Greetings, and welcome to the Citi Trends First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 23, 2023. 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’ first quarter 2023 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 the Citi Trendds first quarter fiscal 2023 earnings call. I will begin our call with highlights of our first quarter 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 the call for your questions. Against what remained a challenging macro backdrop for the low income families that we serve in African American and multi cultural neighborhoods, our first quarter results were in line with our previously stated guidance. Our teams execution of the initiatives I shared during our fourth quarter call improved throughout the quarter and our customers remained remarkably resilient. I will elaborate a bit more in a few minutes. As the first quarter unfolded, we doubled down on offering extreme value basics fashion and trends by stocking our stores with more entry price points, which translated to approximately 70% of our units for sale in stores, priced $999 and under. Additionally, we have great momentum behind continuously improving our store experience from appealing visual merchandising of Fresh head to toe looks to welcoming customers we know by name like a friend. Having visited dozens of stores during the quarter, I can tell you that our experience is getting better and better. During our last call, we mentioned sharpening our focus on trend development as a key lever for the year. I'm pleased with our efforts thus far, we have more work to do. But early efforts are providing some strong success indicators across apparel, footwear, beauty and accessories, home and impulsive snacks, candy, and HBA Essentials. Lastly, we've seen solid response to our spring and early summer newness. Thanks to our bi tee being…

Thanks, David, and good morning, everyone. As David mentioned in his opening remarks, our first quarter results were in line with our previously stated guidance, while the sales environment is uncertain and the low income consumer, the bulk of our customer base remains under pressure, our teams continued to make significant progress against the strategic priorities David outlined, all while controlling the controllables. Our strong balance sheet with $89 million of cash, well controlled inventory and undrawn $75 million revolving line of credit and no debt allows us to manage this environment with agility and flexibility. Turning to the specifics of our Q1 financial results. Total sales for the first quarter were $179.7 million, a decrease of 13.7% versus Q1 2022. While our results were at the low end of previously stated guidance, shopper conversion remained strong throughout the quarter as our assortments resonated well. We did experienced pressure on both traffic and basket as our customers are being very selective about their discretionary purchases. First quarter comp sales decreased 14.1% compared to Q1 2022. Gross margin was 36.7% or 37.0% as adjusted for cyber incident expenses versus 39.0% in Q1 2022. The year-over-year contraction in gross margin was primarily due to higher markdowns and higher freight expense as we strategically cleared aged inventories and shifted our focus to building our inventory position building our inventory position in key categories. These actions allowed us to enter Q2 with a healthy inventory position. SG&A expense dollars totaled approximately $71 million for the quarter or $70 million when adjusted for cyber incident expenses, representing a 1.8% decline to Q1 2022. Lower sales in the quarter drove adjusted Sg&A deleverage of 470 basis points versus prior year to a rate of 38.8% of total sales. We continued to manage the business with disciplined…

Thank you, Heather. Before we wrap up, as you know, we take our connections to neighborhoods very seriously. And during the quarter we celebrated two milestones from a corporate social responsibility perspective. First up, we are pleased to announce that our Citi Cares Council has formally partnered with Goodwill International to create the Citi Cycle program. Citi Cycle is designed to move end of season goods that have reached the end of their markdown life to new usage opportunity in Goodwill Stores helping to reduce environmental waste. The Citi Cycle partnership is aligned with Goodwill’s goal of keeping of 150 million pounds of materials out of landfills. Proceeds from the sales of our goods in Goodwill Stores are then use to support community programs such as Project Search in Milwaukee, a transition program for young adults with disabilities that moves individuals into jobs that match their personalized interest and needs. The Citi Cycle program is currently available in eight markets and we plan to continue to roll out to more markets in the future. Secondly, we are very proud that this year marks the third year of our Black History Makers program, also managed by our Citi Trends, Citi Cares Council, the Black History Makers program increases awareness of black owned businesses and community organizations recognizing entrepreneurs who are positively impacting their communities after considering thousands of inspiring applicants the program awarded ten $5,000 grants to black business owners doing exceptional work. We have now played a role of furthering the success of 30 black owned businesses across the United States in the last three years. I am so proud our Citi Cares team that operates at such a high level to make multiple impacts in our African-American neighborhoods. Before I turn the call over to the operator, I want to take a moment to take the entire Citi Trends team for their commitment and resilience as we continue to navigate the current environment. We are truly grateful for their dedication to our customers, and their unwavering desire to improve the business. We are now ready to take your questions. Kelly?

Thank you. Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. You may proceed with your question.

Good morning and thanks for taking the questions. I wanted to start with the commentary around the quarter-to-date trend. So, it sounds like some crosscurrents in here. You noted good response to spring and early summer assortment. But you noted that their customers are being selective about what they put in their basket. So, I would assume that that means, conversions continue to be pretty good and your maybe your units per transaction is down. But I wanted to see if you could give us a sense for what you've seen quarter-to-date, if the trends have improved on a comp basis from what you saw in Q1. And then, just, a little bit more color around dynamics on your units per transaction versus transactions overall?

Hey, Jeremy it’s Heather. Thanks for the question. Appreciate it. A couple of things. So, when we look at the way we exited Q1, David mentioned the construct of the quarter in his prepared remarks, right? Feb and April performed similarly to each other, March was softer. So April was certainly in the pocket of what we expected when we did our prior guide but it was on the lower end of that guide, right? And not where we hoped it would be. That trend continued into May. Obviously May is still underway, but we've seen that trend continue into May. You are correct. We are seeing some green shoots, spring and summer is being received well with our customer. And that is translating and continued strong conversion, but traffic remains under pressure and basket is under pressure. We said it multiple types in prepared remarks that our customer is being very, very selective about what he and she are putting in their basket. And we see that as a reflection of the amount of economic pressure that they're under. So we're seeing some green shoots, but it is it is very much a story of selectivity of our customer on what makes it into the basket.

Got it. That's helpful. And then, you guys have done a great job of controlling inventory here, you noted that it might have even been a little bit lower than where you want it to be. Maybe there were some opportunities because of that. Do you feel good about where it is now? You did see gross margins - adjusted gross margins down about 200 basis points in Q!, but still expecting high 30s for the year. I wanted to get a sense of how you expected that dynamic kind of year-over-year to play out. And if in conjunction with that, if you could discuss at all, freight and the impact we expect freight to have, I know it have been headwind last year, it’s expected to be a little bit of a tailwind I believe this year. But wanted to see if you could provide us with some more color on that.

Hey, Jeremy, it’s David. Thanks. Good question. We'll do a two parter and I'll hand it over to Heather for freight. But on your questions about inventory, so I think you're remembering right at the fourth quarter call, we definitely weren't pleased with our in-stock levels across certain targeted ZIP codes within our store that we knew would be generally good sellers during these tougher times, meaning, things that are essential bucket Health and Beauty, some non-apparel categories that we could see in the TVs were going to be better sellers. And so, when you heard us talk about the plus 8% in stores, primarily driven by fueling more inventory in April to set us up for Q2, we really addressed those categories. So it wasn't storewide, it was very targeted, very planful and then to satisfy the upcoming Q2 demand, even a little bit of a late Q2, early Q3, as we flow it. So we're feeling good about that decision-making and we're seeing some good indicators call them green shoots of when we increased inventory, sales responded. So I think that validates our thinking back from mid-March that knew we needed to do some rebuilding. I’ll hand it over to Heather for the freight question.

Yeah, I think you had a margin question in there, too, Jeremy. Let me address margin in the quarter. Adjusted margin we did see a decrease to prior year by 200 basis points and that's, call it 60% freight, 40% markdowns. We took action in the quarter on both of those fronts. One on the freight side to make sure that we got that exciting product that David just described into the stores in a timely manner, which in some cases meant that we purposely chose a higher cost mode of transportation. On the markdown side, we made the decision to take a higher level of markdowns than we had originally anticipated in order to go into the quarter clean, Q2 clean. So we feel good about those decisions. Certainly, it showed up in the margin, understand that, but we feel good about the decisions because we feel like that plus the inventory comments that David just made have really set us up well for the balance of the year and the key selling seasons that are in front of us. Freight, specifically, let me do a shout-out to our move team who are working very hard to control expenses in both inbound and outbound modes of transportation. Recall, Jeremy, we are a 100% domestic freight, right? So we are not seeing the benefit directly in our margin line on container costs coming down. So they were working hard with existing and with new business partners to bring those rates down and to give us flexibility within our supply chain. So, shout out to them and that will - that will mean that freight expense will moderate throughout the year, allowing us to continue to hold our guidance on margin in the high 30s.

Got it. And then, in terms of the Cyber attack earlier this year that which had clearly impact on the profitability in Q1. Have you seen any lasting impact that has there been any, reputational damage at all? I just wanted to see if that's something that you'd think would linger on a go-forward basis?

Thanks Jeremy. I'll take that one. The quick answer is absolutely not. No reputational damage. It's - really if you would call it was 100% internally focused. It had no impact in our stores or to our customers. And so, it's something that we've largely put in the rearview mirror. The team did a great job conducting all the right recovery exercises and we're set up well, going forward from a security standpoint. So we're – we moved on. I think the it’s the best way to say it.

Got it. Last one for me. Your cash, balance - you project that, based on current share count. I think it translates to about $10 to $13 a share. You have additional liquidity on top of that, but really strong. In terms of, mentality on how you could deploy capital, obviously, you have not done buybacks for a number of quarters here. I think that's probably prudent. But just wanted to understand, in terms of thinking about that down the road is the mindset of we need to give kind of through this uncertain macro environment before we think about doing anything else. I noted that you took your CapEx guidance down by about $5 million, as well. But thinking about it in terms of that the buyback, you still have out there for $50 million but then also as it relates to our remodels are potentially opening up stores on a go forward basis.

Yeah, I’ll take this one, Jeremy. Thanks for the question. Yeah. So the decision to bring down the CapEx guidance for the year in my opinion it just makes sense, right? I mean, our top-line is it’s too choppy right now to feel good about going, big and bold on capital spend. And so we are making the decision to ratchet back on the number of new stores and the number of remodels. It also signals the amount of focus the team has on the strategic initiatives that David laid out, right? So we're looking at no distractions. And the fact that we're also preserving cash is important. The question about share repurchase, I've said this for several quarters now. And so forgive the repeat, but not off the table. It's just a not now, because we really are in preservation of cash mode and investing in the business. So, the inventory investments that we talked about in the first quarter are really first and foremost and top of mind, right? Because that's going to drive the top-line, which is which is what we're looking to be the signal of when we are feeling a bit more stable and we will start to think differently about Capital allocation. I'll also remind you that I'm saying this but as one person, but there is an active conversation with Board of Directors about capital allocation. So it is a continuous discussion. We just want to make sure we're doing what's right for the business in the long-term. And so, we're preserving right now.

Got it. Seems prudent. Thanks so much for taking the questions and best wishes here.

Thanks so much, Jeremy.

Thanks, Jeremy.

Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed with your question.

Good morning everyone. As you think about the CTX stores, how was those performance versus the base? Is there any difference between the remodeled stores? And then David, you mentioned that 70% of the units are now at 999 and under. Does that differ by category at all? Does it differ by newness and how you are planning pricing going forward? And just lastly, with the trend development being effective and you mentioned sharpening the focus, what are the next levers as we move through the trend development time period? Thank you.

Good morning Dana. Thanks for the good questions. I’ll just do those. From a CTX standpoint for our existing base of CTX stores, which is nearing 100 of the fleet, we are still seeing a nice separation between them and the rest of the chain. They are a little longer in their history as you know, since we did a number of them in ‘21 and ‘22 and less so in ‘23, but we're seeing mid to high-single-digits differentials between them and the rest of the chain. So we're pleased with them and they're starting to show up regularly in our top 100 stores and all that good stuff. So we are still proud about the performance of those. Secondly, on your pricing question, that’s a good one. I would tell you it does differ by category. For example, in Beauty, almost probably 85% under $10. But in apparel it’s more like 60%, 55 60. So it depends on the category, but I would tell you that was thoughtful about it because in a way, our customers vote for this stuff, typically test, before we rolled chain and we see some really, or excuse me, we've seen some really good voting results, dating back to January when it started dabbling in a more kind of entry price point mindset given the nature and the state of the economy. And we're seeing some great pickup by the customer. And frankly a thank-you from the customer, right, for voting for these lower price point. So, we are monitoring it carefully, I do want to send the message back above 10 bucks is working really well too that’s not it’s just we're not seeing any AURs that are higher and we think that work us well. But we really wanted to be mindful…

Thank you, and then one other follow-up. Heather, when you think about the shaping of the year and obviously last quarter we heard about the meaningful improvement in the second half of the year. This now, it's moderate given the pressure is on the consumer. Any puts and takes that you think about whether it's second third and fourth quarter to be mindful of, as we go through the year?

Hey Dana. Thanks for the question. What I would say, is that the conversation that we had last quarter fold just coming down a bit, right? So, the idea of sequential quarterly improvement in the top-line holds, it’s just a more moderate sequential improvement throughout the year. And to remain constant throughout the – I am sorry, Dana, will remain constant throughout the year margin will start to see improvement throughout the year, as well. So consistent with last quarter’s conversations, just unfortunately, given the top-line environment, we felt it was prudent to bring our guidance down.

Just one last thing, we're hearing about shrink all over the place with retail. Is your price point too low to be impacted. Is it an impact what are you seeing there?

David, I'll take that one, as well. So shrink is a hot topic within the Citi Trends Four Walls, as well. It is something that we are monitoring and working to manage in a cross-functional way. It gets senior leadership attention. I think it's not too extreme to say on a daily basis. I will tell you it saddens me to tell you that the number of instances of scary events has increased. Not unusual in this economic environment, but still disappointing and I will say the number one concern, certainly we worry about the margin impacts, but our number one concern is the safety and security of our associates and our customers. So we take that very seriously and are monitoring it. We are putting some new processes in place. More to come on that that we think will help us to be able to manage and monitor more closely and more efficiently. But in total, it’s up a smidge. Technical term is up a smidge, but we're watching it very, very closely.

Thank you.

Thanks for the question.

Thanks Dana.

Our final question comes from John Lawrence with Benchmark. You may proceed with your question.

Great. Thanks. Good morning, guys. So, David would you – could you comment a little bit about …

Hey, John.

If you look at just the inventory situation across the vendor base, what are you seeing out there? As you go try to be sharper in certain categories. Just that discipline of trying to find newer and fresher product. And how does that work? You mentioned the idea of getting something in faster? Can you just talk about that environment? And with other people having trouble with apparel. What are you seeing out there in the marketplace?

Sure. Hey, John. Good question. First of all, I'll give a shout-out to our vendor partners, because I would tell you our true partners have stood by our side through thick and thin. And we continue to do business with them in really healthy ways and they've got terrific offerings as we as through the difficult times. And you're right. They're feeling it too right? Their retail base so to speak is causing them to feel as well, but they've been terrific partners. And then, secondly, we’ve added an incredible amount of new vendors. So I would tell you, we're playing big-time offense. And we're constantly in the marketplace looking for new resources that can actually deliver the trends that we've talked about in, the right at the right cost. Excuse me. And also in right time window. And so we're being really creative. We're working with more and more vendors out in our way. Certainly sticking with plenty we can do within business within New York and, I even then between, but the two coasts for certain categories are outside of apparel. So, we are fast at it. We're on top of it. I think the opportunity remains and you can kind of hit on it. How can we just stay on that current sort of modern relevant fashion and trends play in so to speak and just keep on bringing it. And that's our job and it's our job to write those orders in the right quantities. So we are not over our skis and write it in the way where we want to celebrate selling out. So we're all over it. And we see plenty of advantageous products in the marketplace. We're well ahead of things in terms of back-to-school. We start shipping that in actually about four weeks and we're all over holiday. Like, I mentioned earlier two really big moments that are extremely important to our customer and to our sales lines. So, I think we're acutely aware of all the peaks and how to manage them and we trust as Heather mentioned that the customer will come along. It's our job to read the tea leaves as they present themselves and adjust accordingly. But I think we've got the right team to do so and the right vendor partners to join us in that.

Great. Thanks. Abd just a quick follow-up. Obviously, remind us again, a little bit about the ERP system sort of 90 to 100 days behind there? What - and obviously, a lot of that benefit goes to the ‘24. Can you just remind us a little detail there? And I assume there's no sort of diminished outlook as far as what that system is going to provide for your productivity?

Sure. Happy to do that. Yeah, at a high level we are on track after a temporary delay from the Cyber incident. We are on track to deliver the new platform at the end of the summer. And what it will bring us really is a brand new way of planning and allocating our inventory. And then, much different way, in the back of house running our finance operations. Those are kind of the two teams, the buy team and the support finance team that will really benefit from this. And then a third benefit organizationally speaking is the power of data and analytics that this new platform will bring to the entire organization spanning stores, HR you name it. So we're really excited about it and we've got a team that's Marshall against the new timeline bringing it home at the end of summer. And it basically will replace literally a green screen antiquated system that has served us well, but we are ready to graduate to the cloud literally, and take advantage of this new easy-to-use interface that will offer new sophisticated algorithms and methodologies to most importantly, send the right goods to the right store at the right time. And I can't, I can't underline that enough, those that – little that simple we will see great benefits from. You're right. It won't be as big a benefit in ‘23, but we are going little bit out of it, for sure. And then, we will absolutely count on it to impact ‘24 ’25.

Great. Thanks. Good luck.

You're welcome. Thanks John. Good to hear from you.

There are no further phone questions at this time. Mr. Makuen, I will now turn the call back over to you for your closing remarks.

Thanks, Kelly. Thanks everybody for joining today. Have a great Memorial Day weekend upcoming. Take care.

That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.