Greetings, and welcome to the Citi Trends Fourth Quarter and Fiscal Year 2022 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 21, 2023, I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Thanks, and good morning, everyone. Thank you for joining us on Citi Trends’ fourth quarter 2022 earnings call. On our call today is our Chief Executive Officer, David Makuen; and Chief Financial Officer, Heather Plutino. 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 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 on our fourth quarter and full-year fiscal 2022 earnings call. I will begin our call with highlights of our fourth quarter and full-year financial and operational performance. Heather Plutino, our Chief Financial Officer, will then elaborate on our detailed financial results and a few other items related to our outlook. Then we'll open your call or your questions. I'm pleased to report that we delivered on every aspect of our stated guidance for the fourth quarter and second half of 2022. This outcome was driven by our talented teams, whose grit and dedication never ceases to amaze me. For the full-year 2022, we are really proud of achieving a healthy gross margin rate of 39.1%, while driving operating expenses lower than 2021 by 9%. Our inventories were well managed across all of our product cities, or categories, with dollars down nearly 15% to the prior year. We also ended the fiscal year in a better-than-expected cash position of nearly $104 million, coupled with zero debt. Despite what remained a highly challenging economic environment, especially for low-income African American families, the bulk of our customer base, our team successfully leveraged our flexible operating model while executing our strategic priorities, including optimizing our product mix, enhancing our in-store experience, and investing in our infrastructure. Lastly, about 13% of our fleet now reflects our CTx enhanced store experience. Our expanded and new categories are working, including our Q line, our Missy size offering, and our Tween girl styles expansion, and the broadening of our assortment to attract the fast-growing multicultural audience is well underway. Looking forward, our strong balance sheet enables us to invest in key merchandise categories to continue to delight our customers with fresh, exciting products at prices that…

Thanks, David, and good morning, everyone. As David mentioned, we are pleased to have closed out fiscal 2022 with fourth-quarter and second-half results that were in line with our expectations despite the inflationary environment and challenging macro backdrop. We once again delivered strong gross margins and a reduction in SG&A dollars while continuing to make progress on our key strategic initiatives. We further strengthened our balance sheet with $104 million of cash, well-controlled inventory, and our $75 million revolving line of credit remains unused. Our balance sheet positions us well to play offense and to make strategic investments to generate top-line momentum. Consistent with the guidance we provided with our second-quarter 2022 earnings, we delivered low single-digit sales growth of 2.2% in the second half of the year compared with the first half. We delivered gross margin in the second half in the high 30s, 39.7% to be exact, and controlled our SG&A to reduce deleverage to prior year by over 400 basis points compared to the first half of the fiscal year. As a result, we delivered second-half operating income of $10 million, in line with the second half of 2019. Finally, consistent with the guidance we provided in January of this year, we ended the quarter with $104 million of cash and adjusted earnings per share of $0.83 in the fourth quarter and $1.04 for the second half. In short, we delivered on every aspect of our guidance. Now, let's turn to the specifics of our Q4 financial results. As mentioned in our earnings release, we are comparing select operating results for the fourth quarter and 52 weeks of 2022 relative to the same periods in 2019 in order to provide a more normalized comparison of performance. Total sales for the fourth quarter were $209.5 million, a decrease…

Thanks, Heather. I'd like to take a moment to thank the entire Citi Trends team for their hard work and resiliency this past year. Our team's relentless efforts continue to make a difference in the neighborhoods we serve as we provide unique value position and proposition for existing and new customers alike. For 2023, we'll leverage our brand strengths and customer loyalty and manage the business prudently, while strategically playing offense to support our highest priority, driving comp store productivity. We're excited and motivated to tackle the challenges that lie ahead and are fortunate to have a first-class team and a first-class brand that our customers trust and value. With that, we're now ready to take your questions. Thank you. Malika?

Thank you. [Operator Instructions] Our first question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead. Your line is open.

Good morning, everyone. As you think about the second half of the year and the improvement that you expect to see coming with the priorities that you laid out, David, what are the markers that you're looking at? And are there anything under the hood with the supply chain, anything with supply chain, lapping of wages that we should be mindful of that could help drive us to the second half of the year? And with the product trend assortment that you're guiding to, anything specific like the missy area, whether it's the pets or the beauty that you've talked about, that - how the assortment is shifting? And what does this mean in terms of pricing and margin? Thank you.

Hello, Dana. Thanks for joining us. Thanks for that question. I'll try to kind of summarize our point of view on that, and I'll take us back to our number one priority, which is driving comp store productivity. And a lot of your points hit on that. And I think it's really going to be driven by the fact that we have work to do in certain existing categories that I name, for example, footwear, ladies and missy to grow that, some opportunities in the girls area, which I mentioned as tween girls. So, a lot of the things that we've been working on and tested during 2022, we expect to really take flight especially in the second half of the year. And regarding pricing, we're getting a little more rigorous about our good-better-best approach to many of the categories in the box so that we are really locked down on great entry price points for the ultra-value shopper and then we can ratchet up to better invest when it comes to offering more trend and more feature-laden products. So, when you combine sort of what we want to develop further in existing categories, get pricing even sharper, and then I'll kind of end with the trend development that I referred to, really doubling down on improved trend development, which is what our customer yearns for and is voting for today, we expect all of those things that I've mentioned to kind of take flight during the rest of the first half but really to start to get to be very sticky in the second half. And there's a couple of reasons why the second half, we believe, will offer that window. One, based on external forecasts, it does appear that our low-income customer will begin to experience some relief. So, we hopefully have that going in our favor. And then, secondly, we performed very well at back-to-school and holiday, and the timing that we're living now allows us to get really prepared for those two important periods in our year, which will help support the second half.

Got it. And two other things to follow up on. One, on the ransomware incident and what happened there. Any updates on with inventory levels down 15%? Are things moving through the DCs now? How - where do you expect inventory to end the first quarter? And then on the CTx remodels, how are those performing relative to the base? Thank you.

Great, Dana. Thanks. Yes. On the inventory piece, we will get back to better than negative 15, but I want to give you a couple of color comments on that. First off, that was our year-end number. We have a temporary disruption, but we've been building back. Once we got back, as we've noted and said week 3, and we've been using all of our ways to shift from drop ship to 3PLs to our own DCs to build back inventory levels as aggressively as we can. We won't release today what we anticipate end of Q1 to be, but I can give you directionally that we're going to build back to better than negative 15 and yet still drive really good terms and still be really rigorous about our inventory management, which, as you know, we've been delivering on since mid-last year. And then, secondly, on CTx, we're continuing to see the sort of mid to high single-digit lifts in those stores, and we're pleased with how the customer is reacting to the new experience in those stores. But I think that summarizes your question. Makes sense?

Yes, yes. Thank you. Yep. Makes sense. Thank you.

Thank you. Our next question is from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead. Your line is open.

Thanks for taking the questions. I wanted to start by just making sure I understand a couple of things in the guidance. In terms of the contribution that you're expecting for the 53rd week this year. Are you looking at like kind of 10 million to 15 million from a sales perspective? And what would the contribution be to either operating income or EBITDA?

Hey, Jeremy. This is Heather. I'll take that one. Thanks for the question. From a sales perspective, we want you to think about the growth contribution from the 53rd week is about 150 basis points over prior year. And then, from a profitability standpoint, it's negligible. It's immaterial.

Got it. And then, just drilling down a little bit on trends and what you've seen the callout of SNAP benefit reduction on March 1, as well as the lower tax refunds. Have you seen a difference because, if you look at kind of the tax filing statistics, refund money dispersed at the middle of February was quite a bit higher, 9 billion or so. And then there has been a pretty significant falloff over the last few weeks. Have you seen that play out in your trends within Q1 thus far? In other words, how have the post February 15th trends been relative to the very end of Q4 and into the very first couple of weeks of Q1?

Thanks, Jeremy. Good question. I'll give you a slightly different nuance after I address your question. First off, timing of the refunds, we haven't seen anything that's statistically relevant. You're right, it was a little heavy and faster, which is a good thing in the beginning, and it slowed a bit. But we're pinning much more of the softness on the amount of the refund, less about the timing. And if you dissect, for example, the families that filed this year, their refund is substantially lower than last year and substantially lower than the national average, which is lower. And so, that's what we've been more focused on, that our core family is quite a bit lower in refund amount than prior year. And that's driving different decisions by them when it comes to discretionary shopping. So, less about the timing and the disbursement, much more about the amount TY versus LY.

Got it. Okay. And then just in terms of - historically, Q1 is - has always been a stronger quarter from a sales perspective than Q2. I would imagine that that pattern probably still plays out again this year. I mean, if you were to look at your splits from first half to second half last year, there was a little bit of an uptick overall, but I think it was still like 49%/51% split in terms of total sales for the year. You know, it seems like the guidance implies that there's going to be maybe a much stronger second half of the year recovery. But I wanted to get a sense for what you're thinking here just as it relates to Q2, whether or not that historical seasonality would play out where Q2 would be down from what you're expecting in Q1.

So, Jeremy, this is Heather. I'll take that. Thank you again. We're not guiding by quarter, but I will tell you that - and you can glean this from our prepared remarks that the improvement throughout the year means that this year's construct is going to be a little bit different than last year, right? Q1 is softer. Q2 relative to Q1 and then Q3, Q4, I mean it's just going to look a little bit different. It will be a little more back-half weighted than what we typically see. And that's really more a function of the pressure that the customer is under currently and how we expect that to ease up in the latter half of the year.

Got it.

Obviously coupled with our initiatives. Sorry, Jeremy, talked over you.

Yes, no, problem. Sorry. Sorry. And then, just in terms of - it's kind of an SG&A-related question tied into the sale leaseback. And just to confirm, so the - when you take the combination of the two DCs that have been sold, the rent for the year, that's - I believe, is that about $2 million a quarter or about $8 million or so for the year?

That's fair.

I just wanted to make sure and that's embedded in your SG&A now.

Yep, you got it.

All right. Thanks so much. Best wishes.

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

Hey, good morning, guys. How are you? Can you talk a little bit more about your consumer and the sales compression you're seeing? Is it traffic? Has it been basket-driven? And, I guess, I'm curious if it's more pronounced in certain parts of the country. And then, following up on Jeremy's question, when did the inflection occur? Was it - did it start in January if you unpack your comp? It looks like January and the stack was pretty soft, so I was wondering if it started in January. That would be helpful.

Sure. Hi, Chuck. Thanks for joining. The drill down a little bit on the current sales trend is the following. We're seeing pretty good traffic trends, kind of in the neighborhood of what we'd expect. We're also seeing good conversion trends where we're seeing weaknesses in our basket. And that's primarily driven by some UPT softness, less about AUR. So, it's clear to us that macro forces are causing the customer to kind of buy a little less per trip. So, that's part one of your question. And then, from a trend standpoint, we started to see some of this economic pressure churn a little bit more tougher on our customer in late January and into early Feb. So, your facts are correct. Our January stack was a little softer than we expected, and then, that continued a little bit into early Feb. So, we were watching it pretty keenly. And to your earliest point, the state of the consumer was, I think, yielding a slightly different story than we first anticipated, let's say, in late December, early Jan. So, we did notice what you were picking up on.

And then when you're - obviously, the guidance is really back-half weighted. And I know there are some things in your control, but you talked about just general consumer relief. And I was just wondering if you could just dive a little bit deeper. Exactly what are you referring to when you guys say that?

Well, we're - I think we're combining a couple of things, Chuck. First, we believe that the - I'll call it the shock of a lower tax refund and the elimination of the SNAP benefits is just that. It's a bit of a shock to the system. That's definitely impacting the quarter that we're in. And then, we parlay third-party information to suggest that the economy should continue to improve the beginning sort of post first half and expecting some relief for those low-income customers with slight wage growth and a lessening of inflation, hopefully, causing a good point of view for them to think about returning more and more to more discretionary behavior. But I will underline, you noted it, I'll underline our priorities. We've analyzed this pretty thoroughly, and we know we have opportunity to improve our assortments. As I noted, I called it refining our assortments. We have opportunity to build better inventory levels in target areas of the store. I mentioned that. We have some opportunities to improve our sharp price point strategies, particularly at the entry price point level for the low-income family. So, the reason we wanted to articulate those priorities is that we're taking them very seriously, and we believe that they are going to be very helpful toward just controlling our own trends, so to speak. And coupled with what we hope is some relief gave us confidence in guiding a little back-heavy improved second half.

Okay. That's helpful. And then, just the delay of the ERP system is obviously pretty disappointing. Can you just talk about when you expect to implement that? And is it fair to assume that any gains you were anticipating are likely a '24 event at this point?

Yes, So, we're disappointed by that delay, but I will tell you, the teams are all over it, and we would intend on launching it before our holiday season, well before it, which is kind of typically the last time we could do something. So, think of it as kind of late launch. And then, as we've spoken before to the group here, most of that benefit will yield its rear, it's head, I should say, in 2024. We'll get a little bit of pick up in '23. But you're right, most of it will be '24 and beyond, and we'll certainly factor that in as we think about the future.

Okay. And then one last quick one for me. This is, Heather, on the balance sheet, right? I think they're close to $13, I think, in cash per share, more than 50% of the market cap of the stock right now. I guess - I don't think you guys bought back in your stock in 4Q. But I guess just talk about how you're thinking about cash priorities when you - at what point would you look to put that cash to use? And, I guess, sort of a follow on there, you continue to have great success with the CTx remodels, but the rollout continues to be pretty small in terms of the total store base. So, I guess, how do we think about cash deployment and then accelerating those CTx remodels?

Hi, Chuck, I'll take that one. Just to clarify, you are correct. We did not repurchase any shares in the fourth quarter. Really happy with our cash balance right now given the uncertain environment that we're living in and that we expect to continue for at least the first half of 2023. It allows us to weather the environment while also giving us what I call dry gun powder, right, to take advantage of inventory opportunities in key categories. So, it's giving us a lot of optionality. All of that being said, capital allocation is an important topic for us, and we continue to monitor opportunities in partnership with our board. We don't have plans to deploy cash meaningfully, at least through the first half, given the trough that we've been describing. But as we think about how we deploy our cash, and I feel like we've probably talked about this before, first and foremost, it's to fund the operations. Second, we invest in inventory opportunities, and then we talk CapEx, right? So, system upgrades and to your point, CTx remodels and new stores. And then, finally, and not off the table is the return to shareholders via share repurchase. So, active conversation, but as you can imagine, given the uncertain environment that we're operating in, gives us a lot of comfort to have a very strong and stable balance sheet.

Okay, great. Thanks very much.

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

Good morning. David, would you - could you take just a moment and - when you look at the cash spent and you talk about some of the new areas of inventory purchases, the kids area, and we've talked about the men's area, is there any way to drill down into '22 and see, we spent X million dollars on that additional inventory when we sort of went on the offensive - on the offense? And what was the gross margin for that particular product? Was - can you dissect that at all just to show the strength of that new inventory?

Hey, John. Thanks for that question. It might be tough to dissect all of that in a quick answer, but I hear where you're going. And I can tell you that the test that we did last year and/or partial rollouts, I'll use the Q line as an example, we started scaling that big time in late '21 into 2022. That inventory is largely turning into sales. It's a nice turning business. So, when we look at sort of the ROI on that inventory investments, it's generally pretty strong across all of our categories. We go into them. Planning, inventory and margin at very good levels. And then, we, obviously, manage the turn as the product starts to get adopted and accepted by our customer base. So, I can tell you that for the most part, all of our "incremental activities," whether it was Q line expanding into our multicultural men's assortment efforts or the missy size range, which is new to our store, ever in our chains history, all of that had really good planning associated with it where it was both sales- and margin-accretive to the P&L.

Great. Thanks. And, Heather, just an admin question. Can you talk about the stores that are closing? What would be the profile of those?

Yes. Hey, John, how are you? Good to hear from you. Stores that we closed in 2022 and those that we're looking to close in 2023, the common thread is that the sales volumes are not sufficient enough to ensure stable and growing profitability. And that - you know, they're all over the country. They're in different markets. They're different profiles. They're different rent structures, payroll structures, etc., etc. But that's the theme, right? They're just not hitting the sales volumes that we need in order to cover the expenses of those particular stores. In some cases, they're newer stores that just aren't hunting, to use internal language, or their stores that we have been working to improve for a while, and they're just not going to get there. So, it's always painful to leave our neighborhoods. You know that that's very, very important to us. But having a stable and healthy fleet is definitely high priority for us as we go through the year. And it's just going to set us up better for 2024.

Great. Thanks a lot. Congrats on the quarter.

Thank you. And there are no further questions at this moment. I'll turn it back to the presenters.

Very good. Thanks, Malika. Thanks everybody for joining. Have a great week. See you next time. Bye-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.