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Citi Trends Inc (NASDAQ:CTRN)
Q2 2018 Earnings Conference Call
Aug. 23, 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 Second Quarter 2018 Earnings Release. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, August 23, 2018.

I will now turn the conference over to Tom Filandro, Managing Director at ICR. Please go ahead, sir.

Tom Filandro -- Managing Director

Thank you, Cathy, and good morning, everyone. 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 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 President and Chief Executive Officer, Bruce Smith. Bruce?

Bruce Smith -- President and Chief Executive Officer

Thanks, Tom. Good morning, everybody, and thank you for joining us today. Also on the call is our Chief Financial Officer, Stuart Clifford; and our two merchandising Senior Vice Presidents, Christina Short and Brian Lattman.

In the second quarter, we were pleased to see continued sales momentum that was once again driven by broad-based strength with all five of our major merchandise categories contributing to the positive results. We were also pleased to see growth across all selling metrics, including units per transaction, average unit sale, and the number of transactions. Our second quarter operating performance was highlighted by a 3.3% increase in comparable store sales and a benefit to total sales from a shift in the fiscal calendar. These sales increases when combined with a higher gross margin and strong expense controls contributed to a much improved operating profit. In addition to the improvement in operating results, a lower income tax rate and fewer outstanding shares led to a 52% year-to-date increase in adjusted earnings per share.

Now I'll turn the call over to Stuart to provide additional details on the results before I discuss future expectations.

Stuart Clifford -- Senior Vice President and Chief Financial Officer

Thanks, Bruce. Total sales in the second quarter increased 9.5% to $182 million. As we mentioned on last quarter's call, each fiscal quarter this year starts one week later than in fiscal 2017 due to last year having 53 weeks. As a result, the strong back-to-school week that falls at the beginning of August was in the second quarter this year compared to the third quarter last year. This calendar shift provided a benefit to total sales in this year's second quarter of $6.7 million. In the third quarter, we will lose the benefit of that strong back-to-school week and it will be replaced by a week at the beginning of November that is typically a lower sales week. Due to the shift in weeks, the year-over-year comparison of total sales in the third quarter is expected to be adversely impacted by approximately $5 million.

For clarity, the calendar shift does not impact our disclosure of comparable store sales, which compare identical weeks on a shifted basis. In the second quarter, the 3.3% increase in comparable store sales compares the 13 weeks ended August 4, 2018 to the 13 weeks ended August 5, 2017. The positive comp sales reflected an increase of 2% in the average number of items per transaction and average unit sale that was 1% higher and a slight increase in the number of customer transactions. In looking at comp store sales for the individual merchandise categories, the home division again led the way with an 11% increase on top of a strong 25% increase in last year's second quarter. Men's comps increased for the seventh consecutive quarter, increasing 5% after being up 2% in last year's second quarter.

Accessories were up 3% this year on top of a 7% increase in the second quarter of 2017. Comp sales in the children's division increased 3% during the second quarter after increasing 1% in the same quarter last year. And ladies comps were up slightly on top of a 4% increase in last year's second quarter. In the first half of the year, total sales increased more than 7% while comparable store sales were up 2.7%. Second quarter gross margin increased 80 basis points due to improved shrinkage results and a higher core merchandise margin. For the year-to-date, gross margin is 30 basis points higher than in the first half of 2017. Second quarter SG&A expenses increased 5.7% compared to last year's expenses after adjustment for proxy contest expenses, reflecting impacts associated with the higher store count, normal inflation, and the strong sales results.

As a percentage of sales, second quarter SG&A expenses decreased 120 basis points to 34.2% compared to last year's adjusted expenses of 35.4% due primarily to the leverage provided by the additional sales from the calendar shift and from the increase in comp store sales. Year-to-date SG&A expenses as a percent of sales have declined 30 basis points in relation to last year's adjusted expenses. Net income in the second quarter increased to $3.2 million or $0.24 per diluted share compared with a net loss of $200,000 or $0.01 per share in last year's second quarter. After adjusting for proxy contest's expenses, last year's second quarter was slightly profitable with net income of $400,000 or $0.03 per share. Year-to-date the company has net income of $14.5 million or a $1.08 per share compared with $8.7 million or $0.59 per share earned in last year's first half. Adjusting for proxy contest expenses, last year's first half net income was $10.4 million or $0.71 per share.

Now I'll turn the call back over to Bruce.

Bruce Smith -- President and Chief Executive Officer

Thank you, Stuart. In other second quarter developments, we successfully opened three new stores and relocated or expanded four stores while closing two stores. We expect to open 20 new stores for the full year. Also in connection with our expanded capital return program, during the quarter we repurchased $18 million of stock under the $25 million share repurchase program authorized by our board earlier this year, which brought the year-to-date repurchase total to $21 million. In this morning's earnings release, we've raised our guidance for the full-year earnings from the previous range of $1.55 to $1.70 to a range of $1.65 to $1.75 and we provided separate guidance for the third and fourth quarters in order to help investors understand the impacts of the calendar shifts associated with last year having 53 weeks.

We also mentioned in the release that although there was still a long way to go in the third quarter and the back half of the year, we are off to a good early start with a 9% comp store sales increase thus far in August. Our strategy of driving sales in both apparel and non-apparel lines of business has continued to produce strong results thus far in 2018. All three apparel divisions had positive comp store sales last year for the first time in a few years and through mid-year 2018, they are again running positive. And on the non-apparel side, the home division has now had double-digit comp sales increases in 20 consecutive quarters while the accessories area, which represents 32% of sales, entered 2018 with nine consecutive years of comp sales increases and it's up 3% year to date.

As for balance sheet guidance, I will note one item regarding third quarter inventory. This year's third quarter ends on November 3, 2018, which is one week closer to the important holiday selling season than the end of last year's third quarter, which was October 28, 2017. As a result, inventory at the end of the third quarter is expected to increase year-over-year at a slightly higher rate than in recent quarters in order to ensure that appropriate levels of merchandise are available in stores for the holiday season.

Cathy, why don't we open it up for questions now?

Questions and Answers:

Operator

Certainly. Thank you. (Operator Instructions) And our first question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Patrick McKeever -- MKM Partners -- Analyst

Thank you. Hi Bruce. Question on the monthly comparisons in the third quarter, I was just wondering if you could remind us of those. How the third quarter unfolded last year and by month? And then a question on labor costs, you didn't call that out as an issue. A number of other retailers have been more recently both at the stores and also at the distribution centers so I'm just wondering if you're seeing any labor cost pressure -- wage pressure. And then third question on tariffs and just big picture thoughts on how the tariffs that are being talked about in Wash -- or reviewed I guess in Washington right now. If those were to go through; the $200 billion, the 10% on some of those items that are made in China, how that -- including some fabrics and handbags and some other things. How that might impact your business in the back half of the year?

Bruce Smith -- President and Chief Executive Officer

Okay. Thanks, Patrick, for the questions. Let me start with the sales question you ask about Q3 and how we saw comps unfold in the third quarter last year. Last year in August, comps were up 7% and then were up 8% in each of September and October -- I'm sorry, that was total -- total comps. And when you looked at it for just the stub period that we reported for the two-plus weeks where we reported a 9% so far in the quarter this year, last year during that same time period we were up 5%.

And then your other question -- second question was about payroll costs and whether we're feeling any specific pressure there. You know we have had wage pressure for a number of years now. There hasn't really been a stop to it. It started I would say three or four years ago. I would say that we've done a really good job of making sure that we did give increases in -- particularly in the stores where we needed to especially at the Store Manager and Assistant Manager levels. And at the same time we were doing that, we were implementing a number of productivity improvements in the stores and in one case even with the help of an outside consultant to make sure that we had our processes defined to a point where we're doing the bare minimum to get the job done and that helped us offset some of those wage increases.

So, you never really saw it in our numbers. As our payroll costs were going up, you didn't feel it as much in the P&Ls because we were also reducing the number of hours by getting more efficient in the stores. And then I believe your last question dealt with tariffs. To this point, the tariffs announced it really had a minimal impact on our business, but we are closely monitoring it. There's a few accessory and home items that are exposed, but not apparel and footwear. And so as it relates to the back half of the year, there's really nothing to discuss at this point.

Patrick McKeever -- MKM Partners -- Analyst

And then just a question on the ladies business, up slightly in the quarter. I think it was up 3% in the first quarter so positive, but some sequential deceleration. I know the comparison was a little bit more difficult. Question is more just -- maybe you could talk through -- talk through the category; what's working, what's not, and what the outlook for that business might be in the back half of the year?

Brian Lattman -- Senior Vice President and General Merchandise Manager

Right. So as you mentioned, the ladies business within apparel had the toughest comparisons versus last year and year-to-date, it's still positive for the year. So digging deeper within the ladies division, our junior sportswear business had a very strong quarter and we see the momentum continuing into holiday with a lot of exciting trends, urban fashion trends to build on. Digging deeper into the ladies' business, the plus-size business was flat in the second quarter and our swim and dress departments both were not as positive and had reduced inventories, which resulted in healthier margins. So, the negative comps in the swim and dress departments were kind of self-inflicted. But we still feel good about the ladies business for the second half of the year as we see some good momentum in fashion happening currently.

Patrick McKeever -- MKM Partners -- Analyst

Okay. I think that's it from me. Thanks very much, guys.

Bruce Smith -- President and Chief Executive Officer

Thanks, Patrick.

Operator

And there are no other questions at this time.

Bruce Smith -- President and Chief Executive Officer

Okay. Thank you for joining us today. That concludes the call.

Operator

Thank you. Ladies and gentlemen. This does conclude the call. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

Duration: 17 minutes

Call participants:

Tom Filandro -- Managing Director

Bruce Smith -- President and Chief Executive Officer

Stuart Clifford -- Senior Vice President and Chief Financial Officer

Patrick McKeever -- MKM Partners -- Analyst

Brian Lattman -- Senior Vice President and General Merchandise Manager

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