourth quarter.

This leverage in the quarter was similar to what we experienced for the full year, where we had an 80-basis-point improvement in the year-over-year expense rate comparison after adjusting for proxy contest expenses incurred in the first half of 2017.In continuing down the P&L, we recorded a $1.6 billion charge to income tax expense in the fourth quarter as a result of the enactment of the Tax Cuts and Jobs Act in December. This charge was to remeasure the deferred-tax assets on our balance sheet to the new 21% federal rate from the previous 35% rate. In effect, this represented a one-time non-cash writedown of these assets.Fourth-quarter net income was $5.2 million. When adjusted for the effect of the income tax charge, that net income increased more than 23%, to $6.9 million from $5.6 million in 2016.

Earnings per diluted share in the quarter were $0.38 in both years and adjusted for the impact of the new tax act, EPS increased over 31%, to $0.50 per share in 2017. For the full year, net income was $14.6 million, or $1.03 per share, compared to $13.3 million, or $0.91 a share in 2016. When adjusted for the proxy contest expenses and the effect of the new tax act, the 2017 earnings per share increased 38.5% over last year to $1.26.Looking forward, we are well-positioned for the spring season, reflecting a combination of strong fourth-quarter sell-through of fall-winter product and the high-quality flow of trend-right, value-priced spring merchandise. Through yesterday our comparable-store sales were up 3% for the first five-plus weeks of the new year.

So, we are off to a good start thus far in 2018. We also continued the roll-out of the previously mentioned enhancements to our merchandise planning and allocation systems, which we expect will improve our ability to tailor our merchandise assortments on a store-by-store basis. We plan to continue our strategy of focusing on growing both the apparel and non-apparel areas of our business by meeting our customers' fashion needs at exceptional values.In our earnings release issued earlier this morning, we provided guidance for fiscal 2018 indicating an expected 2% to 3% increase in comp-store sales. We expect that such an increase in comps would lead to 3% to 4% increase in total sales when considering one fewer week next year and the goal of opening 20 new stores.

From an earnings standpoint, we expect earnings per share in a range of $1.50 to $1.70 versus the 2017 adjusted EPS of $1.26. The 2018 guidance range includes $0.23 to $0.25 of expected benefit from the decline in the tax rate next year.Now, Beatrice, we will open it up for questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Patrick McKeever -- MKM Partners -- Managing Director

Thanks. Good morning, everyone. First of all, congratulations, Bruce, and I guess you can get some sleep now, perhaps.

Bruce Smith -- Chief Executive Officer

I'm not sure about that.

Patrick McKeever -- MKM Partners -- Managing Director

All right. I guess on the last point that you made on the benefit from the tax bill on 2018 earnings, I mean, it sounds like most of the benefit will flow to the bottom line. Is that correct, or is there some reinvestment of savings back into the business as well? So, that will be my first question. And then just on the strong comp in the fourth quarter, the 3% first-quarter-to-date guidance of 3% for 2018, I mean, it seems like some of the volatility in same-store sales that you've seen historically is dissipating and that the business has become or is becoming more consistent.

So I was just wondering if you might comment on that. And if that is the case, what do you think the major factors are behind the greater consistency and how should we think about the different quarters in 2018 from a same-store sales standpoint? I mean, there is some fluctuation of the comparisons, meaningful fluctuations by quarter, but should we think about more of a steady kind of, in that 3% area growth rate for same-store sales?

Bruce Smith -- Chief Executive Officer

Thanks, Patrick. I'll start with the question you asked about the tax changes. You're correct. In the guidance, we have shown that benefit all the way through the bottom line.

It's probably helpful to discuss some of the things that we thought about, as well as what other companies are considering. And first, I think, we should probably discuss the amount. Remember that we have no foreign operations. Therefore, we're not like some companies that are bringing money back into the country and being able to use that cash for other things.

Our benefit will come annually from the federal rate decline to 21% from 35%. On a pre-tax income of roughly $23 million last year, that works out to about $3 million benefit per year. And, of course, as you can see from our balance sheet where we have $105 million of cash and investments, that $3 million benefits per year are not expected to make a meaningful impact on our financial position. Therefore, we really just plan to use it as we do cash from operations or any other source.

We'll use it to grow and reinvest in the company and where appropriate return capital to the shareholders.And then as far as your question about the sales volatility, yeah, you're right. We've have seen that smooth out in the past year and a half or so. Of course, we're past the period of time where the brands were really falling off dramatically and impacting our sales four, five, six years ago. So things have stabilized.

The other key thing is that we have all five major merchandise categories going in the right direction. So we don't have any area that's pulling us back. And likewise, we don't have the pressure from the average unit retail like we did for a number of years. I mentioned in my comments that we actually had 10 consecutive years of declining average unit sale.

And so we always had that anchor around our necks, where we were having to more than make it up in more transactions and more items per transaction. We've now gotten to a point where all three of those metrics are working in the right direction and we expect to continue to do that as reflected in our guidance.And I think you also asked volatility between quarters. I really don't have anything to give there. There's nothing that we know of that would be unusual.

You know what our costs by the quarter last year were, so you know what the comparisons are, but as far as our business goes and what we're looking at, we're not really pointing toward any unusual volatility between quarters at this point.

Patrick McKeever -- MKM Partners -- Managing Director

OK, sounds good. And then just a couple of more on the longer-term guidance that you gave, which is helpful. The store growth rate, the 2% to 3% square-footage growth rate, why not grow a little bit faster than that just given the fact that the business has been more consistent and there should be a still pretty open-ended growth opportunity given the relatively small size of the company and limited geographic footprint? And then on the operating margin, maybe you could comment on where you see in the longer term operating margin potential both relative to Citi Trends' peak margin, which I think was around 8%, and then also just where do you see the company's margin relative to the big off-price chains -- Burlington, Ross, TJ. I mean, I think those margins are in the very high single digits to, even into the mid-teens.

Bruce Smith -- Chief Executive Officer

Thanks, Patrick. Yes, as far as your question goes regarding the growth rate, there's a lot of factors that go into that, including one key factor that is we shop for real estate the same way we shop for merchandise and the same way that we spend money for expenses, and that is on an off-price basis. And so we are always looking for great deals when it comes to real estate in order to make those stores give us great returns on investment. So, yes, if that keeps us from growing at maybe a higher rate, we are perfectly fine with that because really what we're looking to do is grow profitably, not just growing for the sake of growing.

Another factor that goes into this, when we were a smaller company, we were growing in some years 15% to 20% square footage, 50 to 60 stores a year. And there are issues that go along with that when you're trying to grow that fast and we're cognizant of that. We learned it the hard way in some respects and try to keep a nice steady growth rate growing.Your question on the operating margin, there's was probably a four-year period there back seven or eight years ago where we were consistently in the 5% range in terms of operating margin. That would certainly be a goal for us to get back to.

And, of course, longer term we would strive to get to where the much, much bigger off-prices are like you said, high single-digits. Some of that high-single-digit operating margin that those companies are able to achieve is because of the scale that they have. We are much smaller than them but as we continue to grow, it's certainly a good goal for us to keep in mind. But the key to it all is comp-store sales because with comp-store sales come expense leverage, and with expense leverage comes a higher operating margin.

And so we've got to keep the comp store sales going the right direction.

Patrick McKeever -- MKM Partners -- Managing Director

Great. Thank you, Bruce.

Operator

Mr. Smith, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Bruce Smith -- Chief Executive Officer

OK, thank you. I hope everybody has a great day. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

Duration: 23 minutes

Call Participants:

Tom Filandro -- ICR Managing Director

Bruce Smith -- Chief Executive Officer

Patrick McKeever -- MKM Partners -- Managing Director

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