Citi Trends, Inc.

Greetings. Welcome to CityTrend's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. The 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. Please note this conference is being recorded. I will now turn the conference over to Nita McKee, Senior Associate at ICR. Thank you. You may begin.

Thank you and good morning, everyone. Thank you for joining us on CityTrend's second quarter 2024 earnings call. On our call today is Interim Chief Executive Officer Ken Seifel and Chief Financial Officer Heather Patino. 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 more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statement. I will now turn the call over to our Interim Chief Executive Officer, Ken Seichel. Ken?

Thank you, Nisa. Well, good morning, everyone, and thank you for joining our Q2 earnings call today. Since our first quarterly call, I've had the opportunity to evaluate our business and chart corrective measures to enhance the long-term sales and profitability of CityTrans. Today, we'll discuss the strategic actions taken in Q2 to prepare CityTrans for future growth and outline important work underway to improve our near-term and long-term results. You know, and I must say, while there's a lot of work ahead still, I'm more energized and optimistic than ever about our company's future. Returning to Q2, in Q2, we achieved growth in customer traffic versus last year, which indicates our core customer remains highly engaged with the CityTrends brand and our unique store experience. Our home and impulse categories delivered double-digit comps, and our back-to-school children's categories got off to a good start. I'm pleased to report that we've experienced continued momentum in the important back-to-school period with positive single-digit comparable store sales growth in Q3 to date. Importantly, Fittitrans remains in a healthy financial position with strong liquidity and no debt, allowing us to execute the foundational work necessary for future growth and profit acceleration. In stepping into the business on June 1st, I made an evaluation of several key areas of our business, including an extensive review of our product assortment. Relatedly, I made the strategic decision to execute markdowns in the second quarter, quickly clear through agent inventory, and make room for new product. This action will enable us to consistently offer pressure, balanced assortments of good, better, and best products. At the same time, we're swiftly capitalizing on two distinct opportunities. Versus enhancing the treasure hunt experience by securing branded goods at significant discounts, while also increasing the penetration of opening price point goods. And second, we've identified specific opportunities to improve our pre-season assortment planning process and product allocation processes. I am confident these actions are foundational for producing consistent comparable store sales growth and improved working capital efficiency. Inventory shrinkage has been an area of concern for CityTrans over the past several quarters. You've heard us discuss in prior calls the actions we're taking to correct recent elevated shrink trends. In July, I made the decision to engage services of Affirm to identify causal issues and assist us with fixing the problem. Working with our team, they are identifying several specific correctable administrative and process actions that are expected to have a tangible impact on shrink results going forward. The team has also identified corrected measures to monitor and manage internal and external theft. We're in the process of implementing shrinkage improvement measures, and we expect to make a positive impact on shrinkage results going forward. As I mentioned on our prior call, we've identified opportunities to enhance the effectiveness of the Island Pacific ERP upgrade that occurred last year. Transitioning from customized legacy software to a standardized software platform left a void in reports, processes, and monitoring capabilities that I view as fundamental for our leaders to guide the business. Our senior leadership team is highly engaged and has prioritized the business needs, and the work is now underway to make the necessary improvements. I want to emphasize that each of these actions I described are foundational improvements that position CityTrains for profitable growth. After these past couple of months, it's clear to me that the majority of the opportunities we face as a company are well within our control and really not dependent on external factors. You know, as a company, it's really nice to be in control of your own destiny. You know, knowing that if you get focused, hard work, determination will result in significantly improved outcome for our shareholders. My optimism about CityTrans is really rooted in my belief of our core business model. which boasts a defensible mode against competition. We're uniquely positioned in the marketplace as a value retailer serving a largely underserved customer base. With our extensive network of retail locations, we're one of the largest national retailers focused on providing family apparel to lower-income customers. Our strength lies in our deep-rooted presence within the African-American community, which continues to be the cornerstone of our financial success. Our long-term neighborhood presence has fostered highly engaged and loyal customers who respond positively when we meet their needs. Now I'd like to say a few words about the groundwork that we're laying for the future. Our plan includes a clear focus on the core customer, a strong product value proposition, trendy fashions with more traders in the trade run, consistent execution of our business model and disciplined expense management, a combination of which will contribute significantly to improved profit margins. Beginning with our core customer, we have narrowed our company's focus to our core African American consumer, who represents the majority of our trade area in nearly 90% of our stores. This targeted focus will allow us to deliver more precise assortments. While we acknowledge the presence of multicultural and Latinx customers in our trade areas, our core African-American customer remains central to our business and is critical to our success. Our merchandise teams have embraced the narrow focus on our core customer, which is enabling them to create a more refined and targeted assortment. In addition, we have initiated a comprehensive consumer insights study to gain both quantitative and ethnographic insights into the drivers of purchase decisions. This study, expected to be completed by the fall, will be a critical factor in our decision-making process for 2025 and beyond. Next, our product assortment. In past years, the company reduced the style choice count for opening price point goods under $5, which lessened our value perception and created a void for commodity needs at value prices. Simultaneously, we increased our offering of higher priced products, which was a positive step. However, we did not keep pace with the consumer demands for brands, leading to disappointment among customers seeking branded products at competitive prices. Moving forward, our objective is to always offer a balanced assortment of good, better, and best products across all categories. For our lower income customers on a tight budget, we're going to offer increased selection of goods priced under $5 with visible in-store signage to emphasize our value proposition. An even more significant growth opportunity for our business lies in expanding our sales of branded products. Our customers are fashion conscious and have demonstrated that they're willing to trade up when the fashion is right, the brand is recognizable, and the price value proposition is strong. We have identified juniors, men's, and family shoes as the categories with the greatest potential for near-term top-line growth. And I want to recognize our merchant team for recently opening up relationships with well over 20 well-known national brands that were previously inaccessible to CityTrans. Our merchants have noted our large scale of nearly 600 stores uniquely positioned in African-American neighborhoods is very attractive to brands looking to expand their reach to this important demographic. We expect some of this product to begin filtering into our stores in Q4 with continued expansion in 2025. You know, speaking of brands, We're currently developing internal capacity to add more to the Treasury Act by securing branded deals from various sources at significant discounts to regular costs. And although the current economic climate is challenging, it presents an excellent opportunity for off-price deal making with distressed vendors and retailers. We've added a highly regarded off-price buyer to our team to open new relationships, create off-price deal flow, evaluate assortment, fit, and execute. Our buyers are in the market now, reviewing a seemingly endless amount of opportunistic deals to begin delivering in Q4, as we refine our capacity to execute this important growth initiative. And over time, I expect this newly developed price treasure segment of our assortment to contribute an additional 10% or more incremental sales at a higher than average margin rate. I'm confident that the changes in our product strategy will drive traffic to our stores, resulting in consistent top-line and gross margin dollar performance in the future. Now turning to operations. In our supply chain, we are working to increase the speed of product delivery from vendor to store while reducing costs. Our objective is to shorten the number of product days in the supply chain. enabling us to respond more quickly to customer demands and reallocate inventory working capital to fuel sales growth opportunities. Our distribution teams have identified several tangible opportunities to increase speed and reduce operating costs. Our progress in supply chain was solved this summer when our primary outbound carrier unexpectedly shut down. And although we were able to react, the disruption caused a distraction for our teams and some delay in product flow. We are now refocusing on the supply chain efficiency project and will provide updates on our progress in the near future. Now I'll turn the call to Heather to review the financial points from Q2, as well as our outlook for the second half of the year. Heather?