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Operator
Greetings, and welcome to the CityTrends first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nitsa McKee, Senior Associate at ICR. Thank you, you may begin.
spk19
Thank you and good morning, everyone. Thank you for joining us on CityTrend's first quarter 2024 earnings call. On our call today is Interim Chief Executive Officer Ken Seifel and Chief Financial Officer Heather Pitino. 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 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 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 Interim Chief Executive Officer, Ken Seifel. Ken?
Ken Seifel
Thank you, Nitsa. Well, good morning, everyone. I'm pleased to join you today to discuss the work I had for Citadrills. Heather will provide you a review of the Q1 business results, and then I will give you a brief overview of my prior experiences and a high-level outline of the work that we are undertaking to increase shareholder value. Before we discuss the business, on behalf of the Board of Directors and the entire CityTrends team, I'd like to thank our former CEO, David McCune, for his hard work and leadership these past four years. David shaped and built our purpose-driven CityTrends culture while leading the company through some of the most challenging consumer environments in recent history. And on a personal level, I'd like to thank David for his willingness to provide business advice to ensure a smooth transition, and we want to send him very best wishes. I'd like to turn the call over now to Heather to review Q1 business results. Heather?
David
Thank you, Ken, and good morning, everyone. We are pleased with our first quarter performance in which we registered an improved top-line trend by delivering a positive comp store sales increase of 3.1%. The quarter was further highlighted by gross margin expansion of 160 basis points compared to last year. Both of these Q1 wins were assisted by our inventory rebuilds and targeted product categories, combined with our buy team's continued focus on making wise inventory investments, maximizing markups, while also providing incredible values for our customers. Early in the quarter, we felt the impact from the slower start to the tax refund season. as well as unfavorable spring weather patterns. However, we posted positive comps in each month of the quarter. We also experienced an improved trend in store traffic with basket size similar to last year and continued healthy in-store conversion. These key performance indicators are proof points that our unique assortment curated specifically for our African American and multicultural customers resonated. As mentioned on recent earnings calls, our teams remain committed to setting up key selling moments earlier, and it paid off in the first quarter. Our Q1 product offering included a healthy balance of exclusive trends, leading brands, year-round fashion, and, of course, basics for spring selling, the tax refund season, and the Easter holiday. From a category perspective, our performance was broad-based with particular strength in home and lifestyle, Impulse, also referred to as our queue line, Big Men's, and Ladies Plus, all areas positively impacted by our inventory rebuild efforts. Across our largest categories, Ladies, Men's, and Kids Apparel, quarterly comp sales were all positive, driven by trend-right values and incredible brands that met the needs and wants of our customers for the spring season. We exited the first quarter with total inventory dollars up 4%, in line with our expectations. We feel good about the quality, mix, and value proposition across our inventory as we entered the second quarter. We are positioned to capitalize on late spring and peak summer selling weeks with a robust assortment of made-for-city trends coordinating short and tea sets, plenty of teas for the whole family, fresh takes on Americana and Juneteenth, and all the goodies for summer barbecues from outfits to audio. With a large portion of our fleet in areas that go back to school by mid-August, we will also be well-positioned to capture demand in July with a heightened focus on kids' apparel, accessories, and footwear. Lastly, our value proposition is showing up loudly on the sales floor, with many new deal-priced offers that are driving strong sell-throughs. In addition to the inventory rebuilds and targeted product categories that we've been discussing for the past several quarters, in Q1, we leveraged our new ERP system to optimize assortments in key African American neighborhoods where we've identified significant sales opportunity. This initiative using our improved planning and allocation methods, is impacting about 20% of the chain and had encouraging results in the quarter. We'll continue to monitor results and refine our approach based on what we learn, with the potential to expand this effort as we move through the year. In the quarter, we continued testing radio and paid social marketing, turning the dials on market size, repeat markets, frequency of messaging, and combinations with other initiatives. We've seen particularly strong results with a combination of remodels and marketing. To date, we've touched about 140 stores with our marketing efforts and will increase that number throughout the year with back-to-school and holiday campaigns. We remodeled 20 stores in the first quarter and an additional 15 locations in May, quickly closing in on our fiscal year goal of 40 remodels. As we've discussed in prior calls, these refreshed stores see positive results with mid to high single-digit sales lists and at half the prior cost. Including the May remodels, CTS stores represents approximately 21% of our fleet. Turning to the details of gross margin, our first quarter adjusted gross margin expansion of 160 basis points was driven by the focus on markup I described earlier, significant freight expense improvement, and effective markdown management. Partially offsetting the gross margin benefits in the quarter was an unexpected shrink headwind as a result of physical inventory counts. As we've discussed on prior calls, we count a portion of our store fleet each month and continue to see issues in very specific stores and very specific categories. We do not believe that this is a chain-wide problem. At CityTrends, we are accustomed to managing shrink, and although a headwind this year, it remains a very small component of our margin structure. Internally, we have engaged cross-functional experts to reduce the impact of shrink with particular focus on internal theft. We are ensuring that stores have well-placed cameras and are leveraging recently improved exception reporting to quickly identify root causes and to take appropriate action. We're updating key loss prevention policies and are establishing a more robust restitution program. And key to all of this, we've been working to upgrade our store talent and our training programs. Next, we'll turn our attention to our supply chain, tightening controls and reporting to identify and resolve any additional causes of shrink. Importantly, we will continue to place the safety and well-being of our employees and customers at the center of our operational decisions to stem this headwind. Despite pressure from shrink, we remain confident in our ability to deliver continued growth margin expansion for the balance of 2024, driven by incremental markup improvement and reduced freight rates. Moving to SG&A. Adjusted SG&A expenses increased about $3 million in the quarter compared to last year, in line with our expectations and reflecting our previously discussed reset of the SG&A base. The increase as expected, was driven by merit increases in stores and corporate and a modest increase in advertising spend. During the quarter, we closed three stores as part of our ongoing suite optimization effort, ending the period with 599 locations. Now turning to the balance sheet. At the end of the quarter, we remained in a healthy financial position with a strong balance sheet including no debt, no drawings on our $75 million revolver, and $58 million in cash. With a liquidity of approximately $133 million, we can more than sufficiently fund our business initiatives, building on our foundational strengths for future profitable growth. Before I turn the call back to Ken, I want to reiterate that we are encouraged by our first quarter results. Our strategic initiatives are driving improved performance, and we are playing offense while controlling what we can control. This approach is particularly important as our customer continues to face inflationary pressures and is carefully managing their discretionary spend. We still believe in the overall approach to the annual outlook we shared in March. However, with one quarter under our belt, we felt it was prudent to make a few adjustments to our 2024 outlook as follows. Full-year comp store sales are expected to grow by low to mid-single digits compared to fiscal 2023, a range slightly below our previous outlook. We expect full-year growth margin to expand by approximately 75 to 100 basis points, consistent with previous outlook. We are now planning an SG&A dollar increase of 1.5% to 2.5% over 2023, slightly better than what we discussed during our last earnings call, driven by streamlining costs in a variety of areas. Consistent with our previous outlook, resulting full-year EBITDA is expected to be in the range of $4 million to $10 million. As we shared in March, we plan to open up to five new stores, remodel approximately 40 locations, and close 10 to 15 underperforming stores, ending fiscal 2024 with approximately 595 stores. we continue to expect full-year capital expenditures to be approximately $20 million. With that, I will turn the call back to Ken. Ken?
Ken Seifel
Thank you, Heather. Appreciate it. First, I'd like to share my appreciation to the CityTrends team for their hard work that generated a 3.1 comp store sales increase and gross margin rate growth of 160 basis points compared to last year. The board remains committed to the core strategies of the business As I take the reins, I'm focused on ensuring that the business consistently executes those strategies to improve top line sales and EBITDA profit. Now, if I may, I'd like to briefly introduce myself and discuss the near-term road ahead for CityTrends. I joined the CityTrends board in late 2019 and have recently served as chair of the Nomination and Governance Committee and also members of the Audit and Finance Committee. The majority of my 40-year professional career has been in value apparel retailing. The first half of my career was with J.C. Penney in the 80s. I was with Target in the 90s during their brand development and rapid growth. Old Navy in the 2000s, where I led explosive store growth and eventually becoming the largest specialty store retailer in the world. And during my time in the Fortune 100 companies, I held a number of executive roles in most company functions, including merchandise buying and in operations. In 2010, I entered the second phase of my career focused on working in private equity-backed retail companies where I assumed the role of CEO and co-investor in all business engagements. I found that owning a financial stake in each business created strong alignment with the shareholders and really helped reinforce an acute focus on increasing shareholder value. As co-owner, entrepreneur, and leader, I was able to generate three successful business turnarounds, which resulted in returns of three times, in some cases over six times, the initial investment for our shareholders. I've been fortunate to have a wide variety of retail experiences. However, my time as CEO of Gabes, an off-price apparel store serving a low-end consumer, is the most relevant to Cititrans. My experiences in both public and privately held companies have taught me there are just a few critical and foundational points to restoring company profits and setting it on the path to long-term sustainability. First, successful companies need to clearly understand the core customer and how to best serve their needs. And as this core customer evolves in response to their environment, it's critical for that organization to be nimble and adaptable as well. Next is a compelling and differentiated value proposition that distinguishes the business from competition and generates increasing market share in a highly competitive environment. Also critical to success is operational excellence. This is the ability for a company to consistently execute the business model with profitable cost efficiencies. Next is a compelling growth plan. That allows a company to continually expand and capture market share. And last but not least are well-trained, highly engaged people who are dedicated to bringing the strategies to life. I have found in my past a balanced focus on the core customer, a compelling value proposition, strong operational excellence, clear growth avenues, and engaged people creates unstoppable momentum for a company. Oh yeah, and by the way, all of this has to be done very fast. I'm really looking forward to bringing my past retail experiences and learnings to lead the next chapter for CityTrans. I'm optimistic about CityTrans because of its unique position in the marketplace as a value retailer serving a largely underserved consumer. With nearly 600 retail locations, we're one of the largest national retailers focused on lower-income consumers. Our company is rooted on the strength that we have in the African-American community, which to this day accounts for the majority of our financial success. Because of our long-term neighborhood presence, our customers are highly engaged and loyal to CityTrans. When we get it right, our customers respond. Another positive trait of our company is the balance sheet. which gives us a big competitive advantage today in today's world of higher interest rates, also allowing us the flexibility to take advantage of growth opportunities to increase our market position. And although an appointment of an interim CEO could be viewed as a transitional period, I want to assure you there will be minimal disruption because I am familiar with CityTrains, which will aid me in quick transition into the day-to-day work. My objective is to deliver consistent top-line growth streamline expenses, lay the groundwork for long-term store expansion. And it all begins with really getting back to the basic blocking and tackling of a good retail company. My goal is to first clearly understand what's working and find ways to accelerate that work, as well as remove obstacles so our team can perform their jobs more efficiently. To that end, we're going to focus on the following initiatives. Number one, driving profitable sales. Number two, sharpening our product assortment decisions, and improving inventory returns. Number three, streamlining costs. Four, optimizing our supply chain. And five, leveraging benefits from recent IT upgrades Heather mentioned a moment ago. I plan to lead the company through a fresh review of our current business performance in each of these areas. Our goal is to align on the facts, focus on the opportunities, to accelerate areas of success, and course-correct areas of opportunities. The strategy themes are pretty familiar, and I believe many of the answers already exist. The difference will be a laser focus on initiatives to significantly improve our execution and speed on all fronts. Regardless of external factors, we will control what we can control, and we're going to fight hard to significantly improve our top-line sales results. As I enter the business, there are a few questions on my mind that I want to quickly answer. First, are we offering enough exciting brands at compelling prices? Increasing frequency and enticing new customers begins with putting more treasure in the treasure hunt of product choices. The thrill of finding unexpected deals is the reason customers love to shop off price and value retail formats. It's also the key reason our business has a defensible moat around external competition and online retailers. We will review all product categories and adjust the assortments as needed to ensure that we have compelling treasure throughout the store to excite our customers. Next question is really our product assortment breadth of offering and value, price value equation strong enough in all of our categories. You know, we know that many of our product categories are doing well, and they offer us opportunities to study and replicate their success. We can capitalize on these early positive results in our Q-Line product, for example, and successful apparel departments plus continue expanding our reach and home categories. However, there is an opportunity in some categories to sharpen the value equation and improve customer choice counts. All in all, I see a good deal of opportunity to consistently grow our top-line sales. Also in support of our sales initiatives, we have an opportunity to ramp up business analytics and product allocations. As previously reported, the company installed a new enterprise resource system And we had the opportunity to realize efficiency savings from the new technology, which include driving sales through more accurate store-by-store product allocations and the ability to more accurately analyze markdowns. Another area to review is our supply chain costs, which impacts our gross profit. Work is already underway in the supply chain, where our distribution teams are beginning to uncover ways to reduce our transportation costs and the cost of processing products. An example is vendor direct to store shipments that can be reduced and result in a significant savings. We also have line of sight with savings in transportation by renegotiating inbound shipping rates. Both business analytics and supply chain efficiency initiatives will have a positive impact on our gross profit. We also need to lower SG&A expense base. Over time, our total sales have decreased while our SG&A has steadily increased Clearly this relationship is untenable and it must be reversed. Increasing sales will help, but we also need to find cost efficiencies to offset inflationary pressures. We intend to deep dive review every cost center to ensure that the SGA is cost efficient and supports our go forward strategies. I expect we're going to find a lot of smaller expenses that's going to add up to significant SG&A savings. We will find ways to lower our expenses and improve our operational execution. I also want to dig into our new stores. Our recent new stores performance has been a divergence from our long successful new store strategy. We're embarking on a detailed review of our performance to understand root cause issues and what's driving the underperformance. Nonetheless, the company has a long history of successful new stores and our demographic market white space data tells us we have a sizable opportunity to grow our square footage. We are a growth company, and we will return to industry standard, return on investment, new store growth. An initiative that we can accelerate also is our successful store remodel program that Heather touched on. She outlined the remodel count and our success so far this year. But with a little over 20% of our store base remodeled, we have an opportunity to bring more stores current over time. We're going to continue this good work and combine current store remodels with top market growth initiatives to ensure that we capture top line sales available to us in each marketplace. Another big question we're going to work on is getting a fresh view of the quantitative characteristics and qualitative desires of our customer base. As the new shopping alternatives have emerged, it has likely shifted our customer's perception of value and selection. We need to clearly understand our customer current needs and understand our recently lapsed customers so we can more able and accurately focus strategic efforts on remaining or becoming their store of choice. We'll use differential analysis to determine how to implement measured and meaningful steps to sharpening our overall value proposition, investments in categories of product to fulfill consumer demand, and service and convenience options that might be expected in a neighborhood store. This work will take us a few months to complete. but I expect the insights will be a key driver of our long-range growth plans. Well, as I just outlined, we have a lot of work to do. I plan on spending the first few weeks listening and learning from the internal team. My goal is to clearly understand what's working and accelerate that work, as well as remove obstacles so our team can perform their jobs more efficiently. And some of the themes mentioned on today's call may sound familiar to those of you that have been tracking our business for the past few years. As I mentioned at the beginning of the call, operational excellence is one of the five tenets of a successful company. I plan to lead the team through deep, thorough analysis, narrowing focus on opportunities that have the most significant impact on sales and EBITDA. Relentless tracking of results and course corrections is needed. In short, we will execute, we will achieve operational excellence, and we will move fast. CityTrends is really fortunate to have such a talented team of people who are highly invested in our company's success, and I feel fortunate to work with the CityTrends team. We will analyze together, we will learn together, we will execute initiatives together to significantly improve our shareholder value. I look forward to updating you in the future on our progress. I'd like to now return the call to our operator to facilitate questions. Christine, back to you.
Operator
Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Baker with DA Davidson. Please proceed with your question.
Michael Baker
Okay, great. Hopefully you can hear me okay. It seems to me you guys were heading in the right direction, but maybe speed was the issue, trying to get there a little bit faster. You mentioned that a couple times, Ken. In your past experiences in the three turnarounds you referenced, how long does it take to get typically to where you want to go? And then I'll ask my follow-up, which is, where do you want to go? What do you think the right margin is for this business? I think you said you got there in 2019 on the board. EBITDA margins were close to foreign change. What do you think they should get back to? Thanks.
Ken Seifel
Yeah, thanks for your question, Mike. I appreciate it. Yeah, in terms of turnaround and turnaround timing, I mean, the answer to that question varies greatly on each company's situation and depending upon the depth and breadth of some of the initiatives. My thoughts are to take a few moments, as I mentioned earlier, really kind of evaluate what's going on, do a lot of listening and learning. It's a little bit of a go slow to go fast philosophy. And then by the point of getting into about 30 days of learning and listening, themes really do emerge. And what I've found is that there's often some low-hanging fruit that can be enacted right away, and you'll start to see some improvement in some areas of the business. I touched briefly on transportation as a good example of something that can be done, and we can see some results of that sooner than later. Whereas when you get into some of the assortment decisions and some of those things, it takes a little bit longer for the training to take effect and for those to really impact the marketplace. So the answer to your question is I view it a bit as a journey, and it's difficult to give an exact timeframe on that, but that's essentially that would be where I would go. I think in terms of your second question, which was in EBITDA margin rates. As you go back and you look at the history of the business, I think we should be in that mid-single-digit range for sure. And I do think that as you look at the industry, particularly in value and off-price, the market actually sometimes will pay for a better EBITDA margin rate. But I certainly see an opportunity for us to get back into mid-single-digits, and that is certainly a goal and focus we have. Hopefully that answers your question okay.
Mike
Yeah, thank you. I appreciate that. Thank you.
Operator
Thanks, Mike. As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Again, we ask that all callers limit themselves to one question and one follow-up. Our next question comes from the line of Jeremy Hamblin with Greg Hallam. Please proceed with your question.
Jeremy Hamblin
Thanks, and congrats, Ken. Looking forward to working with you. I wanted to first start with some sense of what you're seeing in terms of current trends in the business. You're lapping compares that are not as easy in Q2 as you saw in Q1. And just in terms of with the performance in Q1, $186 million and change on total sales, there's a kind of a typical or historical seasonality to the business in which, you know, Q1, Q4 are your strongest quarters. You know, you noted that tax season was a little bit slower than normal, you know, this year because the filing started a week late, but wanted to get a sense, you know, Ken and Heather, in terms of, you know, what you were expecting, you know, in terms of how that seasonality plays out this year, and to get to your low single-digit comp guide, you know, how you might see that kind of flowing throughout the year.
David
Great.
Jeremy Hamblin
Jeremy, thank you. Oh, go ahead.
David
Thank you. Sorry. Ken and I are doing airplane signals to each other. Jeremy, you can't see us, but we are... Thank you for the question. Always good to hear from you. As far as the labs in Q2 look... May is a tough one to say that is a read for the full quarter. It is the least important month of the quarter. June and July are by far more impactful as we get into summer and we get into early back-to-school, very important seasons, as you know. So, yeah, maybe a little bit more difficult lap, but as I mentioned in my prepared remarks, we're set up, we're ready. We know that our earlier set works. Our customer needs some time to plan out their schedule their spend for important timeframes, like the ones that are coming up. So we feel good about that. As far as how the balance of the year looks, I hear you that Q1 is usually looking like Q4. Our intent is that Q4 this year will be stronger than Q1 from a dollar sales perspective. The builds are based on history, but with some breaking in there because that's our challenge is break the build, right? Build more sales. quarter to quarter. And then let's remember there are some, we've talked about this before with a calendar shift, there's some sales that move into Q2 out of Q3. So it's going to be a little bit different throughout the year. But we're planning, we're watching. The most important thing is that our inventory is right and that it's set up correctly in the store. We've got products that's compelling and our customer will respond. All of the initiatives that we have in place will support that as well. You've heard us talk about it, remodels, marketing, and the testing and learning that we've been doing and has been enhanced with our ERP system and our ability to better analyze data and to react and act much more quickly. So we feel good about hitting our target top line for the year. Ken, do you want to add anything?
Ken Seifel
Yeah, thank you. Yeah, Jeremy, thank you. It's a good question, and I'll certainly add everything that Heather said there. Your central question is, what are we seeing in the current trends? And it kind of goes back to what I said earlier in the script. I mean, there are certainly some things going into business right now that look good, and we have a lot to build on, and we can accelerate those results. And I mentioned earlier the remodels. We're just getting those completed. You'll see some momentum in those moving forward, which is exciting. We have a handful of categories that have had a reasonably good start for the year and appears to be continuing and we can accelerate those things. So from my desk, I have a good deal of confidence that we can continue to accelerate our business going forward.
Jeremy Hamblin
Got it. That's helpful. And then I wanted to come back to the point that you made on your SG&A and expense management. So it looks like, I think by my math, your SG&A dollar guide for the year is you have about 2 million lower than what you were previously expecting. It sounds like you feel like there is more opportunity than that, you know, over time here over the next year or two. Can you give us a sense of what you think? Obviously, you're not new to the business, but can you give us a sense for what, you know, you think the magnitude of range might be? on that opportunity? I mean, are we talking about, you know, something that's on the order of $10 million in annualized savings or something bigger than that? Any way to square it up?
Ken Seifel
Yeah, Jeremy, I'll start with that and certainly give it to Heather for follow-up on that. I think a couple things I'd say about that. Obviously, we, as you mentioned, have lowered our guide to the back half in terms of expenses, which is a good start. As I mentioned in my script, the answer to your question is TBD. We're going to be going through each of our expense centers, taking a really deep look at where we are at and looking for opportunities for efficiencies. And I think that there's going to be some things that will unfold over time that we'd be more equipped to better share a solid answer to your question in the future here. We have some immediate line of sight in some areas, as I mentioned, in transportation that we're encouraged about and DC processing, but there's a whole lot more there. We definitely know that as we step back and think about our SG&A rate, it needs to be lowered. It's certainly untenable, as I mentioned in the script earlier, and we're going to continue to work on it. But I believe the answer to your question will be just over time here we're going to find bits and pieces here that will make this a much more efficient organization. Heather, if you'd add anything to that.
David
Yeah, and not surprising, Jeremy, your math is spot on. It's about 1.4 to 2.8 on my math in the range, the amount that we've reduced SG&A in our guide. We were able to do that because we're showing our city trends chops. We're a nimble, agile team. We're able to find savings across the board on discretionary spend, nothing that will harm our ability to achieve our initiatives, nothing that will harm our ability to achieve our financial goals for the year. So to Ken's point, longer term, this is a moment of, you know, he talked about let's get the data, study and analyze. So that's what we will be doing with Ken's leadership and more to come as we learn and uncover. But I think we've proven that we are able to control our SG&A and can make the The adjustments that need to be made in order to bring that line down is something that we'll partner with Ken on over time. It's going to be great.
Jeremy Hamblin
Great. Last one for me. In terms of getting back to, let's say, to get to a mid-single-digit operating margin or even just to get to that 4%, where do you think your gross margin needs to be? to get there. You know, I think as you look at it, there's been some nice improvements that have been made versus where the business was, let's say in 2018 or 2019. You know, and obviously you just made the implementation on the systems upgrades that is creating some opportunity. But really to get to that plan, I mean, are you targeting, you know, 40%, something higher than that Any color that you might be able to share would be helpful.
spk05
Yeah, for sure, Jeremy. You know, we've been in the high 30s, right?
David
We're very proud of our growth margin rate, but we think we've got room to grow. We're shooting to have that start with a four over time on the backs of freight rate improvements. Our supply chain team, shout out to them, are tireless in being able to find opportunities to improve that line. mark-up expansion. We've been talking about that throughout the call, plus mark-down management, right? And that's where the ERP system comes in. And then, you know, finally, of course, getting shrink back to nice low levels. It's all in the mix. So certainly starting with a four, and we're going to keep pushing to make that happen.
Jeremy Hamblin
As a follow-up on that shrink comment, I think previously, because you had noted on the last call in March that there was some elevated shrink. And it sounds like maybe that's not only remained elevated, but maybe even a little bit worse than you had expected. So I think previously, Heather, you'd quantified it as maybe a 25 to 30 basis point impact for FY24 is what you had expected. can you give us an update on where that expectation is on shrink? And, you know, I gather that that's probably not something that can be cured, you know, incredibly quickly. But, you know, how long do you think, how many quarters or possibly longer than that do you think before we can see significant improvement and get it to a level where you're content?
David
Yeah, thanks, Jeremy. And I'm going to have to make this the last question so we can move on to our But thanks for the question. Really appreciate it as always. But shrink is continuing to be a concern, right? I will say and remind you that this is not new for CityTrends. We have managed shrink well over our history, but it is a bit of a sign of the times. It's a bit of some, we can't control external. We do what we can. It's all about safety when it comes to external theft. So we've been very much focusing on internal theft, as I mentioned in my prepared remarks. So was it another surprise in the quarter? Disappointing surprise. Yeah, it was. We expect it to come down over time. But this takes time, right? Because shrink is a function of physical inventory counts. We do, as you know, count a portion of our fleet each month. So I expect this to still be a headwind, but we'll start to see it mitigating in the second half of the year as we are lapping the beginning of what I would call our surprise period, right? And then into the following year, we'll start to see it improve even more based on all of the levers that we're pulling to put controls in place and to get ahead of it. So...
Jeremy
wish us well, please.
spk12
And Heather, I'd like to take all my questions. Good luck.
Jeremy
Yeah, thank you. Go ahead.
Ken Seifel
I just want to add to that a little bit. Yeah, I just want to say on the back side of that, I know you guys have been really, really focused on shrink, which is good. And certainly with a peer that you've taken the right steps to get the shrink rate accommodated in your grow rate going forward and is contained inside of our guidance. So it's an opportunity for us to continue to improve that you should feel confident that it has been accounted for appropriately by the business.
spk04
Good point, Ken. Thank you so much.
Ken
Christine, do we have any other questions?
Operator
Our next question comes from the line of John Lawrence with the Benchmark Company. Please proceed with your question.
John Lawrence
Thank you. Good morning. Ken, can you talk a little bit about um, when you were at Gabe's, um, and looked at that transition, I know it's a smaller store base, et cetera, that compare and contrast a little bit when you got there, uh, you know, the business, um, what's happened. And I sure, I assume that that's how some of these business cases are coming about. Well, can you talk about that and, what you were able to adjust to, um, to get that business back to the level you wanted it and what were some of the major steps to make that happen?
Ken Seifel
Yeah, for sure, John. Happy to talk about that. When I came into the business, as you might remember, the private equity firm A&M Capital had purchased it and they had bought it from the family themselves. And so as with a family business at times, you run into a situation where Um, some things are good, but not everything. And so I mentioned earlier, the five balanced approach that I take in the business and actually applied all of those principles there and found that as, as with every business, there's some things that are going quite well engaged. They have to be quite good at deal-making and, and, and they were amazing at putting treasure in the treasure hunt. However, The replication and accuracy that was, was, was not there. So what we embarked upon was really first and foremost, there was getting operational excellence. And I really found that, find that to be the foundation of a great company, which is, you hear the old saying retail is detailed, right? If you get in there, just make sure that everything you do is replicable. and consistent and shows up for the consumer in that way. So that's really kind of step one. Then step two actually is helping, you know, get the teams really fully engaged. And what that means basically is really getting people excited about winning. Sometimes when you are working in turnarounds, people have been kind of used to seeing negative numbers and it kind of can wear on individuals over time. So there's a, A key ingredient here about creating some little wins and getting folks excited, and the more that tends to kind of breed higher engagement. That was kind of the next piece of the puzzle. And then, as I mentioned earlier, dialing in and getting the branding and the value proposition right. Marketing is a key piece of this. Now, it's not necessarily a marketing stand, but it's actually a voice of the company and making sure that it's crystal clear so the consumer can see and understand it. So I can kind of go on a little bit, but you kind of get the idea here that really working through those five tenants that I mentioned earlier, really in a sequential order. Now, I am still yet evaluating city trends to decide which and what we need to be focused on. I would not suppose for one minute to walk in with all the answers, but I do have a lot of questions. And then couple that with my past experience, I think we're going to find, and the internal team's knowledge, we're going to find the right formula for city trends. And I'm incredibly confident that we can replicate some of these past experiences that I've had and perhaps even beyond.
John
Great, thanks for that, and just a quick follow-up.
John Lawrence
Heather, can you give any kind of little deeper dive into those stores that have been remodeled that might have had that marketing spend as well in the right categories, and how significant were some of those better stores' performance? The average was a three, but... How well did some of those successful stores really perform in the quarter?
David
Yeah, thanks, John, for the question. I appreciate it. I know you're a big supporter of our CTX format. I won't disclose exact details, but what I will tell you is that, as you know, with these, we're calling them our incremental initiatives, right, marketing, remodels, inventory rebuilds, et cetera, et cetera. I mean, we're tweaking the dials as we learn. combination of remodel and marketing has had a particularly exciting result that we're looking at and saying, as we always do, how do we replicate that? Where do we replicate that? So it's small yet. It's a learning, but it's an exciting one. And we'll apply it going forward in a measured manner. But yeah, I mean, it's It's helping lift for sure.
John
Great. Thanks. Good luck.
Operator
Thanks, John. Thank you. We have reached the end of the question and answer session. Mr. Seiple, I will now turn the floor back over to you for closing comments.
Ken Seifel
Thank you. I certainly appreciate everyone joining us today on our call. Thank you for the good questions and your time and attendance here. We look forward to updating in the future on our progress. Thank you very much.
Operator
Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day. Music. Thank you. Thank you. Greetings, and welcome to the CityTrends first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nitsa McKee, Senior Associate at ICR. Thank you, you may begin.
spk19
Thank you and good morning, everyone. Thank you for joining us on CityTrend's first quarter 2024 earnings call. On our call today is Interim Chief Executive Officer, Ken Seifel, and Chief Financial Officer, Heather Pitino. 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 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 Interim Chief Executive Officer, Ken Seifel. Ken?
Ken Seifel
Thank you, Nitsa. Well, good morning, everyone. I'm pleased to join you today to discuss the work I had for Citadrills. Heather will provide you a review of the Q1 business results, and then I will give you a brief overview of my prior experiences and a high-level outline of the work that we are undertaking to increase shareholder value. Before we discuss the business, on behalf of the Board of Directors and the entire CityTrends team, I'd like to thank our former CEO, David McCune, for his hard work and leadership these past four years. David shaped and built our purpose-driven CityTrends culture while leading the company through some of the most challenging consumer environments in recent history. And on a personal level, I'd like to thank David for his willingness to provide business advice to ensure a smooth transition, and we want to send him very best wishes. I'd like to turn the call over now to Heather to review Q1 business results. Heather?
David
Thank you, Ken, and good morning, everyone. We are pleased with our first quarter performance in which we registered an improved top-line trend by delivering a positive comp store sales increase of 3.1%. The quarter was further highlighted by gross margin expansion of 160 basis points compared to last year. Both of these Q1 wins were assisted by our inventory rebuilds and targeted product categories, combined with our buy team's continued focus on making wise inventory investments, maximizing markups, while also providing incredible values for our customers. Early in the quarter, we felt the impact from the slower start to the tax refund season. as well as unfavorable spring weather patterns. However, we posted positive comps in each month of the quarter. We also experienced an improved trend in store traffic with basket size similar to last year and continued healthy in-store conversion. These key performance indicators are proof points that our unique assortment curated specifically for our African American and multicultural customers resonated. As mentioned on recent earnings calls, our teams remain committed to setting up key selling moments earlier, and it paid off in the first quarter. Our Q1 product offering included a healthy balance of exclusive trends, leading brands, year-round fashion, and, of course, basics for spring selling, the tax refund season, and the Easter holiday. From a category perspective, our performance was broad-based with particular strength in home and lifestyle, impulse also referred to as our queue line big men's and ladies plus all areas positively impacted by our inventory rebuild efforts across our largest categories ladies men's and kids apparel quarterly comp sales were all positive driven by trend right values and incredible brands that met the needs and wants of our customers for the spring season We exited the first quarter with total inventory dollars up 4%, in line with our expectations. We feel good about the quality, mix, and value proposition across our inventory as we entered the second quarter. We are positioned to capitalize on late spring and peak summer selling weeks with a robust assortment of made-for-city trends coordinating short and tea sets, plenty of teas for the whole family, fresh takes on Americana and Juneteenth, and all the goodies for summer barbecues from outfits to audio. With a large portion of our fleet in areas that go back to school by mid-August, we will also be well-positioned to capture demand in July with a heightened focus on kids' apparel, accessories, and footwear. Lastly, our value proposition is showing up loudly on the sales floor with many new deal-priced offers that are driving strong sell-throughs. In addition to the inventory rebuilds and targeted product categories that we've been discussing for the past several quarters, in Q1, we leveraged our new ERP system to optimize assortments in key African American neighborhoods where we've identified significant sales opportunity. This initiative using our improved planning and allocation methods, is impacting about 20% of the chain and had encouraging results in the quarter. We'll continue to monitor results and refine our approach based on what we learn, with the potential to expand this effort as we move through the year. In the quarter, we continued testing radio and paid social marketing, turning the dials on market size, repeat markets, frequency of messaging, and combinations with other initiatives. We've seen particularly strong results with a combination of remodels and marketing. To date, we've touched about 140 stores with our marketing efforts and will increase that number throughout the year with back-to-school and holiday campaigns. We remodeled 20 stores in the first quarter and an additional 15 locations in May, quickly closing in on our fiscal year goal of 40 remodels. As we've discussed in prior calls, these refreshed stores see positive results with mid to high single-digit sales lists and at half the prior cost. Including the May remodels, CTS stores represents approximately 21% of our fleet. Turning to the details of gross margin, our first quarter adjusted gross margin expansion of 160 basis points was driven by the focus on markup I described earlier, significant freight expense improvement, and effective markdown management. Partially offsetting the gross margin benefits in the quarter was an unexpected shrink headwind as a result of physical inventory counts. As we've discussed on prior calls, we count a portion of our store fleet each month and continue to see issues in very specific stores and very specific categories. We do not believe that this is a chain-wide problem. At CityTrends, we are accustomed to managing shrink, and although a headwind this year, it remains a very small component of our margin structure. Internally, we have engaged cross-functional experts to reduce the impact of shrink with particular focus on internal theft. We are ensuring that stores have well-placed cameras and are leveraging recently improved exception reporting to quickly identify root causes and to take appropriate action. We're updating key loss prevention policies and are establishing a more robust restitution program. And key to all of this, we've been working to upgrade our store talent and our training programs. Next, we'll turn our attention to our supply chain, tightening controls and reporting to identify and resolve any additional causes of shrink. Importantly, we will continue to place the safety and well-being of our employees and customers at the center of our operational decisions to stem this headwind. Despite pressure from shrink, we remain confident in our ability to deliver continued growth margin expansion for the balance of 2024, driven by incremental markup improvement and reduced freight rates. Moving to SG&A. Adjusted SG&A expenses increased about $3 million in the quarter compared to last year, in line with our expectations and reflecting our previously discussed reset of the SG&A base. The increase, as expected, was driven by merit increases in stores and corporate and a modest increase in advertising spend. During the quarter, we closed three stores as part of our ongoing suite optimization effort, ending the period with 599 locations. Now turning to the balance sheet. At the end of the quarter, we remained in a healthy financial position with a strong balance sheet including no debt, no drawings on our $75 million revolver, and $58 million in cash. With a liquidity of approximately $133 million, we can more than sufficiently fund our business initiatives, building on our foundational strengths for future profitable growth. Before I turn the call back to Ken, I want to reiterate that we are encouraged by our first quarter results. Our strategic initiatives are driving improved performance, and we are playing offense while controlling what we can control. This approach is particularly important as our customer continues to face inflationary pressures and is carefully managing their discretionary spend. We still believe in the overall approach to the annual outlook we shared in March. However, with one quarter under our belt, we felt it was prudent to make a few adjustments to our 2024 outlook as follows. Full-year comp store sales are expected to grow by low to mid-single digits compared to fiscal 2023, a range slightly below our previous outlook. We expect full-year growth margin to expand by approximately 75 to 100 basis points, consistent with previous outlook. We are now planning an SG&A dollar increase of 1.5% to 2.5% over 2023, slightly better than what we discussed during our last earnings call, driven by streamlining costs in a variety of areas. Consistent with our previous outlook, resulting full-year EBITDA is expected to be in the range of $4 million to $10 million. As we shared in March, we plan to open up to five new stores, remodel approximately 40 locations, and close 10 to 15 underperforming stores, ending fiscal 2024 with approximately 595 stores. we continue to expect full-year capital expenditures to be approximately $20 million. With that, I will turn the call back to Ken. Ken?
Ken Seifel
Thank you, Heather. Appreciate it. First, I'd like to share my appreciation to the CityTrends team for their hard work that generated a 3.1 comp store sales increase and gross margin rate growth of 160 basis points compared to last year. The board remains committed to the core strategies of the business As I take the reins, I'm focused on ensuring that the business consistently executes those strategies to improve top-line sales and EBITDA profit. Now, if I may, I'd like to briefly introduce myself and discuss the near-term road ahead for Cititrans. I joined the Cititrans board in late 2019 and have recently served as chair of the Nomination and Governance Committee and also members of the Audit and Finance Committee. The majority of my 40-year professional career has been in value apparel retailing. The first half of my career was with JCPenney in the 80s. I was with Target in the 90s during their brand development and rapid growth. Old Navy in the 2000s, where I led explosive store growth and eventually becoming the largest specialty store retailer in the world. And during my time in the Fortune 100 companies, I held a number of executive roles in most company functions, including merchandise buying and in operations. In 2010, I entered the second phase of my career focused on working in private equity-backed retail companies where I assumed the role of CEO and co-investor in all business engagements. I found that owning a financial stake in each business created strong alignment with the shareholders and really helped reinforce an acute focus on increasing shareholder value. As co-owner, entrepreneur, and leader, I was able to generate three successful business turnarounds, which resulted in returns of three times, in some cases over six times, the initial investment for our shareholders. I've been fortunate to have a wide variety of retail experiences. However, my time as CEO of Gabe's, an off-price apparel store serving a low-end consumer, is the most relevant to Cititrans. My experiences in both public and privately held companies have taught me there are just a few critical and foundational points to restoring company profit and setting it on the path to long-term sustainability. First, successful companies need to clearly understand the core customer and how to best serve their needs. And as this core customer evolves in response to their environment, it's critical for that organization to be nimble and adaptable as well. Next is a compelling and differentiated value proposition that distinguishes the business from competition and generates increasing market share in a highly competitive environment. Also critical to success is operational excellence. This is the ability for a company to consistently execute the business model with profitable cost efficiencies. Next is a compelling growth plan. That allows a company to continually expand and capture market share. And last but not least are well-trained, highly engaged people who are dedicated to bringing the strategies to life. I have found in my past that balanced focus on the core customer, a compelling value proposition, strong operational excellence, clear growth avenues, and engaged people creates unstoppable momentum for a company. Oh yeah, and by the way, all of this has to be done very fast. I'm really looking forward to bringing my past retail experiences and learnings to lead the next chapter for CityTrans. I'm optimistic about CityTrans because of its unique position in the marketplace as a value retailer serving a largely underserved consumer. With nearly 600 retail locations, we're one of the largest national retailers focused on lower-income consumers. Our company is rooted on the strength that we have in the African-American community, which to this day accounts for the majority of our financial success. Because of our long-term neighborhood presence, our customers are highly engaged and loyal to CityTrans. When we get it right, our customers respond. Another positive trait of our company is the balance sheet. which gives us a big competitive advantage today in today's world of a higher interest rates, also allowing us the flexibility to take advantage of growth opportunities to increase our market position. And although an appointment of an interim CEO could be viewed as a transitional period, I want to assure you there will be minimal disruption because I am familiar with CityTrains, which will aid me in quick transition into the day-to-day work. My objective is to deliver consistent top-line growth streamline expenses, lay the groundwork for long-term store expansion. And it all begins with really getting back to the basic blocking and tackling of a good retail company. My goal is to first clearly understand what's working and find ways to accelerate that work, as well as remove obstacles so our team can perform their jobs more efficiently. To that end, we're going to focus on the following initiatives. Number one, driving profitable sales. Number two, sharpening our product assortment decisions and improving inventory returns. Number three, streamlining costs. Four, optimizing our supply chain. And five, leveraging benefits from recent IT upgrades Heather mentioned a moment ago. I plan to lead the company through a fresh review of our current business performance in each of these areas. Our goal is to align on the facts, focus on the opportunities, to accelerate areas of success, and course-correct areas of opportunity. The strategy themes are pretty familiar, and I believe many of the answers already exist. The difference will be a laser focus on initiatives to significantly improve our execution and speed on all fronts. Regardless of external factors, we will control what we can control, and we're going to fight hard to significantly improve our top-line sales results. As I enter the business, there are a few questions on my mind that I want to quickly answer. First, are we offering enough exciting brands at compelling prices? Increasing frequency and enticing new customers begins with putting more treasure in the treasure hunt of product choices. The thrill of finding unexpected deals is the reason customers love to shop off price and value retail formats. It's also the key reason our business has a defensible moat around external competition and online retailers. We will review all product categories and adjust the assortments as needed to ensure that we have compelling treasure throughout the store to excite our customers. Next question is really our product assortment breadth of offering and value, price value equation strong enough in all of our categories. You know, we know that many of our product categories are doing well and they offer us opportunities to study and replicate their success. We can capitalize on these early positive results in our Q-Line product, for example, and successful apparel departments plus continue expanding our reach and home categories. However, there is an opportunity in some categories to sharpen the value equation and improve customer choice counts. All in all, I see a good deal of opportunity to consistently grow our top-line sales. Also in support of our sales initiatives, we have an opportunity to ramp up business analytics and product allocations. As previously reported, the company installed a new enterprise resource system And we had the opportunity to realize efficiency savings from the new technology, which include driving sales through more accurate store-by-store product allocations and the ability to more accurately analyze markdowns. Another area to review is our supply chain costs, which impacts our gross profit. Work is already underway in the supply chain, where our distribution teams are beginning to uncover ways to reduce our transportation costs and the cost of processing products. An example is vendor direct to store shipments that can be reduced and result in a significant savings. We also have line of sight with savings in transportation by renegotiating inbound shipping rates. Both business analytics and supply chain efficiency initiatives will have a positive impact on our gross profit. We also need to lower SG&A expense base. Over time, our total sales have decreased while our SG&A has steadily increased. Clearly this relationship is untenable and it must be reversed. Increasing sales will help, but we also need to find cost efficiencies to offset inflationary pressures. We intend to deep dive review every cost center to ensure that the SGA is cost efficient and supports our go forward strategies. I expect we're going to find a lot of smaller expenses that's going to add up to significant SG&A savings. We will find ways to lower our expenses and improve our operational execution. I also want to dig into our new stores. Our recent new stores performance has been a divergence from our long successful new store strategy. We're embarking on a detailed review of our performance to understand root cause issues and what's driving the underperformance. Nonetheless, the company has a long history of successful new stores and our demographic market white space data tells us we have a sizable opportunity to grow our square footage. We are a growth company, and we will return to industry standard, return on investment, new store growth. An initiative that we can accelerate also is our successful store remodel program that Heather touched on. She outlined the remodel count and our success so far this year. But with a little over 20% of our store base remodeled, we have an opportunity to bring more stores current over time. We're going to continue this good work and combine current store remodels with top market growth initiatives to ensure that we capture top line sales available to us in each marketplace. Another big question we're going to work on is getting a fresh view of the quantitative characteristics and qualitative desires of our customer base. As the new shopping alternatives have emerged, it has likely shifted our customer's perception of value and selection. We need to clearly understand our customer current needs and understand our recently lapsed customers so we can more able and accurately focus strategic efforts on remaining or becoming their store of choice. We'll use differential analysis to determine how to implement measured and meaningful steps to sharpening our overall value proposition, investments in categories of product to fulfill consumer demand, and service and convenience options that might be expected in a neighborhood store. This work will take us a few months to complete. but I expect the insights will be a key driver of our long-range growth plans. Well, as I just outlined, we have a lot of work to do. I plan on spending the first few weeks listening and learning from the internal team. My goal is to clearly understand what's working and accelerate that work, as well as remove obstacles so our team can perform their jobs more efficiently. And some of the themes mentioned on today's call may sound familiar to those of you that have been tracking our business for the past few years. As I mentioned at the beginning of the call, operational excellence is one of the five tenets of a successful company. I plan to lead the team through deep, thorough analysis, narrowing focus on opportunities that have the most significant impact on sales and EBITDA. Relentless tracking of results and course corrections is needed. In short, we will execute, we will achieve operational excellence, and we will move fast. CityTrains is really fortunate to have such a talented team of people who are highly invested in our company's success, and I feel fortunate to work with the CityTrends team. We will analyze together, we will learn together, we will execute initiatives together to significantly improve our shareholder value. I look forward to updating you in the future on our progress. I'd like to now return the call to our operator to facilitate questions. Christine, back to you.
Operator
Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Baker with DA Davidson. Please proceed with your question.
Michael Baker
Okay, great. Hopefully you can hear me okay. It seems to me you guys were heading in the right direction, but maybe speed was the issue, trying to get there a little bit faster. You mentioned that a couple times, Ken. In your past experiences in the three turnarounds you referenced, how long does it take to get typically to where you want to go? And then I'll ask my follow-up, which is, where do you want to go? What do you think the right margin is for this business? I think you said you got there in 2019 on the board. EBITDA margins were close to foreign change. What do you think they should get back to? Thanks.
Ken Seifel
Yeah, thanks for your question, Mike. I appreciate it. Yeah, in terms of turnaround and turnaround timing, I mean, the answer to that question varies greatly on each company's situation and depending upon the depth and breadth of some of the initiatives. My thoughts are to take a few moments, as I mentioned earlier, really kind of evaluate what's going on, do a lot of listening and learning. It's a little bit of a go slow to go fast philosophy. And then by the point of getting into about 30 days of learning and listening, themes really do emerge. And what I've found is that there's often some low-hanging fruit that can be enacted right away, and you'll start to see some improvement in some areas of the business. I touched briefly on transportation as a good example of something that can be done, and we can see some results of that sooner than later. Whereas when you get into some of the assortment decisions and some of those things, it takes a little bit longer for the training to take effect and for those to really impact the marketplace. So the answer to your question is I view it a bit as a journey, and it's difficult to give an exact timeframe on that, but that's essentially where I would go. I think in terms of your second question, which was in EBITDA margin rates. As you go back and you look at the history of the business, I think we should be in that mid-single-digit range for sure. And I do think that as you look at the industry, particularly in value and off-price, the market actually sometimes will pay for a better EBITDA margin rate. But I certainly see an opportunity for us to get back into mid-single-digits, and that is certainly a goal and focus we have. Hopefully that answers your question okay.
Mike
Yeah, thank you. I appreciate that. Thank you.
Operator
Thanks, Mike. As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Again, we ask that all callers limit themselves to one question and one follow-up. Our next question comes from the line of Jeremy Hamblin with Greg Hallam. Please proceed with your question.
Jeremy Hamblin
Thanks, and congrats, Ken. Looking forward to working with you. I wanted to first start with some sense of what you're seeing in terms of current trends in the business. You're lapping compares that are not as easy in Q2 as you saw in Q1. And just in terms of with the performance in Q1, $186 million and change on total sales, there's a kind of a typical or historical seasonality to the business in which, you know, Q1, Q4 are your strongest quarters. You know, you noted that tax season was a little bit slower than normal, you know, this year because the filing started a week late. But wanted to get a sense, you know, Ken and Heather, in terms of, you know, what you were expecting, you know, in terms of how that seasonality plays out this year, And to get to your low single-digit comp guide, you know, how you might see that kind of flowing throughout the year. Jeremy, thank you. Oh, go ahead.
David
Thank you. Sorry. Ken and I are doing airplane signals to each other. Jeremy, you can't see us. But we are – thank you for the question. Always good to hear from you. As far as the LAP in Q2, look – May is a tough one to say that is a read for the full quarter. It is the least important month of the quarter. June and July are by far more impactful as we get into summer and we get into early back-to-school, very important seasons, as you know. So, yeah, maybe a little bit more difficult lap, but as I mentioned in my prepared remarks, we're set up, we're ready. We know that our earlier set works. Our customer needs some time to plan out their schedule their spend for important timeframes, like the ones that are coming up. So we feel good about that. As far as how the balance of the year looks, I hear you that Q1 is usually looking like Q4. Our intent is that Q4 this year will be stronger than Q1 from a dollar sales perspective. The builds are based on history, but with some breaking in there because that's our challenge is break the build, right? Build more sales. quarter to quarter. And then let's remember there are some, we've talked about this before with a calendar shift, there's some sales that move into Q2 out of Q3. So it's going to be a little bit different throughout the year, but we're planning, we're watching. The most important thing is that our inventory is right and that it's set up correctly in the store. We've got products that's compelling and our customer will respond. All of the initiatives that we have in place will support that as well. You've heard us talk about it, remodels, marketing, and the testing and learning that we've been doing and has been enhanced with our ERP system and our ability to better analyze data and to react and act much more quickly. So we feel good about hitting our target top line for the year. Sandy, do you want to add anything?
Ken Seifel
Yeah, thank you. Yeah, Jeremy, thank you. It's a good question, and I'll certainly add everything that Heather said there. Your central question is, what are we seeing in the current trends? And it kind of goes back to what I said earlier in the script. I mean, there are certainly some things going into business right now that look good, and we have a lot to build on, and we can accelerate those results. And I mentioned earlier the remodels. We're just getting those completed. You'll see some momentum in those moving forward, which is exciting. We have a handful of categories that have had a reasonably good start for the year and appears to be continuing, and we can accelerate those things. So from my desk, I have a good deal of confidence that we can continue to accelerate our business going forward.
Jeremy Hamblin
Got it. That's helpful. And then I wanted to come back to the point that you made on your SG&A and expense management. So it looks like, I think by my math, your SG&A dollar guide for the year – you have about 2 million lower than what you were previously expecting. It sounds like you feel like there is more opportunity than that, you know, over time here over the next year or two. Can you give us a sense of what you think? Obviously, you're not new to the business, but can you give us a sense for what, you know, you think the magnitude of range might be? on that opportunity? I mean, are we talking about, you know, something that's on the order of $10 million in annualized savings or something bigger than that? Any way to square it up?
Ken Seifel
Yeah, Jeremy, I'll start with that and certainly give it to Heather for follow-up on that. I think a couple things I'd say about that. Obviously, we, as you mentioned, have lowered our guide to the back half in terms of expenses, which is a good start. As I mentioned in my script, the answer to your question is TBD. We're going to be going through each of our expense centers, taking a really deep look at where we are at and looking for opportunities for efficiencies. I think there's going to be some things that will unfold over time that we'd be more equipped to better share a solid answer to your question in the future here. We have some immediate line of sight in some areas, as I mentioned, in transportation that we're encouraged about and DC processing, but there's a whole lot more there. We definitely know that as we step back and think about our SG&A rate, it needs to be lowered. It's certainly untenable, as I mentioned in the script earlier, and we're going to continue to work on it. But I believe the answer to your question will be just over time, we're going to find bits and pieces here that will make this a much more efficient organization. Heather, if you'd add anything to that.
David
Yeah, and not surprising, Jeremy, your math is spot on. It's about 1.4 to 2.8 on my math in the range, the amount that we've reduced SG&A in our guide. We were able to do that because we're showing our city trends chops. We're a nimble, agile team. We're able to find savings across the board on discretionary spend, nothing that will harm our ability to achieve our initiatives, nothing that will harm our ability to achieve our financial goals for the year. So to Ken's point, longer term, this is a moment of, you know, he talked about let's get the data, study and analyze. So that's what we will be doing with Ken's leadership and more to come as we learn and uncover. But I think we've proven that we are able to control our SG&A and can make the The adjustments that need to be made in order to bring that line down is something that we'll partner with Ken on over time. It's going to be great.
Jeremy Hamblin
Great. Last one for me. In terms of getting back to, let's say, to get to a mid-single-digit operating margin or even just to get to that 4%, where do you think your gross margin needs to be? to get there. You know, I think as you look at it, there's been some nice improvements that have been made versus where the business was, let's say in 2018 or 2019. You know, and obviously you just made the implementation on the systems upgrades that is creating some opportunity. But really to get to that plan, I mean, are you targeting, you know, 40%, something higher than that Any color that you might be able to share would be helpful.
spk05
Yeah, for sure, Jeremy. You know, we've been in the high 30s, right?
David
We're very proud of our growth margin rate, but we think we've got room to grow. We're shooting to have that start with a four over time on the backs of freight rate improvements. Our supply chain team, shout out to them, are tireless in being able to find opportunities to improve that line. mark-up expansion, we've been talking about that throughout the call, plus mark-down management, right? And that's where the ERP system comes in. And then, you know, finally, of course, getting shrink back to nice low levels. It's all in the mix. So certainly starting with a four, and we're going to keep pushing to make that happen. Thank you.
Jeremy Hamblin
As a follow-up on that shrink comment, I think previously, because you had noted on the last call in March that there was some elevated shrink. And it sounds like maybe that's not only remained elevated, but maybe even a little bit worse than you had expected. So I think previously, Heather, you'd quantified it as maybe a 25 to 30 basis point impact for FY24 is what you had expected. can you give us an update on where that expectation is on shrink? And, you know, I gather that that's probably not something that can be cured, you know, incredibly quickly. But, you know, how long do you think, how many quarters or possibly longer than that do you think before we can see significant improvement and get it to a level where you're content?
David
Yeah, thanks, Jeremy. And I'm going to have to make this the last question so we can move on to our next analyst but thanks for the call or the question really appreciate it as always but shrink is is continuing to be a concern right I will say and remind you that this is not new for city trends we have managed shrink well over our history but it is it is a bit of a sign of the times It's a bit of some, we can't control external. We do what we can. It's all about safety when it comes to external theft. So we've been very much focusing on internal theft, as I mentioned in my prepared remarks. So was it another surprise in the quarter? Disappointing surprise. Yeah, it was. We expect it to come down over time, but this takes time, right? Because shrink is a function of physical inventory counts. We do, as you know, count a portion of our fleet each month. So I expect this to still be a headwind, but we'll start to see it mitigating in the second half of the year as we are lapping the beginning of what I would call our surprise period, right? And then into the following year, we'll start to see it improve even more based on all of the levers that we're pulling to put controls in place and to get ahead of it.
Jeremy
wish as well, please.
Ken Seifel
Heather, I might just add a little bit. I'm just going to say on the backside of that, I know you guys have been really, really focused on shrink, which is good, and certainly it would appear that you've taken the right steps to get the shrink rate up. of our guidance. So it's an opportunity for us to continue to improve, but you should feel confident that it has been accounted for appropriately by the business.
spk04
Good point, Ken. Thank you so much.
Ken
Christine, do we have any other questions?
Operator
Our next question comes from the line of John Lawrence with the Benchmark Company. Please proceed with your question.
John Lawrence
Thank you. Good morning. Ken, can you talk a little bit about when you were at Gabe's and looked at that transition. I know it's a smaller store base, et cetera. Compare and contrast a little bit when you got there. You know the business, what's happened, and I assume that that's how some of these business cases are coming about. Can you talk about that and what you were able to adjust to – to get that business back to the level you wanted it and what were some of the major steps to make that happen?
Ken Seifel
Yeah, for sure, John. Happy to talk about that. When I came into the business, as you might remember, the private equity firm A&M Capital had purchased it and they had bought it from the family themselves. And so as with a family business at times, you run into a situation where Some things are good, but not everything. And so I mentioned earlier the five balanced approach that I take in the business and actually applied all of those principles there and found that as with every business, there's some things that are going quite well. Engaged, they have to be quite good at deal making and they were amazing at putting treasure in the treasure hunt. However, the replication and accuracy that was, was, was not there. So what we embarked upon was really first and foremost, there was getting operational excellence. And I really found that, find that to be the foundation of a great company, which is, and you, you heard the old saying retail is detailed, right? You have to get in there, just make sure that everything you do is replicatable. and consistent and shows up for the consumer in that way. So that's really kind of step one. Then step two actually is helping, you know, get the teams really fully engaged. And what that means basically is really getting people excited about winning. Sometimes when you are working in turnarounds, people have been kind of used to seeing negative numbers and it kind of can wear on individuals over time. So there's a, a key ingredient here about creating some little wins and getting folks excited. And the more that tends to kind of breed higher engagement. That was kind of the next piece of the puzzle. And then, as I mentioned earlier, dialing in and getting the branding and the value proposition right. Marketing is a key piece of this. Now, it's not necessarily a marketing spin, but it's actually a voice of the company and making sure that it's crystal clear to the consumer can see and understand it. So I can kind of go on a little bit, but you kind of get the idea here that really working through those five tenants that I mentioned earlier, really in a sequential order. Now, I am still yet evaluating city trends to decide which and what we need to be focused on. I would not suppose for one minute to walk in with all the answers, but I do have a lot of questions. And then a couple of that with my past experience, I think we're going to find in the internal team's knowledge, we're gonna find the right formula for city transit. I'm incredibly confident that we can replicate some of these past experiences that I've had and perhaps even beyond.
John
Great, thanks for that. And just a quick follow-up.
John Lawrence
Heather, can you give any kind of little deeper dive into those stores that have been remodeled that might have had that marketing spend as well in the right categories? And how significant were some of those better stores' performance? The average was a three, but how well did some of those successful stores really perform in the quarter?
David
Yeah, thanks, John, for the question. I appreciate it. I know you're a big supporter of our CTX format. I won't disclose exact details, but what I will tell you is that, as you know, with these changes, we're calling them our incremental initiatives, right? Marketing, remodels, inventory rebuilds, et cetera, et cetera. I mean, we're tweaking the dials as we learn. And that combination of remodel and marketing has had a particularly exciting result that we're looking at and saying, as we always do, how do we replicate that? Where do we replicate that? So it's, It's small yet. It's a learning, but it's an exciting one, and we'll apply it going forward in a measured manner. But, yeah, I mean, it's helping lift for sure.
John
Great. Thanks. Good luck.
Operator
Thanks, John. Thank you. We have reached the end of the question and answer session. Mr. Seiple, I will now turn the floor back over to you for closing comments.
Ken Seifel
Thank you. I certainly appreciate everyone joining us today on our call. Thank you for the good questions and your time and attendance here. We look forward to updating you in the future on our progress. Thank you very much.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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