Greetings, and welcome to the Citi Trends 4Q 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, March 15, 2022. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends fourth quarter 2021 earnings call. On our call today is Chief Executive Officer, David Makuen; Chief Financial Officer, Pam Edwards; and Vice President of Finance, Jason Moschner. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer to you to the company's most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, David Makuen. David?

Thank you, Nitza. Good morning, everyone. And thanks for joining us today for our fourth quarter and fiscal 2021 earnings call. This morning, I will begin by reviewing the continued transformation of business and highlight our financial and operational results for the fourth quarter and fiscal 2021 before updating you on our progress related to the evolution of our Citi Master Plan and activity in support of our strategic growth priorities. Then Pam Edwards, our CFO, will elaborate on our financial results and a few other items related to our outlook. Fiscal 2021 was a productive year for Citi Trends with meaningful progress against our transformation strategies as we remained focused on our underlying goals of expanding the Citi Trends brand to many more underserved African-American and Latinx communities. We achieved strong 2021 financial results with some of our highly differentiated specialty value store experience and continued discipline and focus on the execution of our strategic priorities. For the year, we grew our top line 26.8%, comparable stores plus 22% and increased our earnings per share by nearly 400%. All of these data points are compared to 2019. Highlights of our accomplishments for the year are: we launched and market-tested our revolutionized CTx new store format. We opened 27 new stores and remodeled 25 during the year. We navigated and managed this challenging supply chain backdrop while maintaining healthy in stocks and a high level of inventory freshness. We successfully managed store and distribution labor headwinds with prudent leadership and effective staffing solutions. We kicked off investments in infrastructure that includes system enhancements for our Buy team and capacity upgrades for our Move team. We strengthened our diversity and leadership with two new additions to our Board of Directors. And we returned value to shareholders through our share repurchase program.…

Thanks, David, and good morning, everyone. In fiscal 2021, we delivered exceptional financial results with both top and bottom line growth, while making meaningful operational progress in all of our core areas of Buy, Move, Sell and Support. In addition, while we certainly saw a benefit from the extraordinary federal stimulus, particularly in the first quarter, we also saw underlying strength from the transformation initiatives we have put in place. And while in the early innings, these initiatives are changing how we operate this business. Specifically, we have made significant improvements in our merchandise, our inventory management, our expense management and the efficiency in which we run the operations of this business. Similar to our second and third quarter calls, before turning to our results, I want to first address the top-of-mind topic, which is supply chain. We continue to successfully navigate the supply side environment which, as you know, remains fluid. We have strategically leveraged opportunistic inventory buys from last season, and we have more effectively secured in-season growth in response to customer demand. As a result, we feel good about the quality and the quantity of our inventory heading into fiscal 2022 that will help us remain agile in light of the macro volatility. In addition, while transportation costs are elevated, we have continued to work diligently through what we can control by streamlining and increasing the efficiency of our internal operations and processes. This allows us [Technical Difficulty] to manage the impact of disruption to approximately 110 basis points versus 2019. We will continue to monitor this closely as the current environment is expected to persist through at least the remainder of 2022. Now let's turn to the specifics of our Q4 financial results. As mentioned in our earnings press release, we are reporting operating results for…

Thanks, Pam. As you can hear from today’s call, the Citi Master Plan is really getting traction. With changemaker initiatives in flight, we will not only excite our customers, but also importantly, evolve our diverse organization to be excellent operators. Turning our attention to our longer-term opportunities, I can assure you that our three-year growth plan and assumptions are fully intact. In 2023 and 2024, we are confident that the business will generate low single-digit annual comp growth and double-digit operating income and EPS growth. Once again, we are very proud of our team’s execution in 2021 and very pleased with the results for the year. We’re entering 2022 in a strong position and we are confident in our ability to continue to execute against our transformation strategy. We look forward to building on our progress in capitalizing on the opportunity we see for our brand this year and beyond. Before I close, I would like to acknowledge the announcement made on February 2 that Pam Edwards has decided to retire and leave the company on April 1. I want to thank Pam for her commitment and dedication to Citi Trends over the past 15 months. She has built a strong, capable finance organization and helped drive our retail transformation. We wish Pam all the best in her future endeavors. And we’re knee deep in a search for Pam’s replacements. In closing, I want to reiterate my gratitude to the entire Citi Trends team for their hard work and dedication to our brand purpose and mission of driving long-term profitable growth while continuing to make a difference in the communities we serve. We appreciate your interest in our exciting growth story. Join us to bring our purpose to life: live bold, live proud and respect all. With that, Malika, we’re ready to take questions.

[Operator Instructions] Our first question is from the line of Jeremy Hamblin with Craig-Hallum. Please go ahead. Your line is open.

Thank you. So, I wanted to start by getting in a little bit more details around the Q1 guidance. So in terms of the same-store sales figure that’s embedded within that, I don’t know if you’re kind of looking at a kind of down 30% type of figure. But I wanted to see if you could clarify that as well as the share count that’s implied in that Q1 EPS guidance range? And then we also note that in Q4, your gross margins came in significantly better than what you had guided to and where the Street was and was up about 70 basis points versus 2019. I wanted to get an understanding of what was implied in your Q1 guide from a gross margin perspective and your outlook for 2022 as a whole? Thanks.

Hey Jeremy, thanks for joining. Great questions. I’ll take kind of a 50% crack of things, and then I’ll turn it over to Pam. From a high-level guidance standpoint on the top and top-line, you’re right in the zone. We guided negative 25% to 30% for Q1 on a total sales basis. And that equates to roughly a 28% to 33% range for comp store sales. So, you’re right there. And then I’ll turn it over to Pam to highlight our share count and a little bit of knowledge and background around the better margin for Q4. Pam?

Yes. For the share count, we ended the year at roughly 8.6 million shares outstanding. And as we mentioned, we purchased – we repurchased shares at the beginning of the quarter. For the Q1 perspective – I’m sorry, Q4 perspective on what got better, I mean we stand to our high-30s, low -40s guidance for our overall gross profit and margin. And really, the – that came through being able to manage the freight expenses to that low end of the range that we’ve given out before around that 110 basis points result. We also had fewer markdowns than what we had expected in the quarter. That also helped drive the gross profit better as well. So really, as we started to see the quarter evolved and come out a little bit lighter than expected starting December week five and through the beginning of the January and started to lap up against the first stimulus from last year, we just started managing the business. We were nimble with our inventory management, whatever expenses we could manage at that point in time, we did. And just manage the business accordingly to account for what we were seeing in the market. So just really maintaining agility across the entire business in light of the slowdown that we saw again in that last month of the quarter.

And as a follow-up to that point, so it looks like your inventories are down about 11% versus 2019 levels to end the year. Do you feel like, obviously, your customer base is really being impacted by inflationary pressures and just the rapid spikes that we’ve seen in whether it’s utilities or gas prices or food prices. Do you feel like you’ve managed your inventories to the point here for the next couple of quarters that you can maintain that lower markdown certainly versus where you were a couple of years ago in 2019. Is that a fair assumption?

That’s a good assumption, Jeremy. And let me give a little context. As you know and a lot of the group knows, we started getting really good in inventory management coming out of the opening in the summer of 2020. And as I think you might remember, one of my quotes, we’re never going to look back. And so the team has really pressed hard on how to best manage inventory in good times and tough times. And Pam mentioned that word agility. We’re getting better and better at [indiscernible] when it comes to making sure that we’re reading the TVs and that we have enough dry powder and are open to buy and that we can work the best we can with our vendors to move things around and occasionally cancel things and yet still look for opportunities and so on. So it’s a multivariable game, if you will, in terms of how we manage all that, but we’re really pleased with how it’s going. And it’s our job to give the customer what they want, but knock it over our skis and manage down, markdowns and make sure that it’s out of the box and looking good that we sell through it and bring in the next trend. So the last point I’d make is this idea of the life cycle of trend management is just getting better and better. I talked about this when I joined the company. I talked about it in 2021, and I’ll tell you about it today. Getting better and better. Our mayors are truly becoming masters of trend management and that helps mitigate perhaps falling in any rabbit holes when it comes to too much inventory. So, we’re excited about what the numbers are telling us. And we’ll maintain our normal MO, which is gross margin of high-30s, low-40s as we look forward here.

The only thing I would – Jeremy, just the only thing I would add to that, just from a quarterly cadence standpoint, we do expect that Q1 will be our most difficult comparison from a margin perspective. And so of that, we’re planning high- 30s for the first quarter with a sequential improvement in the rate from Q2 to Q4. And again, that’s largely a – a result of last year. We also had prior year strength favorability in our Q1 number that we’re not seeing this year. And then also just additional markdown versus last year.

Great. Last one for me is just is the change in the unit development for the year, 35 store openings versus 45 store in your prior guidance, seems like a prudent change given the way the environment has changed. I wanted to understand the cadence of the openings expected for the year whether or not – how many are you thinking about in Q1, first half versus back half? And then as a follow-on to that, how are your CTx stores, and I know you only have a handful, but how are those stores performing versus the rest of the chain? Thanks so much.

Thanks for your questions, Jeremy. Yes, the 45 to 35, I appreciate your point, we think it is prudent. It’s just a little breather this year to get everything in order in terms of rolling out our CTx store format that required a lot of heavy lifting and importing of fixtures from China. And the good news is it came in right on time, which is an amazing call out to our real estate and construction teams, so kudos to those guys. But we just thought we’ll back off a few, we’ll catch up in 2023 and 2024. That’s not an issue. And most importantly, if I can go through the quick cadence, we went from saying in November of last year, 40 remodels in 2022 to January 45 to now 50. So, we actually put a little more emphasis, I wanted to make sure you didn’t lose that factoid into the remodel program, which I’ll end with your question about how they’re doing. It’s too early to report on the age that are going live as we speak. But I can tell you the ones that we went live with last year continue to outperform the chain at a healthy margin. So, we’re excited about it. It is really representing a revolution in our experience. And I hope you and others can get into some of these because they’re going to start popping around the country pretty quick here. Thanks for your questions today, Jeremy.

Thanks so much. Best wishes.

Thank you. Our next question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead. Your line is open.

Good morning everyone. And Pam, best of luck in – on your retirement. In terms of inflation and stimulus to is obviously the macro topics of current events. As you think about stimulus, David, you had called out stimulus each quarter of last year and what the impact was. Anything to remind us of, as we go forward this year and in the upcoming quarters, of how you’re thinking of the framework of it and the impact, given that you’re looking for low-to mid-single-digit sales gains Q2 through Q4? Anything we should be mindful of? And then next, just on inflation. What are you seeing in your average price increase? How is that helping or to offset wage increases? And does it differ by category and how pricing is occurring?

Hi Dana, thanks for your questions. I’ll take the first one, and Pam can elaborate on the second one. From an overall stimulus impact across the year, we look at it almost like a curve that kind of start – I let me describe it more as a ski hill. It starts pretty high in March, even into a little bit of April, meaning the impact of that March drop. But then it really drops pretty quick on that slope and we look at the impact of CTC or child tax credit that started dropping in July through December. And so really, the lion's share is what you're hearing reflected in our Q1 guidance. And then it gets – I won't say easier, but it gets a lot lower in Q2 through Q4. And then importantly, I want to make sure that you hear this point, many of our initiatives to impact 2022 begin to go live in Q2. We've got a couple of cooking in Q1, but they really start to pump in Q2 and forward. For example, that's when our Missy assortment starts to take hold. That's when our multicultural assortment to capture, for example, more Latinx market share starts to pop into stores. That's when we start to work and show up with a better dress assortment, which is a significant volume opportunity. And then most importantly, our remodel start kicking in. We're going to do almost half, if not more, of the 50 remodels by the end of Q2. So they provide some really nice comp benefit for the rest of the year. And then obviously, on the total top line, building our new stores will start to kick in, and we think we'll build just – of half of those by the end of Q2 as well. So lots of moving good parts coming for the Citi Trends business. Pam, do you want to comment on our pricing?

Sure. As we've previously shared, our AUR has been steadily increasing due to improvements in quality, trend, curation of assortment and also the lower markdowns due to our tighter inventory management. And so we just continue to monitor it closely and look at it very surgically from our business perspective by category to make sure that we're measuring elasticity as well as providing that right value equation for our customers. And so while we are seeing a higher AUR out the door price, some of that is due to lower markdowns than what we've seen historically. But it's also due to where we have inched up the quality and the value and the assortment to match a higher price level that our customer can manage.

Got it. And then on the supply chain side, the 110 basis point impact in the fourth quarter. Does that hold similar throughout the rest of the year? Or is there differences in the upcoming quarters that you're looking at?

We're pretty much holding get the cash, Dana, there's so much uncertainty with transportation costs right now and the rising fuel costs. As David mentioned, we do have some initiatives that will start to take hold in the back half of this year as it relates to our supply chain. But at this point, given the level of uncertainty, we're pretty much holding at that 110 to 120 basis points versus 2019 as the increase, at least until we get out of 2022 and can see some stability, hopefully.

Got it. And then just lastly, David, you had mentioned dresses. I think you had been also looking at other categories like the Big Boy sizing, the Missy sizing, the Junior tops or branded collaborations. What are you thinking about product-wise as we move through 2022 to drive excitement for your core customer?

Great question, Dana, and great memory. All those things that you cited are also on the list. In terms of how we look at our customer and frankly, the improving and changing landscape of how they're going out, how they're returning to the office in some cases, how they're coming out of this without a mask and being more social and more free and so on, we think those are all really great tailwinds for the Citi Trends business. But I also think we have an opportunity to open up some new windows. We have this incredible strength with our loyal and deep customer connections on the casual side of life. But what we haven't done as much and certainly the last two years, but even the last three to five is dabble and enter into the more sort of, I'll call it, dress casual and opportunities to kind of have those day-to-evening looks. And we'll still do it in a Citi Trends way. It will still be full of trend, and it will still represent live and bold and live and proud in the way as you present yourself but it's a belief and I strongly support this from Lisa, our Head of Product Allocating and Planning. She sees this happening, and we're testing the waters with a number of initiatives right now and many of them are flying off the shelves and off the hangers. So we're encouraged by the changing consumer landscape in terms of their apparel needs. And then on the non-apparel front, our business remains stronger than ever. And as you may remember, a lot of our addition of categories or expansion of categories was on the non-apparel side. So I can tell you that our few line initiative is expanding into more stores and keep the things from growing keeps and bounds. And then we're working on really existing stuff like jewelry for the plus-size women with a bigger footprint, if you will, on her neck or hip [ph]. That's blowing out. I mean there's just so many things under the covers of the trends that we're excited about. And we believe, to your point, will engage the customer. And last but not least, generate strong performance with higher store conversion and higher basket.

Thank you.

Thank you. Have a great day.

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

Hey, thanks. Good morning. You guys have called out that conversion and basket have stayed relatively the same. So I guess I'm curious what you're seeing from a footfall or traffic perspective over the past, say, 100 days really since the middle of December.

Hey Chuck, good question. Yes, you're right. We were encouraged about our conversion levels and our basket levels driven by healthy increases in both our AUR selling price as well as our units per transaction. If I could kind of pull back and answer your question comes from Q4 holiday to now, it's definitely seesawed. I think we typically are really strong with our December because our customer tends to shop more last minute. And so we ended the kind of December week three and four, holding really nicely against 2019, still not positive against 2019, but better than we had seen throughout the year prior. And then as we know, January got stocked in by people being stocked in from the COVID Omicron variant. And we saw a pretty big deceleration in our traffic. However, as I reported back then, what we didn't see was any decay in conversion or basket. It was just amazing to see. So what that tells us is our content is really strong and the stories that we're presenting to our customers are strong. And then as we enter early Feb, as we also suggested would happen, we saw a pretty nice recovery, meaning our traffic levels started to recover and our basket and conversion stayed true and high. We're still not above 2019. We've had some seesawing weeks based on the cadence of tax refunds and such. But overall, we're pleased with the progression that we're seeing in the business, and we have that planned to get as soon as we lap Q1 to get better and better between Q2 and Q4.

Okay, because January was down, I think, around 32%, and it looks like you're guiding the first quarter to be down about 30%. So I'm just trying to understand the degree of conservatism in the guide or if you're – if you are trending kind of in this down 30% so far quarter to date. Is there any way you can shake that out for us?

I think I can give you a little high level. I think what you're your hearing is mainly the March into a little bit of April downturn. That will kind of, if you will, quelch some of the increases or improvements we've seen in Feb and March to date. As a reminder, the stimulus really started hitting last weekend, and it hits last year, meaning hit last year, this week and the following week. So what I said is true. We've seen some recovery instead in early March. We'll give some of that back when we lap the stimulus. So that's the color I can provide today. I hope that helps.

Yes. Okay. And then one for Pam. Just last year, in 2021, your EBITDA ratio was over 10%, which is, I think, consistent with the long-term guide that you guys provided, earlier in January. It looks like your EBITDA guide for this year is around, call it, in the low 7% range. Just wondering when you think about it over the next several years, how long do you think it's going to take for you guys to get back to the level that you were able to produce in 2021?

Yes. Great question, Chuck. I do believe that the underlying conditions of the business, once we get past stimulus, and this lapping that we're doing now and some of this inflation, we're going to start to see the business get back on track to where we projected in our long-range goals, and we can see a double-digit EBITDA by 2024. So again, I think we believe that this is temporary from what we're seeing in all stimulus-related and feel that that's still a good measurement of our transformation.

Okay. And then my last question is, if you think about the $80 million and potential proceeds from the monetization on the DCs, I guess has the board done any consideration to get more aggressive on buybacks? If you're – if your guidance holds and you could do north of $5 in earnings per share in 2023, your stock is really, really cheap here and the time to execute that buyback maybe now, but I'm just wondering what the consideration, I guess, would be with those proceeds.

Yes. I mean it's an ongoing and active conversation. And certainly, share repurchase remains an important part or important pillar of our capital allocation strategy. The Board owns this and is actively looking at that as part of the considerations for the proceeds of the sale leaseback.

Okay. Congrats again, Pam.

Thanks. Thank you.

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

Great. First of all, congrats, Pam. Thanks for all the help.

Thank you.

Secondly, David, would you talk a little bit about – you talked about some of these investments in the systems and you talked about those for several quarters. Could you go a little deeper and talk about what you really expect to achieve on the merchandising side with these investments and planning systems maybe that you realize you need to – more efficiency there?

John, sure. Happy to do that, and you're right. I've been previewing this new system and what's exciting is it's now kind of right from – we've got many individuals on our teams across Buy, Move and Sell, working hard on testing and developing what the ultimate solution will be come later in the summer. And the benefits are vast, truly. This represents really the backbone of how our Buy team, both places POs, all the way through to how they plan and allocate based on the types of stores, the climate of the store, the location of the store, the store whether it's an African-American primary store or an African-American and Latinx store and so forth. So if you pull the lens back a bit, it really says to you, gosh, this brand has been operating at a pretty high level without this system, which is a testament on to itself. And with this new system, we're going to give these guys kind of a race car to be able to go and chase opportunities, spend less time in a manual system, more time in a system that will provide the right KPIs, the right dashboards and the right tool set to go in and say, "Hey, I want to allocate this particular product to these 72 stores because I know that's the right thing to do. And that's how I'll probably maximize sell-throughs and markdowns." And most importantly, make the customer happy. So the age old, I need more shorts in Florida, which happens almost every year, will largely go away because we'll have the smarts and the analytics to say, this is when shorts should arrive in Florida. This is when shorts should peak in Florida, and this is when shorts should go away in Florida. And all those conversations, we tend to do very manually today and a little bit across fingers, if you know what I mean. So these are a – I'm glad you asked, this system enhancement is it is a change-maker for Citi Trends.

And David, when would you expect to have that fully implemented and operating?

We are expecting to have that in play late summer, early fall, and we think it has some immediate impact for the rest of 2022. But really when it kicks in is for 2023 and 2024 as the teams get really good at using it.

Great. And can you tell me digging into the new stores; I know you commented on the new format stores. Can you go into just a little bit of a deeper dive, all of those new presentations, the way non-apparel was sort of – is presented in those new stores that we've seen. Can you give a sense of are they stronger than – are they really leading the charge into those solid comps that you presented at merchandise in a different way?

Good question. And I think you're referring to our really large change to the layout on our new CTX store format that we'll put into all of our 35 newbie’s this year and 50 remodels. I would tell you, John, that what pleasantly surprised us is that really all boats rose. We expected the material – or products, excuse me, that we move to the center of the store to be off the charts. The truth is most of the box is up. I mean it's hard to find a business that's not up. And so it just really presented this whole new feel good, well led, dynamic, easy-to-shop, specialty store experience that we weren't upholding. We weren't respecting those that vision in our legacy and older stores. Nobody's fault. It just wasn't something on the agenda for city trends for so long until me and the team got after it last fall – or excuse me, fall of 2020 into launching in spring in 2021. So at the end of the day, we're loving what we're seeing. And I think, I've highlighted a little bit in the past. What we're seeing in the lift out of these stores is what we call a proxy for conversion, meaning we're seeing transactions rise, coupled with some nice little gains in UPTs in the basket, but most of the increase is coming from conversion, which tells us you might have come in and have not been as engaged or as excited about the experience and now you are. And our goal and job is to just become really good operators in operating these stores, filling them up with the right stuff, using that new system when it comes live to get even better in these stores. And I think the performance will follow up.

Thanks. Good luck.

Thanks, John. Take care.

Thank you. And no further questions, I'll turn it back over to David Makuen. Please go ahead.

Thanks, Malika. Thanks, everybody. I think we can conclude the call for today. Thanks for joining us. We look forward to seeing you next time. Have a great day and week and a great spring. Bye-bye.

Thanks, everyone. Bye.

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