This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Greetings and welcome to the CityTrends 2Q23 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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 Tuesday, August 22nd, 2023. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.
spk02
Thank you, Chris, and good morning, everyone. Thank you for joining us on CityTrend's second quarter 2023 earnings call. On our call today is our Chief Executive Officer, David McEwen, and Chief Financial Officer, Heather Portino. Our earnings release was sent out this morning at 645 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 to 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?
Chris
Thank you, Nitra. Good morning, everyone, and thanks for joining us today on the second quarter fiscal 2023 earnings call. I will begin our call with highlights of our second quarter financial and operational performance. Heather Ploutino, our chief financial officer, will then elaborate on our detailed financial results and a few other items related to our outlook. Then we'll open the call up for your questions. We are pleased with our second quarter results that reflect positive momentum for both the top line and gross margin against a continued challenging macro backdrop. The quarter was highlighted by significant sequential comparable store sales acceleration from the first quarter. As you've heard, we are committed to improving our operating results with an extreme focus on driving improved comp store productivity. our 880 basis points sequential increase in our top sales trend is a direct result of our team's agility to amaze our customers via compelling spring and summer assortments. Coupled with sales momentum, we delivered a strong gross margin of 38.2%, which was above last year and 150 basis points better than the first quarter. Importantly, we experienced improved traffic levels and strong conversion throughout the quarter, signaling that our product assortment, strengthened by our strategic inventory rebuild in key areas of the business, is resonating with our customers. Our primary strategic initiative to rebuild inventory in key areas of the business is definitely paying dividends. Central to the rebuild is offering a balanced assortment of good, better and best priced styles with an emphasis on incorporating a healthy mix of entry price points that appeals to our value-based customers. Our total inventory at the end of the quarter was down 5% versus the prior year, compared to down 12% at the end of the first quarter. We are right where we want to be. And rest assured, We are keeping tight reins on our inventory and ensuring we have the right amount of newness and freshness across our primary category cities. During our last call, we mentioned sharpening our focus on trend development as a key lever for the year. With the first half in the books, we are seeing some clear, sustainable wins on the product front, which I'll speak to in a few minutes. And I'm confident that we are moving in the right direction. We definitely have more work to do, consistent with our theme of doubling down on controlling the controllables. In fact, across our three primary operational pillars, buy, move, and sell, we have many initiatives in flight that further optimize business productivity. What's important to note is that our initiatives are designed to benefit our customers, who mean so much to us. After visiting many stores and interviewing customers and tenured associates who know our neighborhoods better than anyone, I can confirm that inflationary pressures are still very real for the population cohort that we cater to each and every day. As a reminder, the bulk of our customer base makes it work on $50,000 or less per year, with about half of our customers living on $25,000 per year. I've met customers whose rent is up 25%, paying higher utilities on just $25,000 a year, and customers who live with their extended family members making it work on $35,000 a year. Incomes are really being stretched. As we sit in the heart of the neighborhood, what I also observe is how resilient lower-income families are. Our everyday mission is is to provide access to fresh and fun trends to these families in a friendly, pleasant, and high-energy environment that is all about respect. Getting this right means everything to us, and I can assure you our model is well-suited to thrive as times get better. Now, for a little more detail on our performance during the quarter, while all months were better than the first quarter on the comp sales trend line, Our best month was July, buoyed in part by pent-up demand that showed up after the cooler weather trends abated in the northern portion of our fleet. Our family-centric seasonal moments were strong, including Mother's Day, Memorial Day, and July 4th. From an assortment perspective, positive momentum in the quarter was broad-based. Notable outperformers included footwear, ladies' and men's apparel, beauty, and queue line merchandise. These categories benefited from our inventory rebuild efforts and had customers voting yes to trends and amazing values. As we head into the third quarter, our stores are stocked with the latest trends, fashion, and basic needs across apparel, backpacks, home, tech, hydration, and more. And our store teams are ready to deliver. They do a wonderful job merchandising our specialty value store experience that reflects their deep connection with our customers. I have seen so many great examples of our customer experience managers, our title for store managers, delivering tailored service to their regular customers, helping them to look great, feel good, and show up for whatever comes their way. With our buy team immersed in the ongoing merchandising process, the fall season and well along with setting up for a successful holiday season, the marketplace remains ripe with high quality, high value goods. Our flexible and agile operating model combined with our strong balance sheet puts us in an excellent position to continue to buy the right goods at the right price. Importantly, we ended the second quarter with liquidity of approximately $141 million, inclusive of $65 million in cash and no borrowings on our $75 million asset-based lending facility, and no debt. I am incredibly proud of how the team managed the business in this environment while maintaining a laser focus on our strategic priorities. We were clear during our first quarter earnings call that we would take decisive actions that reflect our deep connection with our customers. Our performance during the quarter boiled down to positive momentum tied directly to the execution of the priorities that we said would fuel our sequential top-line improvement over the course of the year. In this vein, let me take a moment to update you on our four strategic priorities within the context of driving profitable sales during the rest of the year. First up, and number one, driving comp stores' productivity, The headline here is all about aligning our assortment with the needs and wants of our customers, which includes our decades-long commitment to African American families, combined with our recent efforts to build awareness and traction within rapidly changing multicultural neighborhoods, thanks to the outsized growth of Latinx populations. While the first hack tilted towards essentials and surprise and delight pickups and accessories, we are seeing In Q2, apparel and footwear demand moving in the right direction. Our customers are responding to our healthy penetration of sharp price-pointed goods for her, him, and the kiddos. This shows up in our strong conversion, indicating our lower-income customers are really appreciative of our potent offering of trend, quality, and value at $9.99 and less. Timing of fresh goods is also playing a role in that our customers' values high-quality setup in the store, and presentation of newness in our stores for a given season. We have worked really hard this year to refine the timing of our product flow in order to satisfy the early adoption of new trends and seasonal changes in product assortment. Lastly, we are adding muscle to the areas of the business where we believe there are significant share of wallet opportunities by deploying incremental talent and promoting from within to drive the top line. I am more confident than ever in our people to drive comp store sales productivity. Our second strategic priority is managing inventory and maximizing margin. I think you can tell from the stats that we are controlling what we can control with respect to our inventory levels while delivering on our promise to rebuild where appropriate in targeted areas of the store. Our primary approach is adding breadth in the right stores and in the right categories, which is yielding results that show strong consumer satisfaction and adoption. We are learning a lot along the way and calibrating as we go. I'm most excited that our team is applying analytics earlier in the process in response to the consumer reaction to healthier inventory. Looking forward on the margin front, we are maintaining a maniacal focus on sell-throughs and turns in order to maximize the merchandise margin. We also include domestic inbound and outbound freight in gross margin. And the good news here is that during the quarter, we completed a large freight optimization initiative that will help us deliver reduced freight costs already embedded in our guidance. In total, I feel we are well positioned to recruit market share and to capitalize on potential future demand. Our third priority is controlling SG&A expenses, and leveraging our balance sheet. The good news is the headline of expense management remains consistent. We've instilled a disciplined and prudent approach to expense management across the entire organization, and we delivered on our internal expectations for the second quarter. Although we will continue to look for opportunities to drive incremental cost efficiencies, we believe our cost structure will remain relatively consistent. And more important, highly leverageable as we look to fuel our top line, providing significant potential operating flow through. Additionally, liquidity allows us to take advantage of a product-rich environment for high-quality goods. Lastly, our fourth priority is executing technology enhancements. The main highlight for this initiative is our upgraded ERP system, which will go live shortly. We are ready and excited for major enhancements and added functionality that are game-changers in driving long-term productivity. The upgraded ERP system will benefit our teams throughout the organization, with a particular boost to our buy team, providing a new tool set leveraging data and analytics to dynamically plan and allocate smarter based on climate, trend, and replenishment needs. Essentially, this system over time will enhance our ability to get the right goods to the right stores at the right time, ultimately fueling improved full-price sell-through while reducing markdowns, a win-win for both the top line and bottom line. In summary, we are pleased with our second quarter results that reflect positive momentum for both the top line and gross margin attributed to proactive efforts by the team to execute our stated plans that our customers are responding to living our purpose known as city life, which means we live bold, live proud and respect all is more important than ever. And it's the centerpiece of our local neighborhood strategy serving as the primary specialty value store for local families to enjoy fresh and fun trends that will never break the bank. With that, I'll turn the call over to Heather Plutino, our CFO. She will discuss our second quarter results in detail, as well as a few items related to our outlook. Heather?
Nitra
Thanks, David, and good morning, everyone. Before I walk through our second quarter results, I want to take a moment to thank our many associates for their hard work and dedication. Each of our buy, move, sell, and support teams contributed in a big way to our improved performance in the second quarter, and I couldn't be more proud or more grateful. While the selling environment remained uncertain, particularly for our core customer base, our teams continued to execute against our strategic priorities while remaining disciplined with cost control. Additionally, given the challenging environment, we continued to leverage our strong balance sheet with $65.8 million of cash, well-controlled inventory, an undrawn $75 million revolving line of credit, and no debt. Turning to the specifics of our second quarter financial results. Total sales for the quarter were $173.6 million, a decrease of 6.2% versus Q2 2022. As David mentioned earlier, shopper conversion remained strong throughout the quarter as our assortments resonated well with customers. We are pleased to have seen traffic and basket improve sequentially from the first quarter as a result of our inventory rebuild initiative and our efforts to rebalance our good, better, best assortment. Second quarter comp sales decreased 5.3% compared to last year. and 880 basis points acceleration from Q1. We opened five new stores at the end of July, including a store in Englewood, California, marking our first store in LA County proper. We supported these grand openings with a mix of digital and radio marketing, including Spanish radio spots for our multicultural store openings. Early results have been encouraging across the five new locations. During the quarter, we also remodeled eight stores to drive improved comp sales productivity. Growth margin for the second quarter was 38.2%, slightly higher than last year and significantly stronger than our first quarter. This sequential improvement was primarily due to lower markdowns and moderation of freight expense in Q2. As David mentioned, we expect freight to further moderate in the second half of the year. SG&A expense dollars totaled approximately $69.5 million for the quarter, or $69.4 million as adjusted, down about 1% to last year. Lower sales in the quarter drove adjusted SG&A deleverage of 300 basis points versus Q2 2022 to a rate of 40% of total sales. Operating loss was $7.9 million in the quarter, or $7.8 million as adjusted compared to an operating loss of $3.3 million in Q2 2022. Net loss per share was 61 cents or 60 cents as adjusted versus loss per share of 31 cents in Q2 2022. Now turning to the balance sheet. Total inventory dollars at quarter end decreased 5.4% to last year compared to a decrease of 12% at the end of the first quarter. We remain comfortable with the level and makeup of our inventory and are carefully investing in key areas to drive demand. Next, I'll turn to our outlook. While we expect discretionary spending to remain under pressure in the second half for the low-income families we serve, we are reiterating our guidance for the year which incorporates the expected impact of our key initiative of controlling the controllable and building on the momentum experience during the second quarter. Our reiterated outlook for fiscal 2023 is as follows. Total sales for the year are expected to be in the range of negative mid single digits to negative low single digits as compared to fiscal 2022. Full year growth margin is expected to be in the high 30s. Full year EBITDA is expected to be in the range of $5 million to $20 million. During the year, we plan to open five new stores, remodel 10 to 20 stores, and close 10 to 15 underperforming stores. Full year capital expenditures are expected to be in the range of $15 to $20 million. And finally, year-end cash balance is expected to be in the range of $85 million to $105 million. Overall, we are pleased with our second quarter results. The teams are not standing still and are taking aggressive actions to drive top-line growth while maintaining a disciplined approach to our expense structure and to capital deployment. This approach, combined with our strategic growth initiatives, gives us confidence in our ability to continue to drive the improved results embedded in our guidance. With that, I'll turn the call back to David for closing comments. David?
Chris
Thanks, Heather. I can tell you that the foundation of our 77-year-old brand is strong. As a brand and a company, we're really proud of our connection to our neighborhoods, employing and serving true locals with a high-quality experience. Our 611 stores are located in the heart of these neighborhoods, often within five miles or less from the homes of our core customers, and with little or no competition in the immediate area. Our customer base is loyal and well aware that the whole family can rely on city trends for apparel, accessories, and home trends for way less spend. We curate our product offering from a strong base of vendor partners, with some of these partnerships lasting multiple decades. As a result, we enjoy a large share of the markets we're in. I remain excited about the potential of this important brand and believe that our strong foundation, coupled with the growth-minded investments we are making to fuel the top line, will unlock our flow-through earnings potential. Before I turn the call over to the operator, I want to take a moment to thank the entire CityTrends team for their hard work and dedication day in and day out. They have done an excellent job of helping to manage the business in a difficult environment, and we are so thankful for each and every one of them. Thank you, and we are now ready to take your questions. Chris, back to you.
Operator
Thank you. And at this time, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. Once again, to register for a question, please press the 1 followed by the 4. One moment, please, for the first question. And our first question is from the line of Jeremy Hamlin with Craig Hallam Capital Group. Please go ahead.
Jeremy Hamlin
Good morning. Thanks for taking the question. So I thought I might start with just asking for a little bit more color on quarter to date and what you've seen thus far as we start Q3. It sounds like you're encouraged by what you're seeing on the traffic front. but wanted to see if you could share a little bit more color on, you know, kind of that sequential improvement that we assume that you're continuing to see here.
Nitra
Hey, Jeremy. It's Heather. I'll take that question. Thanks so much. Good to hear from you. So, look, it's early, right? We're in the early days, but I will say that we're pleased with how we entered Q3 from an inventory perspective. both in quantity and quality. Our buy team is working hard to make sure we have the assortment to delight our customers. So we believe that the building blocks starting with back to school are in place to have another quarter of sequential year over year comp improvement.
Jeremy Hamlin
Got it. And then in terms of, you know, you also noted, I think, uh, a shift in terms of the types of categories that were performing best, you know, first half of the year, more tilted towards essentials. And now it sounds like you're seeing a shift in the second half to more apparel and footwear as being drivers. Anything you can share on, you know, A, that shift, does that give you a sense that, your core customers feeling better about where they are and maybe they're managing those inflationary pressures better as they've shifted their spending habits. And then two, I just wanted to get a sense as well with that shift, what types of impact might it have on gross margins as you see that shift from maybe more essentials in the first half to something like apparel and footwear.
Chris
Hey, Jeremy, it's David. Good to hear from you. Good question. And let me clarify because it might not have been as clear as it could have been. The tilting towards accessories was really Q1, so the first half of the first half. And what we saw nicely happening during Q2 was, as I stated, a gradual shift to footwear and apparel. And I would tell you, it all goes back to what we talked about. It directly resulted to some of our inventory rebuilds, getting kind of sharper on the entry price points and, as I mentioned, sharper on trend development. And I think, thirdly, to your point, the customer definitely showed up a little bit more and was willing to invest, so to speak, in apparel products things that she might not have needed coming out of Q4 into the difficult, headwind-filled Q1. And we do think that, you know, things have gotten, as we've all seen in the news, a little better here and there. And we think that's playing a small role. I think by far the bigger reason is the things that we can control. And some of our strategic rebuilds, as I mentioned in targeted areas of the store, were keenly focused on footwear and apparel. And as I mentioned, those are paying dividends. So I'd probably say the weight's probably more towards what we did to impress and excite our customers, and that caused some of the shift. But I agree with you that there has been some improvements that, you know, might be finding their way into the communities that we're in, little by little. And, you know, that's a great thing, right, as that continues, hopefully, over the course of the rest of the year. And secondly, Your second portion of impact on gross margin. As I think you know, we're pretty evenly balanced, meaning our gross margin doesn't swing in tremendous directions from apparel to non-apparel, for example. With that said, we are keeping a keen eye on our price points and our gross margin by item, or I should say our markup by item. And I think the team's doing a great job managing it. You know, really, we put it all in the blender and say, you got to buy it right. We got to sell through it right, meaning timing and price point and in the right stores. And then we got to ship it right, you know, freights in our gross margin line. When that all works, we see the high 30s. So there's no one reason I could tell you. It's just more that when the whole pie gets cranking, it shows up in high 30s.
Jeremy Hamlin
Got it. And then... Heather, I wanted to see if you might be able to quantify for us the freight impact you noted should sequentially get even a little bit better here in the back half of the year. Would you be able to characterize that in terms of basis points of magnitude, Q1, Q2, and then what you would expect here in the back half of the year?
Nitra
So here's what I'll say, Jeremy, is that our outlook for the year assumes that freight improves in the second half to the point that freight is approximately in line with last year for the full year.
Jeremy Hamlin
That freight is in line with last year?
Nitra
Yep, yep. Okay. Approximately in line on a full year basis.
Jeremy Hamlin
Okay, and then just last one real quick here. Your ERP system update, you know, which sounds like that's on track here and about to turn on. In terms of when we might expect to see that begin flowing through in terms of financial benefit, is that more of a, you know, kind of 2024 impact, or do you expect to see some benefit potentially by Q4?
Chris
I think, Jeremy, you pretty much nailed it. It's really a 24 and forward impact. The rest of 23 will be getting traction with the new system and learning our way around all the new functionality that will eventually deliver some great benefit. But we're baking it more into our forward looking. And if we do see some benefit in 23, it's gravy. And we'll take it, obviously. But you kind of summed it up well. With these size upgrades, you've got to kind of have an on-ramp after you go live and have it sort of gain traction throughout the organization. And that's what we've kind of planned. So we're looking forward to it. As I stated, it's a real game changer. And the upgrade is going to be greeted with lots of smiling faces and users.
Jeremy Hamlin
Well, congrats on the progress and best wishes. Thanks for taking the questions. Thanks, Jeremy. Have a good one.
Nitra
Thanks, Jeremy.
Operator
Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead.
Chuck Grom
Hi, this is Greg Summer on for Chuck. I just wanted to kind of dig into what gives you confidence that the second half can improve obviously student debt is hitting you know in a couple months and we've seen rising gas prices I just kind of wanted to confirm you know I guess your consumer is probably under indexed to student debt and then are you know potentially higher gas prices or even rent kind of factored into your outlook hey Greg good to hear from you yeah so here's what I will say
Nitra
We've been talking for a while now that we anticipate some modest improvement for our customer in the second half, and we've confirmed that with third-party economists that that still holds. You are right that we under-index on student debt. Gas price increases harm our customer, there's no doubt. But here's what we need to focus on, is really controlling what we can control. So if you think about the four initiatives that David has laid out, that is what is driving our expected improvement in the second half, making sure that we have the right product in the stores, that we are being as agile as we are known to be in adjusting to the way our customer is voting with their wallet, making sure we've got the right mix of good, better, best, managing margin, you've heard before, right? Controlling expenses and leveraging our technology. So it's really, we're hopeful that our consumer who we love very much gets some relief, but we're not sitting back and waiting for that. We are being pretty aggressive and going after all of the levers that we can pull.
Chuck Grom
Great. I had a quick follow-up. I was wondering if you could just comment on direction that your basket is trending and then also kind of the breakdown of the basket between AURs and units.
Nitra
Yeah, sure. Thanks, Greg. So we're happy to say that basket has improved in the second quarter versus the first quarter. And it's really driven by UPT primarily. So that's telling us that our customer is responding to our move to put more opening price points in our store and they're filling their basket accordingly.
Chuck Grom
Great. Thank you.
Nitra
Thank you.
Operator
Our next question is from the line of John Lawrence with Benchmark. Please go ahead.
John Lawrence
Thanks. Good morning. Congrats, guys. Thanks, John. David, would you talk a little bit about, we've talked a lot about the ERP system. You're doing high 30s and you work really hard to maintain that gross margin line. Looking forward, obviously, that system gets a return. We've talked about all the benefits and all of that. Can you spend a little time on what does it do for you on the expense line? Does it Does it help you leverage that line a little bit? And I see the possibility in 25 and 26 of a 40-plus gross margin. Is that reasonable?
Chris
Hey, John, good to hear from you. You know, I think what I'd say and summarize in the following way, the impact of creating the ERP system will, first and foremost, drive the right product into the right stores at the right time, meaning it adds significant new functionality catered towards better planning and smarter allocations. So always want to anchor the benefit around improving top-line sales, which, as you know, is really what we're aggressively chasing, given a relatively and high, frankly, fixed cost structure within the CityTrends model. So I want to be sure that we always anchor our talks around ERP system impact, that it's all about the top line. Now, to your point, it will impact gross margin, we believe, over the course of the next couple of years. Can't comment whether or not we'll hit the number you mentioned just yet, too early in the game here. But it definitely provides us a really interesting way and compelling way to think about how we run the business a little differently from a planning and allocations point. That kind of kicks in, like I mentioned a few minutes ago, in 24. From an expense side, if you consider kind of quote-unquote markdown expense and expense, which we should, yeah, it should in theory impact that, which we're looking forward. It might even impact freight expense a little bit because it might inform us how we better distribute out of our DCs. Still, again, very early, but As you can tell by my answer, we're thinking about it really holistically. You know, first and foremost, it's sales driving. But then we'll see, I believe, benefits kind of sprinkled throughout different functions in the organization, including Heather's world. You know, it has a finance team benefit as well. So in any event, we're looking forward to all those impacts as they come on, and it'll just take a little bit of time as we kind of phase into it. Does that make sense?
John Lawrence
Yeah, thanks for that. Just a follow-up. The never-ending question you get, I'm sure, is can you give us an update on how the remodels are doing? And, you know, as some of those comp against the year before, how are they comping against prior history?
Nitra
Yeah, John, I'll take that. We remain pleased with our remodel program. Right now we've got 15% of our fleet in CTX format. And we like the look, our associates like the look, and our customers like the look. We still see a lift in the mid to high single-digit range for a period of time after the remodel. on a year-over-year comp basis, they start to perform kind of like their market, right? I mean, they perform a bit better, but that degree of delta starts to come down over time because our customer is getting used to our store and we're comping over it, right? So still something that we're really excited about. We love the look, like I said, and we'll keep looking for opportunities to refresh our stores.
John Lawrence
Great, thanks. Congrats.
Chris
Thanks, John. Thank you, John.
Operator
There are no further questions on the line at this time. I'll turn the call back to David for closing remarks.
Chris
Thanks, Chris. Thanks, everyone, for joining us today. Have a great remainder of the summer, and we'll see you on the next call. Take care.
Operator
That does conclude the conference call for today. We thank you for your operations and ask that you please disconnect your lines.
Disclaimer