Greetings and welcome to the Citi Trends Fourth Quarter 2023 Earnings 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 on Tuesday, March 19, 2024. I would now like to turn the conference over to the Senior Associate, Ms. Nitza McKee. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends fourth quarter and fiscal year 2023 earnings call. On our call today is 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 2023 earnings call. I will begin our call with highlights of our financial and operational performance for both the quarter and year, update you on our progress across our strategic initiatives and establish our 2024 outlook. Heather Plutino, our Chief Financial Officer, will then elaborate on financial details for both 2023 and our outlook for fiscal 2024. Then we'll open up the call for your questions. I am pleased to report that our fourth quarter and annual results were in line with our guidance. We delivered a solid holiday season as our Ready. Set. GIFT! campaign resonated with existing and new customers. Our strong execution of the business across our strategic priorities fueled our performance throughout the quarter. In particular, our focus on rebuilding inventories and targeted product categories drove improved costs. The team's hard work resulted in fourth quarter total sales growth of nearly 2%, EBITDA of $10 million, and a strong gross margin of 39.1%. Throughout the fourth quarter, our team operated with great flexibility and agility. I am incredibly grateful to our entire organization for their continued execution of our priorities while keeping our customers and neighborhoods at the core of everything we do. While our customer base, consisting mostly of families earning $45,000 per year and less, continues to tightly manage discretionary spending in the face of lingering inflationary pressures. Despite this, customers young and old responded well to our edited and trend-right mix of head-to-toe outfits, specially designed pieces only found at Citi Trends, and the full complement of gifts and stocking stuffers. Beginning with a strong Black Wednesday, followed by peak days leading up to Christmas, and lastly, a nice finish for New Year's,…

Thank you, David, and good morning, everyone. As David mentioned, we are pleased to have delivered fourth quarter and full year 2023 results in line with the guidance we provided. The hard work of our dedicated and scrappy teams is paying off with a stabilizing business driven by our strategic inventory rebuilds, remodels, in-store experience upgrades, and the marketing tests David described earlier. Our disciplined management of the middle of the P&L plus the positive comp sales trends we are seeing first quarter to date give us confidence in the 2024 outlook, which I will detail shortly. I am also pleased to report that our balance sheet remained healthy, ending fiscal 2023 with no debt, no drawings on our $75 million revolver, and $80 million in cash. This strong financial position gives us the flexibility to fund our growth initiatives, all in support of our 2024 outlook. Now let's turn to the specifics of our fourth quarter financial results. As a reminder, Q4 2023 included an additional week compared to last year's fourth quarter. Total sales for the quarter were $215.2 million, including $11.2 million from the extra week. Total sales increased 2.7% versus Q4 2022, in line with our guidance. Comparable store sales, calculated on a 13-week to 13-week basis, decreased 1.5% compared to last year, a significant improvement to Q3's negative 6.2% comp. Q4 gross margin was 39.1% versus 39.5% in Q4 2022. The 40 basis point decline to last year was due to slightly higher markdowns as we successfully cleared through year-end seasonal products that were somewhat impacted by winter weather. In addition, as we discussed during the Q3 call, we saw slightly higher shrink versus last year. We continue our cross-functional focus on this headwind, and I am confident that we are moving in the right…

Thanks, Heather. Well, today you heard how over the course of [Technical Difficulty] 12 months, we have devoted considerable effort towards improving foundational aspects of our business. We also shared some scalable steps we can take such as store remodels and targeted category inventory rebuilds to improve top line sales. You also heard some positives coming from our testing of new initiatives, that we are very optimistic about driving top line sales throughout the rest of the year. Looking forward, we remain extremely proud of our connection to the neighborhoods we serve, offering compelling trend-right merchandise to the entire family at incredible values. Our differentiated position in markets where others aren't continue to drive our customers loyalty and continued engagement even when their economic reality is difficult. We are in the new fiscal year with optimism, excited to drive long-term profitable growth and shareholder value while unlocking the full potential of this important brand. Before I turn the call over to the operator, I want to say one more time thank you to the entire Citi Trends team for your hard work, resiliency, and unwavering focus in serving families across so many great neighborhoods in 33 states. It is because of this team that we ended the year stronger than we started. And it is because of you that I am confident that fiscal 2024 will be even better. With that, we're ready to take the questions. Over to you, Frank.

[Operator Instructions] Our first question comes from Mike Baker with D.A. Davidson. Please proceed.

Okay, thank you. So the improvement in sales trends, impressive and sort of goes without saying that that's a good step. What I'm wondering about though is the part about the leverage and the flow through. You don't really see it in your guidance because of the SG&A increase. So, I guess could you just give us a little more color? I guess you said it's mostly on incentive comp, but what would the SG&A -- would it be more flat without the incentive comp increases and is that what we should expect as we think as we go into the future, that kind of leverage? And as part of that, just a subtlety, the 2.5% to 3% increase, is that on a 52 versus 52 week basis or 52 versus 53? Meaning if it's 52 versus 53, it's sort of even more incremental growth.

Hey, Mike. Good morning. It’s Heather. Lots to unpack there. So, let me tackle the expense piece. First, it's on a 52 versus 53, okay, because we were going off of reported SG&A. And as far as the increase goes, the majority of it is incentive costs that we had to bake back in. We had been, as I mentioned in my prepared remarks, we had not done merit increases for years. We had held off on promotions, all in that maniacal focus on the center of the P&L, right, and controlling our expenses. And then of course the bonus pool being reset on an annual basis, that happens every year and impacts our SG&A loads. But we believe it's the right thing to do for our people, making sure that we keep them retained and interested and focused on all of the amazing initiatives that we have going on.

So is it fair to -- to follow up, is it fair to say that it's sort of a little bit of a one-time step up in terms of the catch-up on merit increases and promotions, and so we shouldn't see that same kind of year-over-year increase in SG&A dollars as we look beyond 2024?

Yeah, [Technical Difficulty] year-over-year. It becomes the new base, Mike, right? And then next year, our hope is that we pay merit increase again, right? And that we keep refilling the bonus pool and earning and paying out the bonus pool. So this is, I would consider this the new base.

Our next question comes from Chuck Grom with Gordon Haskett. Please proceed.

Hi, this is Eric on for Chuck. I was just curious if you can talk about the comp outlook for mid-single digits. You said that you're comparing that for Q1, but Q1 also has by far the easiest compare. Compare get tougher over the course of the year and you also have an election and shorter holiday periods in the back half. Just curious sort of how the building blocks to get to the comp work and the sort of how you see it trending sequentially throughout the year.

Hey Eric, it's David. Thanks for joining and good question. I think the way I look at it is we -- as we highlighted, we have a number of initiatives that we're just getting going on and they're contributing some really positive lifts in this quarter, and yet they're pretty young, if you will, in terms of their age as an initiative, and they're in limited stores, as you heard me state. We're going to touch roughly about 30% of our chain by the end of the first quarter, but we have a lot more to go. So when I talked about scaling and rolling out some of these tests and initiatives, that's going to fuel the rest of the year. So we're not as sort of worried about the lap. We're frankly more focused on building up the base. And we believe that we can continue the momentum through Q2, Q3 and Q4. We have these key moments that our customers rely on us on for, for example, Father's Day, Mother's Day, July 4th, the first half, and then obviously back to school and holiday. And we've got really great plans supporting all of those where we believe we can do quite a bit better than LY with our initiatives fueling the growth.

Eric, you also asked about the election impact, if I could. We went back and studied prior presidential election years and then I can tell you that traditionally the impact is minimal to non-existent. So we don't see that as being headwind or tailwind.

That's great. I just wanted to -- you talked about the marketing initiative. Just curious what kind of lift you're seeing there, what you're doing different, and how that sort of [indiscernible] for what you're doing this year and what is the customer going to see in the messaging from you that's different in their eyes?

Great question again, Eric. I'll keep that relatively high level. There's a bunch in there. But I think most importantly, we are sending a message that really hits on our trend assortment. We're really coming out strong with, hey, we're your destination in the neighborhood for amazing trends, and we're being very targeted about it. You may recall, and the audience may recall, we draw a lot of our customers within a five-mile radius of our stores pretty tight-knit in the neighborhood. We go out as far as 10 miles. So depending on the store location, we are going in a pretty targeted fashion at the zip code level through digital social media advertising in that case. And then we're also blanketing entire markets. In that case, we'll bring in radio, as well as traditional streaming radio. So we're kind of doing almost a different mix depending on the task at hand. But what's exciting is we're rebuilding market share thus far in our test from that local community. So we're waking up some last customers and they're coming back and we're enticing new customers to come back in. And through our testing so far, remember we started in August of ‘23 and have done many up and through literally yesterday and we've started a new one today in five more markets. We're seeing really healthy lifts. I would tell you akin to sort of our remodel lifts that we've quoted in that kind of mid to high single digits. So we're excited about the potential of it. We will be very choosy and very targeted. I want to be clear, we won't advertise the entire chain. That's not what we're talking about. We're talking much more about targeted efforts in markets where we believe we can capture more wallet share. And so far, so good.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed.

Thanks for taking the question. So, I want to come back to the quarter-to-date trends. There's quite a bit of noise here in Q1 for the reasons you mentioned. We've got leap year. We've got the lapping of the reductions in SNAP benefits in March. And I was hoping to get maybe a little bit more granular, on just understanding the impact of, again, as you noted, tax refund season started a week later this year, which probably put you behind a little bit at the beginning of February. But just in terms of what you're seeing here as we've gotten into March, you've seen that normalization as you noted, tax refunds up a little bit. Have you started to see a bit more improvement? In other words, are we building a little bit of momentum here on comp trends?

Hey, Jeremy, thanks for the question. I'll say it really simply, you're spot on. The six-day delay and the delay in amount of refunds dispersed has been a little wonky, but it has caught up. There's still some catching up to do as you know, but our trend from a kind of a [cadence] (ph) perspective through the quarter to date has definitely improved in March versus Feb. And I want to re-highlight that being ready for that, even though we didn't predict it, is really paying off. And setting up our inventory levels in a healthy manner at the end of January, early Feb, really has positioned us well, as it turns out to capture sort of a more elongated tax refund selling season. So you're spot on. Earlier Easter, we believe, will only help March, and then as we roll into April, really well positioned thanks to the early setup to deliver the quarter. So we're liking what we're seeing based on your observations for sure.

Great. And then I wanted to come around to a gross margin guide here, which I think the implied is about 38.9% to 39.1% for the year. Just in terms of what was the overall drag in 2023 from shrink, which I think you said is still a bit elevated? And then Heather, what is implied on the guidance for the year regarding shrink? Is it -- are we expecting that to be flat? Are we expecting some improvement? Maybe a little bit more color around the gross margin guide would be helpful.

Yeah. Hey, Jeremy. Thanks for the question. So a couple of things to remind you about with shrink. First, this is not a new story for Citi Trends. Shrink is something that we have been dealing with for decades. It just happened to have reared its ugly head in Q3. And remember that conversation. It was a handful of stores based on their physical inventory counts causing our accrual, which we test on a regular basis throughout the year. We are not a one time per year account scenario. Those results came back worse than we had expected, right? So we'll continue to see some of that. I can't tell you, Jeremy, that all of our stores are just fine, thank you. We continue to see some of it, but we're focused on it, we're swarmed on it, and pulling every lever as we always do to make sure that we're controlling the impact. On a full-year basis -- well, one more thing, sorry, before I get into full year. Shrink as part of our gross margin calculation is a small component. It's a frustrating component, don't get me wrong, but it is a small component. Okay, so it's not -- we're not talking meaningful amounts here. We saw an increase in the ‘23 versus ‘22 to the tune of, call it, 25 to 30 basis points. As we turn the corner into 2024, the guide implies that some of that headwind continues, but it's really minor because remember the back half of the year was impacted by those unfavorable results. So we'll see some headwind in the first half of the year and then kind of flat in the second half of the year. So in total, it's really pretty immaterial for the full year.

Our next question comes from John Lawrence with Benchmark. Please proceed.

Very good morning. Thanks, guys. Heather, can you -- have you been able to quantify, obviously, the last half of January? I mean, we're sitting in the weather zone where I'm sure you were closed for a better part of a week. And obviously, that flowthrough was a slow period of time. I assume stores will close for multiple days. Any chance you can quantify what you think that might have cost you?

[Hi, John, it’s good to hear from you] (ph). Appreciate the question. So yeah, you were right in the heart of it, right? With the ice and cold weather in parts of the country that are just not prepared for that, we definitely saw a holdback in traffic. And we've studied it, we've stared at it. We think that based on our calculations, which is never an exact science, that the sales were impacted to the degree that we would have trended similarly to the levels exiting New Year as whether or not that weather holdback not occurred. So recall, our holiday sales release, the 10 weeks of holiday included in that release, our comps were negative 0.3%, near flat.

Great. Thanks.

Okay, great. Thank you. Go ahead.

Yeah, excuse me. David, when you look at all the things that occurred during the fourth quarter, all the progress, what would you say was, as far as the system is concerned, I know you were getting at the third quarter, we talked about some of that at ICR, what would you say as you continue through that period up to now, what is the system telling you, market, and what are you [indiscernible] and learning from at this point in time?

Hey, John, mind if I clarify, what do you mean by system? I'm going to make sure I understand.

I'm sorry, the ERP, the allocation.

Okay, got you. Yeah, let me give you a quick update on where we are. Similar to probably what I mentioned in the call, the launch went successfully end of August which we reported in the November call. And like with any new system, we've gotten to know it more and more. Users have become more accustomed to how to apply it to our business as the weeks and months have progressed. And we're kind of sitting right at the six month mark in a really good place. We used it to our benefit, as I mentioned in the main call today, to fuel some really good insights and actions that impacted Q4, and most importantly, some actions that impacted our Q1 2024 setup. So we're more or less exactly on track with what we knew would be the case in terms of learning curve and getting to know and use the system. I think the most exciting thing coming out of it is quite simply insights. I mentioned in the call this idea of a new data platform that's included typically in a good ERP system and we're leveraging that data platform literally down to the store SKU, week level if necessary to drive different decisions around allocations, replenishment, and that idea of sort of is it in the right store? Is it in the right place at the right time, et cetera? So we are, as you can tell by my energy, we're really pumped about it. And we think it's over time, like we have stated many times, over time it'll be a really nice benefit to the top line and bottom line of our business. And we're cooking with gaps.

Mr. Makuen, there are no further questions at this time.

Thanks, Frank. Thanks everybody for joining us today. Happy upcoming Easter and Passover. We’ll see you next time. Bye-bye.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.