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Citi Trends (NASDAQ:CTRN)
Q3 2018 Earnings Conference Call
Nov. 30, 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 third-quarter 2018 earnings release. [Operator instructions] As a reminder, this conference is being recorded Friday, November 30, 2018. I would now like to turn the conference over to Mr.

Tom Filandro, managing director at ICR. Please go ahead.

Tom Filandro -- Managing Director at ICR

Thank you, Mary. 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 Mr. 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 third quarter, comparable store sales increased 0.6% on top of a 7.4% increase in last year's third quarter, led by continued strength in the home and accessory businesses.

We had expected a comp sales increase of 2% to 3%, even with a challenging comparison to last year's strong third-quarter results. However, weakness in the ladies apparel category caused us to fall short of our goal. Although, we had good early reads on certain ladies fashion classes, they did not perform nearly as well once we increased the penetration this fall. Due to our buying model, which avoids over reliance on long-term commitments and builds in merchandise liquidity, we have taken the corrective action to make the needed pivot in ladies fashion.

From the standpoint of total sales and net income, we mentioned it in the last quarter's earnings release that $5 million of total sales would shift out of this year's third quarter in relation to last year due to a change in the fiscal calendar. As expected this had a fairly significant negative impact on our bottom line. While the sales moved out of the quarter, costs such as freight and SG&A expenses are fairly constant from week to week and, therefore, did not have a similar shift out of the quarter. Now I will turn the call over to Stuart to provide additional details on the results before I discuss future expectations.

Stuart Clifford -- Chief Financial Officer

Thank you, Bruce. Total Sales in the third quarter decreased 0.9% to $175 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 third-quarter total sales comparison was negatively impacted by $5 million due to the shift of the strong back -to-school week that falls at the beginning of August from the third quarter last year to the second quarter this year.

For clarity, the calendar shift does not impact our disclosure of comparable store sales, which compare identical weeks on a shifted basis. In the third quarter, the 0.6% increase in comparable store sales compares to the 13 weeks ended November 3, 2018 to the 13 weeks ended November 4, 2017. The positive comp sales reflected an average unit sale that was 3% higher, partially offset by decreases of 2% in the number of customer transactions and less than 1% in the average number of items per transaction.  In looking at comp store sales for the various merchandise categories, the home area continued to be the strongest performer, up 13% on top of a strong 29% increase in 2017 third quarter. Accessories, including footwear, were up 4% in addition to a 7% increase in last year's third quarter.

Children sales were up less than 1% after a 4% increase last year. Men's sales were flat in this year's third quarter going up against a strong 8% increase last year. And the ladies category was down 7% this year after being up 6% in the third quarter of 2017. In the first three quarters of the year, total sales increased almost 5% while comparable store sales were up 2%.

Third-quarter gross margin decreased 80 basis points due primarily to a 70 basis point increase in freight costs as a percentage of sales. In addition to continued pressure on freight costs due to transportation rate hikes and higher fuel prices, freight as a percent of sales was impacted by the shift to $5 million of sales out of the quarter without a proportionate shift of freight costs. For the year to date, gross margin is flat compared with the first three quarters of 2017. Third-quarter SG&A expenses were virtually flat compared with 2017.

As a percentage of sales, third-quarter SG&A expenses increased 40 basis points to 34.9% due primarily to the deleverage in the expense ratio as a result of the loss of sales from the calendar shift. Year to date, SG&A expenses as a percent of sales have declined 10 basis points in relation to last year's adjusted expenses. Net loss in the third quarter was $500,000 or $0.04 per share, compared with net income of $600,000 or $0.05 per share in last year's third quarter. Year to date, the company has net income of $14 million or a $1.06 per share, compared with $9.3 million or $0.65 per share earned in last year's first three quarters.

Adjusted for proxy contest expenses, last year's net income for the three quarters was $11.1 million or $0.77 per share. Now I will turn the call back over to Bruce.

Bruce Smith -- President and Chief Executive Officer

Thank you, Stuart. In other third-quarter developments, we successfully opened four new stores and expanded one store while closing one store. We expect to open approximately 20 new stores for the full year. Also, in connection with our expanded capital return program, we completed the $25 million stock repurchase program authorized by our Board in March of this year.

And today we announced that the Board authorized another $25 million stock repurchase program. These actions taken by our Board are a continuation of the capital return program that we started in 2015. Since that time, we've returned approximately $78 million to our stockholders through a combination of dividends and share repurchases. As we enter the prime holiday selling season, we are excited about our merchandize selection, including the most gift-giving offerings that we've ever had.

As stated in this morning's release, we maintained our earnings guidance for the fourth quarter at a range of $0.60 to $0.65 per share, including comparable store sales guidance of positive 1% to 2%. Thus far in the fourth quarter, comp store sales are at the midpoint of that range. Looking forward, we continue to maintain our focus on growing both the apparel and non-apparel components of our business by being the leader and providing value-priced urban fashions to our customers. Now, Mary, we'll take any questions. 

Questions and Answers:

Operator

[Operator instructions] And the first question comes from Luke Hatton. Please go ahead.

Luke Hatton -- FBR & Co. -- Analyst

Good morning. Thanks for taking my question. So, I guess, just starting with the ladies business, what is the timeline you're expecting for fully correcting that business? And then also, what's your strategy for moving through that ladies inventory that did not resonate as well in last quarter?

Bruce Smith -- President and Chief Executive Officer

Yes. Good morning, Luke. Thanks for your question. Brian Lattman, would you please answer that?

Brian Lattman -- Senior Vice President

Sure. As far as the timing to fix the business, fortunately, we have a merchandizing model that tends to result in a decent amount of liquidity at any point in time, so that we can react to what we are seeing from our customers. As you can tell from our comp guidance for Q4, we're not expecting a dramatic change in our sales trends in Q4, but we would expect better results in the spring. And as far as the strategy to move through the liable ladies inventory, as we've always done in the past, appropriate markdown have been taken to ensure that we move through this merchandize through the stores.

We will continue to monitor this situation and take markdowns as needed.

Luke Hatton -- FBR & Co. -- Analyst

Great. Thank you. And then we've been hearing from a couple of our other retailers sort of about upward pressure on wages. And I was just wondering are you experiencing anything in terms of upward wage pressure? And can you provide any initial thoughts on sort of how you're thinking about that heading into 2019?

Bruce Smith -- President and Chief Executive Officer

Yes. So, Luke, we've actually had wage pressure for a number of years. And through those years, we have consistently found ways to try to make our store process as more efficient in order to offset the impact of raising our wages. Currently although all of our store associates make more than the Federal minimum wage, we still do feel wage pressure on a lot of our markets.

We believe that these pressures will probably continue to exist for the foreseeable future and we'll continue to make every effort to offset them as much as possible through continued productivity gains.

Luke Hatton -- FBR & Co. -- Analyst

Got it. And then sort of along the same lines, are you seeing any pressure on transportation and supply chain cost?

Brian Lattman -- Senior Vice President

Yes, definitely. We mentioned earlier that freight was a pressure point in the third quarter, and it really has been all year and even into last year. For the year to date, freight as a percent of sales is up 40 basis points over last year. During the quarter it was up 70 basis points.

Although that was somewhat impacted by the shift of sales, but 40 basis points is probably kind of the norm, and that's been a nine-month number. As we look out to 2019, we're looking at a number of things, various alternatives including transportation and management system that will allow us to, I guess, we call to automate the carrier choice on each inbound shipper to ensure that we get the lowest rate on each shipment. We're also looking at some strategies on tge outbound side that might likely change our approach to the way we do shipments to the store today. So it is a continuing pressure point.

Fortunately, year to date, our gross margin is flat with last year. So we've been able to offset it in other areas, but we're going to have to continue working it.

Luke Hatton -- FBR & Co. -- Analyst

Understood. And then, I guess, last one from me. Can you just walk us through the building blocks of that longer term, 12% to 15% EPS algorithm sort of what gets us there in terms of comp, store growth, and then on the margin side as well.

Stuart Clifford -- Chief Financial Officer

Sure. So that 12% to 15% earnings guidance, if you will, is really based on a 3% annual comp combined with a 2% to 3% store growth model. Assuming that we do both of those things, it should yield a small amount of expense leverage. We tend to get expense leverage on expenses when we're in that 2.5% to 3% range and above.

I will note that year to date, our comps are up 2%, and we've still been able to get 10 basis points of leverage. So we've done a little bit better than that this year and we also did a little bit better than that last year. But long-term, we think it's reasonable to expect maybe 20 to 30 basis points of expense leverage if we get a 3% comp. And we would expect that over the long-term we could continue to push our gross margin up as we continue to improve our store-planning capabilities, so maybe a 20 to 30 basis point improvement there.

And so between expenses and gross margin, maybe 40 to 50 basis points of improvement per year. Hopefully, leading to our operating margin increasing from, let's say, 3.3% up toward 5% and above over the long term.

Luke Hatton -- FBR & Co. -- Analyst

Great. Thank you. I think that's it for me. Good luck next quarter.

Bruce Smith -- President and Chief Executive Officer

Thanks, Luke.

Operator

[Operator instructions] We do have a question from Elan Danan. Please go ahead.

Unidentified speaker

Hey, guys.

Bruce Smith -- President and Chief Executive Officer

Good morning, Elan.

Unidentified speaker

Hello. Good morning. How you guys are doing?

Bruce Smith -- President and Chief Executive Officer

Good.

Unidentified speaker

Another question on the women's fashion miss. Can you just give a little bit more color and detail what it was, was it tops, bottoms or where was the miss exactly?

Bruce Smith -- President and Chief Executive Officer

Yes, thanks for the question, Elan. Really for competitive reasons, we try not to give specific details any lower than the category level. So while we talked about the ladies fashion -- apparel fashion being off for the quarter, we'd rather not give our competitors an advantage over what that miss was.

Unidentified speaker

And I think you kind of touched on the last caller, but -- the question, but have you worked through the inventory of -- are you -- or when do you -- I guess, is that inventory still in stores now? Is it being discounted? How should we look at when that should kind of work its way through the system?

Bruce Smith -- President and Chief Executive Officer

Brian touched on that earlier. Brian, why don't you give some insight into that?

Brian Lattman -- Senior Vice President

So, I mean, like I said earlier, as we've always done, we take appropriate markdowns when we need to and we -- to ensure that we move through the merchandise. So we are currently working through it and are confident we'll get through it.

Unidentified speaker

And so the up 1.5 includes kind of it still includes the weakness in ladies?

Bruce Smith -- President and Chief Executive Officer

That is correct.

Unidentified speaker

Quarter to date? OK. And then in terms of -- I know that you had some gross margin pressure. You discussed it until logistics with about from a merchandise margin perspective, how much did -- is there any way to quantify what that -- what the negative impact on merchandise margin was from ladies?

Bruce Smith -- President and Chief Executive Officer

Yes, not just from ladies, but over -- on an overall basis, the core merchandise margin was down about 30 basis points due to higher markdowns during the quarter.

Operator

And our next question comes from John Laurence. Please go ahead.

Unidentified speaker

Yes. Thank you. Good morning.

Bruce Smith -- President and Chief Executive Officer

Good morning, John.

Unidentified speaker

Yes, could you comment just a little bit, Bruce, on the real estate side? As you get this new capital program and you're looking at this two to three, some of the markets you're looking at as far as possible, are you seeing any, I guess, advantages from some of these larger boxes that are becoming available where you can cut out or just any gains in real estate negotiations at all?

Bruce Smith -- President and Chief Executive Officer

If you look back over the last couple of years where we've seen the biggest change is probably where you would expect it. And that has been that we have been able to open up mall stores that we never really were able to get into before because of the cost. And so if you go back few years, we just had two stores and malls in the entire chain. Today we're up to 22, so we have been able to take advantage of some situations there.

Outside of that, when you look at the shopping centers that we're in and that we tend to be in and want to be in, there hasn't been a radical shift. And even when you look at the guys that we compete with the most, the Rainbows of the world and It's Fashion Metro, which is Cato's urban division, and, of course, Ross' urban division, dd's DISCOUNTS, none of those guys are contracting. And so we're not really seeing a major shift in our typical shopping center. It's primarily in the mall opportunities.

Unidentified speaker

Great. Thanks. And secondly, when you talk about some investments on the transportation side efficiency, are those systems that would be CAPEX projects in -- or that move out to first half of next year or is it something more imminent than that?

Bruce Smith -- President and Chief Executive Officer

First half of next year, yes.

Unidentified speaker

And any time frame on -- is it far enough along to know what CAPEX budget will be or anything like that?

Bruce Smith -- President and Chief Executive Officer

As far as the transportation management system goes, it would not be significant.

Unidentified speaker

OK. OK. And last one for me, is -- I was little late on the call. Did you quantify what you think of the fashion situation cost you in comps, did you mention that at all?

Bruce Smith -- President and Chief Executive Officer

Well, we did in the context of -- the ladies comp was down 7% during the quarter

Unidentified speaker

OK. Thanks. Good luck.

Bruce Smith -- President and Chief Executive Officer

OK. Thank you, John.

Operator

[Operator signoff]

Duration: 21 minutes

Call Participants:

Tom Filandro -- Managing Director at ICR

Bruce Smith -- President and Chief Executive Officer

Stuart Clifford -- Chief Financial Officer

Luke Hatton -- FBR & Co. -- Analyst

Brian Lattman -- Senior Vice President

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