Citi Trends, Inc.

Greetings and welcome to the second quarter 20 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, August 20, 2020. I would now like to turn the conference over to Nitsa McKee, Senior Associate. Please go ahead.

Thank you, Dena, and good morning, everyone. Thank you for joining us on City Trends' second quarter 2020 earnings call. On our call today is our Chief Executive Officer, David McEwen, and Vice President of Finance, Jason Moschner. 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.citytrends.com. You should be aware that prepared remarks today may 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 McEwen. David?

Thank you, Nitsa, and good morning, everyone, and thanks for joining us today. It is a pleasure to be speaking with you on my second earnings call as the new CEO of City Trends, and I hope that you are all safe and well. The second quarter of 2020 at City Trends was unlike any other, posing challenges that required our entire team to commit to doing things differently and being ambassadors of change. To begin, COVID-19 continues to impact us and the retail landscape in unprecedented ways. As we have navigated through this crisis, our top priority has been and continues to be the health and safety of our associates, our customers and the communities we serve. As of July 18th, 2020, we reopened all of our stores except for our store on Lake Street in Minneapolis, which was damaged during the civil unrest that ensued over the Memorial Day weekend. the events that stimulated a nationwide movement moved all of us at City Trends to take a special interest in doing our part to address the indelible racism in our communities across the country and advance the cause of justice and racial equality. Operating stores predominantly in black communities, we have a longstanding commitment to provide a safe and welcoming place for our customers and associates where their differences and diversities are respected and celebrated. Now more than ever, recognize that it is the time to speak up for our neighbors and stand together with others to support the fight against racism. In support of these efforts, effective June 2020, City Trends formed the City Cares Council made up of a diverse set of individuals that will create and oversee initiatives of change. This council will define how City Trends will take action and contribute to elevating humanity to a place of peace and inclusion so that families of color experience equality. In addition, we will rebuild in Minneapolis with the same commitment we've shown there for the past decade. Our City Trends store in Minneapolis stands at the crossroads of an international, diverse community that will be stronger than ever. We opened with a pop-up this week, and we'll follow that through the beautiful store in time for this year's holidays of Christmas and Kwanzaa. Before I jump into our business update, I want to once again pause and take a moment to thank our leadership team and associates for their unwavering dedication to the business and our communities throughout this crisis. The outpouring of support as well as their collective grit and determination throughout our fleet reopening was nothing short of amazing. I reiterate what I said on our first quarter call. Our people are the heart and soul of City Trends. The flexibility and agility of our people over the past few months is a true testament to the unique and powerful winning culture we have built at City Trends. I am honored to lead this great organization and I am immensely proud of all that we've achieved in the face of much adversity. Moving on to the topics to be discussed during today's call. I will first update you on our healthy quarter-end financial position, highlighting the swift actions we took to bolster our strong pre-COVID-19 balance sheet. I will then discuss the safe and successful reopening of our store fleet, providing insight into the record results we achieved and highlight some insights into how we are evolving our operating model. Through our use of data-driven insights, I will update you on the four notable patterns in customer behavior we identified during the initial reopening of our stores, and I will discuss a few new emerging patterns we plan to lean into and capitalize on over the coming months. I will provide an update on the business dynamics we are seeing in the early innings of our third quarter. Next, I will turn it over to Jason Moschner, and our Vice President of Finance, who will briefly review our second quarter results. Finally, before opening the call to your questions, I will reaffirm the pillars of our long-term strategic plan, which when the country normalizes, will place us back on our plan to increase earnings per share at a compound annual rate of 20 to 25%. During the height of the pandemic, we took and many more. These prudent decisions allowed us to aggressively and opportunistically purchase sought after goods as we reopened our stores which in turn drove top line sales resulting in strong second quarter cash generation ending the period with more than 147 million in cash and investments. We began reopening stores with reduced operating hours on April 24th and by July 18th all 574 of our stores across 33 states safely reopened with the proper social distancing and PPE. including required mask wearing for all our store team members and strongly suggested mask wearing for our customers. Customer response to our reopenings exceeded our expectations. We ended the second quarter with a strong positive comparable store sales increase of 32.2% in reopened stores from their respective reopened dates. And An impressive total sales increase of 18.2%. We attribute these results to the strength of our brand and on-trend assortments, our value proposition, and the federal government stimulus that was present throughout the quarter. Importantly, we achieved strong sales growth by selling high-quality inventory, primarily at full price. which resulted in a record second quarter gross margin of 41.2%, 390 basis points above last year's second quarter. We also ended the second quarter in an extremely clean inventory position, down 28.4% to the prior year, allowing us to enter the third quarter in a very favorable open to buy position. Our business model has proved to be resilient during these uncertain times, and the experience we provide in the communities we operate in resonated in ways that effectively reset many of our operational metrics. This includes ending the quarter with significantly lower weeks of supply, fresher than ever merchandise receipts, and a workforce that returned with energy and excitement to serve our customers. What's important to recognize is that our stores sit in shopping centers that are vital to the black, Hispanic, and melting pot towns and neighborhoods across America. We consider our unique in-store experience that showcases broad product choice for the entire family within an extreme value framework to be quote unquote essential for our moderate to lower income underserved customers. Thanks to the overwhelming loyalty of our customer base, we are optimistic that our model will continue to build on our success to date with year-over-year improvements in key operational metrics, including, if not limited to, inventory turns, gross margin, and expense leverage over time. As I mentioned during our first quarter earnings call, using data-driven insights, Our buying team identified four notable patterns in customer behavior, which we named Welcome Home, Mom, It's Too Small, Mom and Dad Break Time, and Relax, Just Hang Out. We successfully leaned into these behavioral patterns during the second quarter, delivering broad-based strength across several categories, including home decor, kids' shorts and tees, lingerie, intimate apparel, Fragrances, Leggings, and Slides. As we look forward to the second half, we are devoting attention to the extended from-home trend that runs far deeper than WFH, or work from home. Continuing our insights-driven momentum, we are devoting incremental attention to how our families EFH, entertain from home, LFH, lounge from home, SFH, School From Home, PFH Play From Home, and GFH Gym From Home, among many others, by providing moms, dads, daughters, sons, and extended family members with appropriate solutions to live what will be a new lifestyle during the second half throughout the country. These solutions, which will emerge in the third and fourth quarter, will be driven by fresh receipts coming from dozens of new vendor relationships that were established during the second quarter. I am particularly impressed by our buying team's ability to expand into new categories, such as pet, VFH, vlog from home, cosmetic sets for young first-time beauty users, an enormous selection of masks, home fitness, and sought-after brands, that span the range of retro cool to must-have current trends. Lastly, our team is agile and adept at proactively chasing opportunities as they arise. And thus far, we've been able to react quickly to merchandise availability that syncs well with our customers' needs and wants. Now for an update on how we are planning the third quarter. With two and a half weeks into the fiscal 2020 third quarter, we are navigating through macro changes in the consumer landscape, including unpredictable and non-traditional back-to-school timing and learning methods, and the ongoing uncertainties stemming from the COVID-19 pandemic. As a result, our customer traffic, as measured via comparable store transactions in the first two weeks of August, has been soft. While it's still very early in the quarter, We are encouraged by the stability of our non-back-to-school related businesses and the increase in average basket size relative to the same weeks of the prior year. We believe once we are beyond the traditional back-to-school selling season, that customer traffic trends will normalize. We are estimating a fiscal 2020 third quarter comparable store sales range of negative mid-single digits to flat, along with Thank you, David.