Citi Trends, Inc.

Greetings and welcome to the CityTrends third quarter 2023 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 on Tuesday, November 28th. I would now like to turn the conference over to Ms. Netsa McKee, Senior Associate. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on CityTrend's third quarter 2023 earnings call. On our call today is our Chief Executive Officer, David McEwen, and Chief Financial Officer, Heather Platino. 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, Nitsa. Good morning, everyone, and thanks for joining us today on our third quarter fiscal 2023 earnings call. I will begin our call with highlights of our third quarter performance. Heather Putino, our chief financial officer, will then elaborate on our detailed financial results and our outlook. Then we'll open the call for your questions. In the third quarter, our team continued to advance our strategic initiatives while navigating a very challenging selling environment and controlling the controllables like we always do. We successfully managed the middle of the P&L, as we registered a strong gross margin of 38.2% and kept operating expense dollars essentially flat compared to the prior year. That said, our third quarter top-line performance did not meet our expectations, with sales held back more than we expected by the ongoing challenging macroeconomic backdrop. Our primarily low-income customer base consisting mostly of families earning $45,000 and less per year, is being very selective in purchasing much closer to need as they navigate higher costs of living, a buying pattern further impacted by unseasonably warm weather throughout the quarter. Our third quarter comp sales decline of 6.2%, while similar to the prior quarter's run rate, did benefit from the intentional inventory rebuilds that I referenced during our Q2 earnings call. In particular, rebuilds in home, men's, big men's, and beauty were embraced by customers thanks to significantly better inventory levels, enhanced assortments, and better values than last year. Additionally, our ladies' business benefited from excellent pre-season trend forecasting that showed up in one of our best assortments ever. As the quarter unfolded, we experienced strong and consistent in-store conversion, signaling that many components of our trend right assortment for all ages continue to resonate with our customers. Our total sales were held back equally by stubborn traffic and basket trends. Contributing to these trends was meaningfully warmer weather throughout most of the quarter across a large portion of our fleet. Additionally, in our latest research, it's clear that rent, utilities, food, and gas are still real issues for our customers who top out at about $55,000 annual household income, with 50% of customers earning $25,000 or less per year. Our back-to-school and back-to-college business felt this pressure as parents and students bought less during a volatile financial environment, coupled with persistent heat waves that kept kids in shorts and short sleeves far longer than normal, therefore curtailing historically strong selling of fall goods. Even though we fell short of our quarterly expectations, we continued to play offense and We began testing a more robust marketing strategy in a few markets to drive traffic and deeper customer engagement from current laps to new customers. And we are very pleased with early test results and are planning to have digital and radio marketing play a bigger role in our future. Additionally, our remodels in the quarter contributed strong sales lifts, more evidence that when we refresh our store experience in established markets, Our customers' excitement translates to better traffic and basket trends. Lastly, our focus on inventory and margin management in the face of discretionary sales headwinds continues with a steady hand at the wheel, ensuring we flow to stores the appropriate amount of newness two to three times per week. With many important selling days ahead of us, I am pleased to report that we've experienced improved top line momentum fourth quarter to date. Our customers are loving our ready, set, gift campaign, supported by a timely setup of our holiday floor set and a wide offering of gifts, including great toys, mega Bluetooth party speakers, the most amazing fragrance gift sets, all the cozy a person could want, And, of course, so much Trenright clothing, accessories, and home for all ages, all at incredible values. We are also ready with must-have fits to help our customers show up to their holiday gatherings with style and confidence. We know for sure that our customers show up in stores for the big moments in their life, and this holiday will be no exception. Our stores and staff are energized, and we feel really good about our jaw-dropping prices and appropriate inventory position. Notably, this year's extra selling day between Thanksgiving and Christmas and resulting super weekend is perfect for last-minute shopping, a hallmark of our customers. I'm confident we are well-positioned to win the holiday season, and we look forward to updating you on our progress during our fourth quarter call. Importantly, the strength of our balance sheet with total liquidity of $135 million at quarter end with no debt provides us the necessary flexibility to navigate the dynamic consumer environment while maintaining our focus on our strategic initiatives as we seek to create long-term shareholder value. I'd like to take a moment to express my gratitude to our teams for their unwavering dedication to in serving our African American and multicultural families across the United States in the heart of their local neighborhoods, making them feel welcome each and every time they visit, particularly during the busy holiday season. Before I pass it on to Heather for a review of our third quarter results and a discussion of our outlook, I want to quickly review the steps we are taking to improve our top line performance. During the quarter, we made significant progress against our four strategic initiatives. To remind you, they are, first, driving ComStore's productivity. Second, managing inventory and maximizing margin. Third, controlling SG&A expenses and leveraging our balance sheet. And fourth, executing technology enhancements. In addition, to these initiatives, we are taking decisive actions to drive top-line sales for the remainder of 2023 and into first quarter 2024. Examples include, first, marketing testing. As I mentioned, during the third quarter, we began testing a more robust marketing strategy in a few select markets. Early results are promising, and we have advanced this marketing effort to approximately 20% of our fleet for the holiday season. the first time in CityTrend's history. Next up, optimizing inventory. We are still bullish regarding the ongoing benefits of building optimal inventory levels for specific categories that offer unique items and upsides at the best values around. Many of these categories, such as home, big men's, and beauty, were not rebuilt during last year in spring. So we're excited to see continued momentum during holiday and continued traction when we turn the corner into 2024. Third, delivering a differentiated store experience. We are laser focused on improving our in-store experience. This includes heightened attention towards visual merchandising, accentuating newness, and putting together head to toe looks. In essence, creating a specialty store vibe with an everyday emphasis on style, quality, and affordability. Our customers think of us as a guide or a coach, providing all ages with today's trends at totally gettable prices. Lastly, in the list of quick, decisive actions, improve spring 24 setup. We are looking forward to the spring selling season, and from a product standpoint, we are highly focused on flowing newness on a regular basis while delivering our spring assortments to our warmer weather stores earlier than last year. Our decision to launch spring assortments earlier was influenced in part by our new ERP system launched in the early portion of the third quarter. This is a significant upgrade from our previous ERP system and allows for more dynamic analytics, product allocation, and assortment planning. Our teams across the organization are benefiting from this new and exciting tool. Looking ahead to next year, we believe the new ERP system will gradually improve our planning and allocation functions and lead to more precise allocations of the right product to the right store at the right time. As you can hear, we are not standing still. We have highly engaged, loyal customers that shop us frequently for curated, made-for-them trends fashion and basics for way less spend and lots of complimentary accessories, home and impulsive items that they just can't resist. I have met with customers during the last quarter in the heart of our most important neighborhoods from Jackson, Mississippi to Birmingham, to Tuscaloosa, to Jacksonville, to Savannah, to Charleston, to Atlanta and beyond. And I can assure you that our customers love their city trends. Our job, is to deliver goods aligned to their trend-based wants and needs at values that fit within their means. It's what we know how to do for our core African-American customer base.