Citi Trends, Inc.

Ladies and gentlemen, please stand by. The conference will begin momentarily. We thank you for your patience and ask that you please remain on the line. Greetings and welcome to the C-Train 1Q22 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press 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 Tuesday, May 24th, 2022. I would now like to turn the conference over to Nitza Miki, Senior Associate. Please go ahead.

Thanks, Malika, and good morning, everyone. Thank you for joining us on CityTrend's first quarter 2022 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 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, David McEwen. David?

Thank you, Nita. Good morning, everyone, and thanks for joining us today on our first quarter of fiscal 2022 earnings call. This morning, I will begin by reviewing the ongoing transformation of our business and highlight our financial and operational results for the first quarter fiscal 2022, before updating you on our focus on our highest priority, providing for our customers and associates during tough times and how we are doubling down on helping them show up for whatever comes their way. Then Jason Moschner, our VP of finance and principal financial and accounting officer, We'll elaborate on our financial results and a few other items related to our outlook. Before turning to our results, I want to recognize that the macro environment has been difficult for our customers, given a number of factors, including ultra-high inflation that is driving high food prices, rents, and gas prices. These factors coupled with geopolitical instability and lapping the stimulus from last year disproportionately impact our core customers and also our associates who work tirelessly to operate our 600-plus store fleets. While it hasn't been easy for them, they are resilient, strong, and able to weather this storm just like they have for so many other storms during the last 20 years. Importantly, CityTrends will always be dedicated to our neighborhoods and will always be there for our loyal and new customers. Our unique ability to listen to the African-American and Latinx families we serve and respond with the right trends, fashion, and essentials at the right time in the right store has never been stronger. No matter the headwinds, it's our responsibility to keep it fresh and fun for the family each and every day. I want to thank our associates throughout all functions and stores that keep city trends purpose driven and running the best way possible for our customers each and every day. Now, turning to our results. Our first quarter top line results were in line with expectations and our bottom line performance was better than our previously provided guidance. The difficult economic backdrop coupled with third party data suggesting shifts in discretionary shopping behavior is negatively impacting traffic to our stores. However, our core customer metrics are holding up well as we continue to see strong and consistent conversion and basket spend with baskets well above 2019 and very close to 2021 levels. I have shared the stability of our conversion and basket trends now in three consecutive calls with you. And I want to underline the following point. Our content is resonating and our agile buy team is reading, reacting and executing at a high level. Our team is more nimble than ever. And in particular, we are chasing ample available trends that will scoop up and offer a crisis that don't break the bank. Looking back on the quarter, We successfully manage inventory levels and have newness and freshness arriving in stores weekly. The classic extreme value chase is definitely on. With a soft store traffic setup, our store management teams have been intensely focusing on conversion while styling customers from head to toe in our specialty store experience to drive UPTs and healthy baskets. We commenced the early phases of further optimizing our product mix with the gradual rollout of multiple incremental product initiatives across our six cities or categories. We remodeled 20 legacy CityTrend stores in our new CTX format, and they are off to a great start as customers engage with their revitalized neighborhood trend spots. We continue to navigate and manage the challenging supply chain backdrop and labor challenges while diligently managing expenses. We completed the previously announced sale leaseback transaction of our distribution center located in Darlington, South Carolina. We are making substantial progress on our infrastructure initiatives to improve our buy and move teams' ability to procure and move goods. And lastly, we are making great progress on our search for a new CFO. As we look to the remainder of 2022, we expect the macro factors to continue to impact our customer and the broader discretionary shopping landscape. It's therefore prudent that we plan conservatively and thus we are revising our growth targets for the rest of the year while still comparing primarily to pre-pandemic 2019 as a baseline. Additionally, we believe the right step is to take a conservative approach to opening new stores, and therefore, we now intend to open approximately 20 stores during fiscal 2022. With that, I'll turn the call over to Jason to discuss our first quarter results in detail, as well as our updated guidance for the balance of the year.

Jason? Thanks, David, and good morning, everyone. For the first quarter of fiscal 2022, the operating environment remained difficult with headwinds of extreme inflation, freight pressures, and lapping government stimulus, to name a few. Despite this, we delivered total sales in line with our expectations, achieved gross margin well above the levels in 2019 and prior, and applied rigorous discipline to controlling our expenses resulting in earnings per share that exceeded the top end of our prior guidance. We ended the quarter with a strong cash balance and a clean inventory position, leaving us poised, as David said, to chase trends within our six cities or categories, keeping our powder dry so we can appropriately respond to our customers' needs based on the time of year and occasion. Now let's turn to the specifics of our Q1 financial results. As mentioned in our earnings release, we are comparing select operating results for Q1 of 2022 relative to Q1 of 2019 in order to provide a more normalized comparison of performance. In addition, certain results are adjusted with 2022 figures adjusted to exclude the gain from selling our distribution center and 2019 adjusted to exclude expenses related to a proxy contest. Please see our earnings release for reconciliation of these adjustments. Total sales for the first quarter were 208 million, an increase of 1.6% compared to Q1 of 2019. Comparable store sales declined 29% versus 2021, on top of a 35% increase last year versus 2019, representing a stack of 5.8%. Our conversion and basket remained strong which tells us our content is resonating. Earnings per share was $3.59 compared to 65 cents, or as adjusted, 42 cents compared to 72 cents. Gross margin was 39%, 150 basis points higher than the first quarter of 2019. Our continued improvement in quarterly gross margin rates versus 2019 and prior is primarily the result of disciplined inventory management, starting with higher markups, stronger full price sell-through, fewer markdowns, and lower shrink rates, partially offset by 125 points of deleverage in freight costs due to the current supply chain headwinds. Navigating the supply chain environment remains fluid, We have worked to increase the efficiency of our internal operations while also negotiating rates with our shipping partners to mitigate the elevated transportation costs. Adjusted SG&A for the quarter was 34.1% of sales, up from 30.9% in the first quarter of 2019. On a dollars basis, adjusted SG&A was 13.8% higher. Adjusted operating income was $4.7 million versus $9.8 million, or on an adjusted basis, the margin was 2.3% compared to 4.8%. Gap net income was $30.2 million compared to $7.8 million in the first quarter of 2019, or as adjusted, $3.6 million compared to $8.7 million. Now, turning to our balance sheet, total inventory at the end of the quarter was lower by 1.2 percent compared to the end of Q1 2019. Excluding our pack-away inventory, inventory was down 13.9 percent, and our average in-store inventory was 32.5 percent lower than 2019, which reflects our continued focus on freshness and improved store terms. During the quarter, we completed the sale-leaseback of our distribution center in Darlington, South Carolina, resulting in gross proceeds of 46 million and a pre-tax gain of 35 million. The impact to rent expense in fiscal 2022 is expected to be approximately 40 basis points. As it relates to our buyback program, we repurchased approximately 170,000 shares at an aggregate cost of $5.3 million, leaving $54.7 million remaining. We ended the quarter in strong capital position with $61.7 million of cash and no debt. As we stated in the past, capital allocation is the primary focus of our board, and we will prudently balance our use of cash between buybacks, investments in our growth strategy, and ensuring adequate liquidity in this challenging environment. Now, turning to our guidance for the balance of the year. With the expectation that macro factors continue to pressure our customer, we believe it is prudent to plan conservatively. We have revised our outlook as follows. Full year sales of $860 to $880 million and a comparable sales decrease of 14 to 16%, on top of a 22% increase last year versus fiscal 2019. At the midpoint of this range, this implies a comp stack of positive 7%. Full-year operating income of $58.8 to $65.3 million, or as adjusted, $23.8 to $30.6 million. At the midpoint of this adjusted range, this implies a 32% increase compared to fiscal 2019. Full year diluted EPS ranging from $5.59 to $6.09 on a GAAP basis, or as adjusted, $2.25 to $2.75. At the midpoint of this adjusted range, this represents an increase of 60% over adjusted EPS in fiscal 2019. I'll note that our full year guidance includes $2.3 million of incremental non-cash SG&A expense related to the conversion of certain cash settled awards to restricted stock, which negatively impacts diluted EPS by approximately 22 cents in our guidance. These converted awards will be fully vested during Q1 of 2023, and therefore they will no longer result in the incremental expense after the first quarter of 2023. Finally, given our revised plans for opening 20 new stores during the year, we project capital expenditures of approximately $32 million. To wrap up, our teams are executing disciplined cost controls, optimizing our operations, and diligently managing the balance sheets. We recognize the challenging environment and therefore we are laser focused on controlling the controllables while we work to maximize our top line sales and amaze our customers each and every day. With that, I'll turn the call back to David for closing comments. David.

Thanks, Jason. Before we take your questions, I want to provide some additional beliefs in our customers and business model that give us the confidence to navigate current unpredictable times and make the ongoing improvements to our model to maximize profitability in the years ahead. First, about our customers. Our associates make it personal and often know their customers on a first-name basis and even what's happening on in their lives. Across our fleet, we play an essential role in the neighborhood where we, quite literally, help bring opportunities to life. by suggesting value outfits for her and him and the kids for both work and play, suggesting value toys and accessories for the little ones, suggesting new value beauty items tailored towards black and Latinx women, and so much more. At the crux of this relationship is a high level of loyalty and dedication our customers and associates have with our brand. It's a special bond. that is not easily eroded by tough times. Our customers know tough times, and they are equipped to muscle through. This characteristic is also an indelible strand of our DNA that we will leverage to help solve for the current times while laying the groundwork for future growth. Regarding our business model, when I take a step back and look at how we've managed the business through an incredibly challenging period, we are definitely behaving like a 75-year-old startup. The modernization of the CityTrans brand is unfolding as planned and can be felt in our people, our culture, and our operations. Our 75-year history is critical to understanding how durable our model is. From where we uniquely sit in the neighborhood to the curated assortment we offer to the unique associate team that takes respect all to a new level if you walk away with one thing today it's the power and underlying foundational strength of a legacy value brand built by and for the neighborhoods it has served for many decades in the past and for many decades in the future i am humbled to be a member of a team that shares my passion for growing and building something really special for the customers and associates that care deeply about the success of City Trends. For this year and beyond, as you've heard before, we remain focused on four strategic priorities. Number one, growing our fleet and expanding our customer base. Number two, optimizing our product mix. Number three, reinvesting in our infrastructure. And number four, making a difference within the communities we serve. In closing, I want to again thank the entire City Trends team for their dedication and all their efforts towards making a difference in the communities we serve. Their passion to live our purpose, life is best when you live bold, live proud, and respect all, is definitely shining bright. With that, we are now ready to take your questions. Malika?

Thank you. Ladies and gentlemen on the phone lines, if you wish to ask a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, ladies and gentlemen on the phone lines, you can press one four on your telephone if you have a question. One moment, please. Our first phone question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead. Your line is open.

Good morning, everyone. Hello, David and Jason. As you think about the current environment and the state of the consumer with inflationary headwinds with your customer, how are you managing on price? How much pricing are you passing on to them? What have you seen be accepted, not be accepted by category? And how are you managing the inflationary headwinds internally in terms of labor costs? And then lastly, any update on how the CTX stores are performing versus the base and the 20 new stores versus the prior guide for 35? Do those push off into 2023? And is some of that because it's just hard to get the goods for the stores, whether it's HVAC equipment or other things? Thank you.

Hi, Dana. Good morning. Nice to hear from you, and thanks for your good questions. I'll try to tick through some of those from the start. On price, I'll tell you that we've really not changed our stance versus what we've shared prior, even dating back into 2021. We have maintained that we can nudge price up in the case of improving value, features, and benefits, and that's been working consistently up until today, and we expect it to work throughout the rest of this year into the future. We have maintained value on sort of the essential band within our cities, you know, call that underwear, socks, the things that you kind of need, less trend driven, more basic driven. We've maintained those prices and really not passed on any increases to the customer. And then thirdly, a lot of our newness, so not like skew for skews, but newness in the area of trends, we've really managed not only the pricing relationship and kind of resiliency of our customer, but also manage the ability for us to price the trend right and bring it in at lower than maybe, you know, 19 and prior inventory levels, which we've heard us talk about, and celebrate the trend selling out and moving on to the next one. So I think we've managed kind of pricing assortment really successfully, and we're going to stay the course on all those points. On the labor headwinds, You know, I think at the end of the day, similar answer to Price, we're going to stay the course. As you've heard me speak in the past, we haven't had to do drastic wage increases, but rather we've done very surgical and strategic and tactical wage increases where needed, and we've treated our people well from a cultural standpoint and from a benefit standpoint. So that's kind of the total package. is uh is working well for us and we expect that to continue um for the for the future uh without any big disruptions and we've had you know great loyalty from our teams in our distribution centers as well as in our stores and of course in our headquarters that indicate a passionate team you know ready to serve the customer no matter what function you're a part of from a ctx perspective we are really pleased with the results so far You know, we're seeing lifts higher than we did in 19 and prior remodels, and we've shared that we expect to see, you know, high single-digit lifts, and we're right on plan for the initial class. Really exciting. We'll have basically 20 open by tomorrow, and that's something that we're pretty pumped about, and we'll do another tranche here in the Q2 period to up that number to close to 30. by the end of Q2. So we're excited about where that's going. And then the refreshment on your last question, if you don't mind.

On the number of store openings going to 20 from 35, is that because it pushes into 23 or is it the headwinds of getting supplies to get a store open?

It's actually, you know, it's not necessarily either one right now. Let me answer the first piece of your question. we expect to grow stores and hit our thousand store target. We have no question in that number that we've shared with everybody prior. Um, the pace of which we do that, we're just kind of slowed down a little bit this year. We expect to return to a faster pace in 23 and four and beyond. Um, and we'll move, so we'll move that 15 for sure. In fact, most of the deals are already in flight or done. We'll move those into 23. In respect to lowering it, it's really just a more prudent measure on our part. We want to make sure that we're able to spread our resources throughout the company around on not only managing the current business, but getting new stores off to a great start, managing the remodels in an effective way, and running our core business in these times of challenges. That's kind of really how we thought about it. But, you know, we've got tons of deals in the pipeline. We're excited about upping the number in 23 and upping it from there in 24 and so on.

Got it. One last thing. Cadence of the quarter. What did you see in terms of cadence of the quarter, whether it's lapping stimulus or tax refunds? And how is the exit rate and what's happening so far Q2 to date? Thank you.

Sure. Good question. The cadence of the quarter, the short answer is it got better by month. So from Feb through April, we saw sequential improvement in our transaction counts. We saw a consistent and strong conversion level and a consistent and strong basket. So that was encouraging throughout the quarter. And then as we've entered the early parts of Q2, we've seen a continued improvement off of the improvements we saw month to month in Q1 And I'll stick a quick plug in for some of our incremental initiatives that we've talked about. The last couple of calls are taking hold. They're in sort of test, learn, summer, and rollout, gradual over Q2 and Q3. But we're liking the traction we're seeing, and that's contributing to the improved momentum.

Thank you.

You're welcome. Have a great day.

You too. Thank you. Our next question is from the line of Jeremy Hamblin with Craig Helm Capital Group. Please go ahead. Your line is open.

Thanks. I want to start by just following up on that last question. And great to hear that there's some improved sequential results. I wanted to clarify, so historically there's been this typical seasonality where Q1 is on an absolute dollar basis is significantly stronger than Q2 and Q3. I wanted to understand if you, you know, just maybe a little bit more color on expectations around Q2 because of how, you know, tax refunds didn't play out as typical. Are you expecting Q2 sales to be up from Q1?

Jeremy, hello. Thanks for calling in and asking some questions. While today we're not disclosing any guidance related to the individual quarters of the year, what I can tell you is that the Q2 to Q4 trend run rate is very similar in our projection and guidance to what we've stated earlier, meaning it gets better over the Qs and ends with the numbers that we've guided as of today. So while we're not sharing the relationship of every single quarter, What I can tell you is the sequential improvement offers us a confidence that we'll accomplish that bill from quarter to quarter. You know, the order and the way I think about it is we expect to have a strong remaining summer inclusive of July 4th, which is an important time period for the brand. Then we roll into a more normalized in the past three years, that is back to school season. We're well positioned. from a current and a pack away standpoint to feed back to school. And then as you can imagine, we're putting the right emphasis and priorities around winning the gifting season in Q4. So that's kind of some color around how the rest of your shapes up in our minds.

Well, let me ask it just in slightly different context and I, I apologize. But you know, you're, you're cut, the full year guidance by roughly $60 million, but Q1 played out kind of right down the pipe of where you were expecting it. So I'm just trying to understand, you know, versus your prior expectations in March, you know, is that $60 million change kind of coming equitably, you know, over the course of the remaining three quarters? are you just having a little bit lower expectation in Q4 or is it more, you know, in the near term where, you know, we thought we might get a little more, you know, bounce in Q2, Q3, you know, previously, and now we're thinking it's, you know, seasonally going to play out a little bit more like it might typically. I know you're going after that summer season though. Yeah.

Yeah. No, no. Good question. Yeah. I think we can give you some directional insights that the, inflationary pressures are, are certainly lingering. And as we know, from all the news expected to linger a lot, a little longer than we all hope. And so you can, you can take it away that your Q2 is got a little more of that 60 million decline than Q3 and four. And that's a, that's a fair takeaway, but they all, as you can imagine, we sliced away a bit from each quarter. to appropriately respond to the pressures from inflation and such.

Great, that's helpful. And then just wanted to get into the inventory. So you have some pack-away inventory levels on a year-over-year basis are up about 27%. Came in maybe a little bit higher than I expected, but consistent with what we're hearing from a lot of retailers in recent weeks that inventory levels for a variety of reasons, are higher than expected. In terms of thinking about your gross margins, which I think probably came in pretty close to where you might have been expecting in Q1, on a go-forward basis, do you have some concerns at all about the risk of maybe markdown rates being a little bit higher not just because, like, one, I wanted to understand if your inventory levels were or are where you expected them to be, you know, two, three months ago. And then, you know, two, given that there's a lot of competitors also with higher inventory levels, certainly than they expected, you know, are you starting to see any incremental pressure from slightly higher promotions? Are you, you know, thinking that maybe clearance rates are going to be up a tick, certainly from where they were a year ago.

Good questions, Jeremy. First off, we are very pleased about where we sit inventory-wise. And if I can, I'll give you a little bit of color versus LY in our script and release. We talked about versus 19, but obviously 21 data is out there. So an important thing to remember about our business model is that we spend considerable effort and devotion towards capturing forward season buys from roughly November of 21 through even as late as March of 22. And we pack away those goods for eventual selling in really back to school and later. And so when you look at our end of quarter inventory levels against last year, up, like you said, you know, kind of mid 20s, We really believe you need to pull forward season buys out of there. So we're really up when you do that up 5%, because that forward season buy amount is sitting in the rafters in our distribution centers. And we pull it out starting in back to school and then continuing through holiday. And we really basically drain it and deplete it in a good way. And that's a good margin and they're unbelievable. deals in that bucket, so to speak. So that's important color to understand. The other thing is our average store inventory against last year is only up a couple of points. And that's important to know because we were extremely depleted last year during the stimulus-fueled Q1 period. And so to be only up 6% on an average store, that's literally what's in our four walls. is just a testament to the team's focus on not getting over our skis, keeping the powder dry, and managing inventory levels across all of our cities in a really effective manner. So long story short, we're not terribly concerned yet. We're extremely maniacal about keeping it this way. And then on your point around risk, around markdowns and margins, you can assume that's all built in to what we shared today. We spent a lot of time modeling that, and we feel comfortable with what we showed today.

Great. The next one for me, real quick. Yep, absolutely. Thanks. That's great color. Last one for me is just around the SG&A, understanding also the $2.3 million non-cash stock charge. So presumably that's going to be spread over the next few quarters. I wasn't sure if it was all hitting in Q2. or not. But then, you know, in terms of your absolute, you know, spend in Q1, just $71 million, you know, down, you know, from where you were in Q2 and Q3 of last year. So managing that, you know, really well. And, you know, my guess is it sounds like that's kind of like a sustainable level, but wanted to just, you know, kind of get a little more detail around that SG&A spend and And then also specific to that $2.3 million, you know, award, if that was hitting all in one quarter or if that was spread over multiple quarters here throughout 22. Thanks. Sure.

Yeah, you bet. I'll take the part one and then Jason can chime in on part two. But on part one relative to the $2.3 million kind of one-time event that will impact, and ding our EPS about 22 cents for this year. It is spread across the year. You know, it's probably more like, you know, 30% in Q1 and then the rest of it spread by quarter. And as Jason pointed out, it runs out as of the end of Q1 of 23 and no longer becomes a quote unquote non-cash charge to the EPS number. So that's a good thing. I'll give you a high level on SG&A. I think we do feel confident about it in terms of how we forecast it and how we're managing it. But I'll turn it over to Jason for a minute or two on that one.

Yeah, and quickly to clarify on those awards, that was a conversion. We disclosed that in the footnotes to our 10-K as well, that it was in the fourth quarter of 2021, and we converted certain cash-settled awards that were for our mid-level managers into restricted stock and the nature of the accounting rules around that is that they take on the fair market value at the conversion price, which was an elevated value relative to their initial grant date price. So that price gets locked in and then the expenses straight line until they best. So they'll be fully busted in March of 2023. And then going forward, we have no cash settled awards. So no mark to market fluctuations in our equity awards and all future equity awards will just be straight line expense based on grant date fair value. As to SG&A expense for the balance of the year, we do feel confident in our ability to control expenses and generally speaking we think we can keep it around the levels that we kept it in Q1 of 22 with the caveat that you know we generally do have some fluctuations through the quarters. We generally a slightly higher SG&A spend through Q2 through Q4, just as it relates to the variable expenses with our sales, particularly in Q4. So I think we expect it'll follow directionally along the same path that 21 followed and even as 19 followed and staying around the levels, starting point being where we were in Q1 of 2022.

great. Thanks for that context and color. Best wishes.

Thanks, Jeremy. Have a great day.

Thank you. Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead. Your line is open.

Hey, thanks a lot. Good morning. Just wondering if you guys could speak to how you arrived at the comp guidance down 14 to 16 percent. You guys we're fortunate enough to come in line with the one QVU that you provided. And if I run the three-year stacks out over the next few quarters, it does imply a pretty big uptick sequentially throughout the year. So just was wondering if you could just unpack how you got to that number for us and if you'd be willing to give us a little bit of help on the second quarter.

Hey, Chuck. Nice to hear from you. Yeah, let me give you a little bit of color on kind of how the year unfolds. And it is pretty consistent methodologically with prior talk on this in the March release, meaning we expect sequential improvement from Q2 to 3 to 4, largely driven by, as I mentioned a few minutes ago, the seasonal patterns in the business, you know, winning back to school, winning holiday, but importantly also tied to the gradual rollout and incremental growth volume initiatives, so to speak, within many of our cities. As I've spoken about in the March call, the addition of a MISI size range, for example, the expansion and rollout of a more intense queue line, last UPT stop before you check out a portion of our store, the further traction of our CTX remodels, which go into comp. So all of those inputs and assumptions remain in our model. Really, as I'm sure you've thought about it, we just kind of tamped down the lifts that we thought we would potentially achieve based on a persistent level of the inflationary impact impacting our lower income customer. So it definitely improves sequentially and is bolstered by these incremental initiatives. And then I'd share a little bit of color on current product trends which is relevant in that we're seeing some really good trend shifts within some of our cities regarding the change in habits of our end customer, mainly driven by greater where-to-work trending activities that is benefiting us. So we're kind of, if you will, way more in business than last year and the prior year on you know, where to work clothing from, you know, black and white simple pieces that you can put together with the trend flare and so forth. And then we're also seeing a continued strong trend in, I guess, the flip side, the at-home portion, the still remote worker slash remote caretaker and matriarch of the household who is still wearing, you know, lounge meets street wear in a casual sense. And we're seeing that boom. In fact, we're seeing both those businesses really surprises every single day, and we're feeding them as best we can. So all of that, you know, kind of like some base things that are happening well, some incremental things that are happening well, are bolstering our confidence in the build, so to speak, quarter to quarter over the year. In terms of Q2, not at liberty to share much more than I shared in a previous answer, but, you know, maybe the thing I'd add and just emphasize is, our confidence in that basket and conversion metric. You know, we're in well over 100 stores now with conversion and traffic meters, or I should say traffic meters, and therefore able to compute conversion. And we're just seeing this really, you know, wonderful, consistent, high conversion level that is just simply not wavering, even with inflationary pressures. So it points to the fact that the consumer who has the funds, many still do, to come into our stores converting at the same rate. And then their basket, it's really interesting. I mean, our basket is similar to 21 levels, never mind well above 19. And so all of those, as it pertains to Q2 specifically, and the rest of the year, but just honing in on your point about Q2, We feel really good. You know, we're seeing incredible take rates on Memorial Day goods as we speak. July 4th is going to be a banger. And then we have a very early back-to-school season because of where our stores are located. And so we're already seeing some good traction on things like uniforms and back-to-school goods. So all that gives us, you know, certainly good feelings about how Q2 unfolds.

Okay, that's very helpful. And then Just to build off that, I was hoping you could talk about the evolution of your basket since 2019 in terms of the overall dollar size, UPT, and I guess what's actually changed within the basket? How much more discretionary that basket has become, or has it stayed mainly in the apparel area?

Yeah, great questions. Let me give you some high-level thoughts on that. First off, what is being driven by? It's being driven by both, the basket that is, both by UPT gains, and I'm talking now versus 19, and AUR improvements. So, similar to how we've reported, frankly, the resiliency and the acceptance of better quality value, slightly better and higher price points for AUR. The brand, the customer is not really balked at those, and that combined with higher UPTs, call it 50-50, Chuck, to the basket, is contributing to that trend being, you know, up significantly against, you know, 19, you know, in the neighborhood of almost 8 to 10 bucks higher than 19. And relative to 21, it's, you know, almost flat to 21, which is encouraging, as you know, given what was in the market in terms of stimuli and such during 21. So as we look at the complexion of that basket, you know what, it really hasn't changed much because of the fact we're a trend-driven brand. The balance between sort of what I'd call needs and wants has stayed relatively consistent. The only sort of aberration in a good way to that is the queue line impact. We're seeing a contribution in UPTs to the basket, incremental for sure from the queue. But everything else apparel to non-apparel, it's kind of holding its own kind of in the same way it did at 19, which I think about as well. I think it shows us that the merchants are keeping up with the times on both the needs and wants and kind of all boats are riding the incremental addition of the incremental queue line activities.

Well, that's actually really, yeah, no, that's great color. Thank you. My last question is just, I'm just trying to, you know, understand you, you talked about business getting better, um, each month of the quarter to Dana's question earlier and a continued improvement into May. Um, yeah, you're, you're more guarded on the, on the consumer. And I'm just curious if you could just maybe just speak to what work you guys have done internally to understand, um, you know, the concerns that your consumer has in terms of the food rent and gas inflation, you know, just like what's changed? Has it gotten incrementally, you know, have they become incrementally more concerned? And I guess if that's the case, then why do you think your business has gotten a little bit better? I'm just trying to understand, I guess, as much, you know, details you have on your consumer right now.

Yeah, no, good, great, great question. I think what we've done primarily to date, Chuck, is hold a series of, internal focus groups, you know, primarily led by the field and getting, you know, direct input from our associate base who often mirrors our customer base. We trade back and forth, in fact, on a regular basis in the neighborhood. And I'll give you some direct color, a little more than in a call, so to speak. We're hearing a disproportionate amount of pressure on gas and hearing things like, hey, I fill up my tank with a portion of my paycheck, and then I bide my driving time so that I don't have to fill it up again a week later. And that's a real from the heart, and it makes you hurt because that's curtailing some of their certainly distance driving and probably pleasure driving choices, and it's keeping them mobile. Now, that in many respects is most likely benefiting our traffic a bit, because they are staying closer to home and we are near home for them. So there's probably a put and take there. Again, this is qualitative data, not quant. The second thing we're hearing is rent. Our customer often rents way over indexes versus the average population and even a slight higher cohort of income. These guys are renters, and they're feeling the pressure of, landlord rents going up, utilities for my rental going up, and those utility costs obviously being passed on to the renter. And, you know, some are facing, you know, things like evictions, and this is certainly more on the lower income trunks, think 20 pain below. You know, they're facing some really, really tough times. And so those are the two that are showing up the most. Food is coming in number three. but certainly not as high as gas and rent. So we're watching that carefully and we're talking frequently to our associate base and they're talking to customers just to kind of keep tabs on that. At the end of the day, I'll go back to some of that shop local commentary that I was talking about. We do think that there's a kind of a benefit, so to speak, for being dedicated to our neighborhoods and being there because over 50% of our volume is literally within a three-mile or less range and around the store. And as you know, in roughly three-quarters of our chain, there really aren't a lot of options to shop for the families. There might be a female option in the neighborhood once in a while, but there's not a lot of options to shop for a guy, a woman, and a kid, and even a baby in the neighborhood. So I think there, to some respect, like I talked about durability of our model and the sheer fact of where we're located and how we curate for our audience, that's really, I think, fortifying, frankly, our basket and conversion levels. And then lastly... the loyalty, which I've talked about, the loyalty of our customer is frankly boundless. Those who can't come in as frequently, which we've talked to, feel terrible, but they're managing their reduced available disposable income, as it were, and they're coming in a little less frequently, but when they do, they shop in a healthy way and they love it and they wish they could come in more. I think all of that is is going to unfold over the rest of the year. Um, and I think short term, you know, we, like, like most of retail is, is going to do some more digging and research. And that's what we're going to do actually in the next couple of weeks, do a little more research quantitatively to figure out, you know, what are we missing if anything? Um, but that's what we know to date. And then lastly, like I mentioned earlier in the call, we're just doubling down, Chuck, on what we do best. And I find that that's the, best way to lead in these situations. And so we are staying true to our purpose and to our mission of providing trends, basics, and fashion to this audience. And as long as we keep doing that, I think it, I think it'll help us get through this.

Got it.

Thanks a lot. Thanks, Chuck. Have a good day.

Thank you. Our last question is from the line of John Lawrence with Benchmark. Please go ahead. Your line is open.

Yeah, good morning, guys. Good morning, John. Hi, David. Would you sort of take Chuck's last question just one step further? When you look at those pressures on your customer base, historically, When you're in these inflation periods, and I guess you somewhat answered that, but just go one step further about what is that trade effect or that trade-down effect for some of your customers as they see this pressure around them? And then maybe some customers find you then in that neighborhood for back-to-school or for July 4th. that were maybe shopping a little upstream or whatever. What have you seen in years past there?

That's a great question, John. You know, I think if you go back to historical trends, we have definitely shown resilience and strength in coming out of the kind of the post- post-period of a recessionary time. You could see that in 08, 09 for the brand as an example. I think these times are, as we've all read, are a little different and have some different characteristics associated with what we're going through today. But for us, I'll key off of what I suggested to Chuck, which is this idea of shopping local. And what we know about our customer is back in 21, they were reaching a bit outside of the immediate local trading area, a.k.a. driving there, going on a trip, and spending some of their wallet out, I'll call it in the regional shopping pad or zone trading area. And they were shopping out, so they were doing both. I think in these times what we're seeing is a little less, a few less trips out to that sort of regional slash 30-minute-away hub And they're staying in the local hub, us and a local grocer and probably a dollar player and maybe a beauty store. They're staying in that area and they're patronizing us. And that's what's, I think, continuing to support the brand and our current reported trends and what we believe will be our year for the rest of the year. So, you know, that's a belief we have in the business. And it's something that for a local brand, shopping base is affordable. And so back to your word of trade down, you know, maybe it's some of that or maybe it's still shopping value, but instead of going out to the regional ring, they're going to shop value in their local ring and save on gas and stay closer to home. So, again, a lot of that's qualitative, but I think it holds together in terms of how our metrics are posting up. And we're going to continue to key in on this notion and offer incredible values and what I call drop-ins of great stuff at prices that don't break the bank. For example, this week we're dropping in three different programs that just blow out great values that we happen to have in our forward season buy bucket. And we're pretty sure the customer is going to go, thank you, we appreciate you. like we always do, because you're thinking about us and you're dropping in great new values. So I think we've always done that. We'll continue to do it. It's a hallmark of who we are, and the customer responds from us doing that. Does that make sense? Great.

Great. Thanks for that. And you mentioned the new stores. I might have missed it, but did you comment on how many more remodels you're going to do?

I did not specifically because there was no change. We still have on the books a total of 50 remodels. And I did mention that we're going to zero in on completing approximately 30 by the end of Q2. So we're on pace to what we've disclosed prior, meaning well over half within the first half of the year.

and no real difference between the performance of a remodel and a new store as far as a lift?

Well, we measure that a little differently. The new store is coming out of the gate new, obviously. The remodel, we're measuring it against a control group of comp stores. But we're pleased with what we're seeing. And we're feeding each of those store groups new and remodels, you know, the appropriate fresh goods to feed back in the sales. And, yeah, it's going as planned.

Great. Last question for me is we've heard some other companies talk about the availability of merchandise is pretty robust out there. Can you comment on that and what you see as far as maybe deals in the pipeline? Sure. Sure.

As I mentioned in the call, the chase for our business model is definitely on. There is, needless to say, unfortunately, for the industry, but for us, it's a good thing in that we're seeing goods come across our desk on a daily that represent terrific values across branded goods and private label goods that represent cancellations from other brands that unfortunately don't need it anymore. but becomes something that we can pick up on an attractive basis. And so it is a very flush environment, which City Trends intends to take advantage of in the right strategic manner. And like I mentioned in the call, we look to do that for bolstering our – BTS is somewhat, although we're pretty good on BTS, and now it's more about bolstering fall and holidays. with looking at those opportunistic buying opportunities. So, yeah, we're out there. We've never not been out there. We love it, and we do it in a very strategic, smart way. And most importantly, that's right for our customer. You know, we don't go out and just do any willy-nilly great deal. We make sure that that product that we're picking up is right for our African-American and Latinx families.

Great. Thanks for the color. Good luck.

Thanks, John. Have a great day.

Thank you. There are no further questions at this moment on the phone lines.

Thank you, Malika. Thanks, everybody, for joining the City Trends first quarter 2022 earnings call. Have a great week and upcoming Memorial Day. Bye-bye.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.