Greetings, and welcome to the Citi Trends First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Nitza McKee, Senior Associate at ICR. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends first quarter 2024 earnings call. On our call today is Interim Chief Executive Officer, Ken Seipel, 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 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 Interim Chief Executive Officer, Ken Seipel. Ken?

Thank you, Nitza. Well, good morning, everyone. I'm pleased to join you today to discuss the work ahead for Citi Trends. Heather will provide you a review of the Q1 business results and then, I will give you a brief overview of my prior experiences and a high-level outline of the work that we are undertaking to increase shareholder value. Before we discuss the business, on behalf of the Board of Directors and the entire City Trends team, I'd like to thank our former CEO, David Makuen, for his hard work and leadership these past four years. David shaped and built our purchase driven City Trends culture, while leading the company through some of the most challenging consumer environments in recent history. And on a personal level, I'd like to thank David for his willingness to provide business advice to ensure a smooth transition, and we want to send him very best wishes. I'd like to turn the call over now to Heather to review Q1 business results. Heather?

Thank you, Ken, and good morning, everyone. We are pleased with our first quarter performance in which we registered an improved top line trends by delivering a positive comp store sales increase of 3.1%. The quarter was further highlighted by gross margin expansion of 160 basis points compared to last year. Both of these Q1 wins were assisted by our inventory rebuilds and targeted product categories, combined with our buy team's continued focus on making wise inventory investments, maximizing markup, while also providing incredible values for our customers. Early in the quarter, we felt the impact from the slower start to the tax refund season as well as unfavorable spring weather pattern. However, we posted positive comps in each month of the quarter. We also experienced an improved trend in store traffic with basket size similar to last year and continued healthy in-store conversion. These key performance indicators are proof-points that our unique assortment curated specifically for our African American and multi-cultural customers resonated. As mentioned on recent earnings calls, our teams remain committed to setting up key selling moments earlier, and it paid-off in the first quarter. Our Q1 product offering included a healthy balance of exclusive trends, leading brands, year-end fashion and, of course, basics for spring selling, the tax refund season and the Easter holiday. From a category perspective, our performance was broad-based with particular strength in home and lifestyle, impulse also referred to as our Q Line, Big Men's and ladies plus, all areas positively impacted by our inventory rebuild efforts. Across our largest categories, ladies, men's and kids apparel, quarterly comp sales were all positive, driven by trend right values and incredible brands that met the needs and wants of our customers for the spring season. We exited the first quarter with total inventory dollars…

Thank you, Heather. Appreciate it. First, I'd like to share my appreciation to the City Trends team for their hard work that generated a 3.1 comp store sales increase and gross margin rate growth of 160 basis points compared to last year. The board remains committed to the core strategies of the business. As I take the reins, I'm focused on ensuring that the business consistently executes those strategies to improve top line sales and EBITDA profit. Now if I may, I'd like to briefly introduce myself and discuss the near-term road ahead for City Trends. I joined the City Trends Board in late 2019 and have recently served as Chair of the nomination and governance committee and also members of the audit and finance committee. The majority of my 40 year professional career has been in value apparel retailing. The first half of my career was with JCPenney in the 80’s. I was with Target in the 90’s during their brand development and rapid growth. Old Navy in the 2000s where I led explore -- explosive store growth and eventually becoming the largest specialty store retailer in the world. And during my time in the Fortune 100 Companies, I held a number of executive roles in most company functions, including merchandise buying and in operations. In 2010, I entered the second phase of my career focused on working in private equity backed retail companies, where I assume the role of CEO and co-investor in all business engagements. I found that owning a financial stake in each business created strong alignment with the shareholders and really helped to reinforce an acute focus on increasing shareholder value. As co-owner, entrepreneur, and leader, I was able to generate three successful business turnarounds, which resulted in returns of 3 times and in some…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Okay. Great. Hopefully, you can hear me, okay. It seems to me you guys were heading in the right direction, but maybe speed was the issue trying to get there a little bit faster. You mentioned that a couple of times, Ken. In your past experiences in the three turnarounds you referenced, how long does it take to get typically to where you want to go? And then I'll ask my follow-up, which is where do you want to go? What do you think the right margin is for this business? I think you said you got there in 2019 on the board, EBITDA margins were close to foreign change. What do you think they should get back to? Thanks.

Yeah. Thanks for your question, Mike. I appreciate it. Yeah. In terms of turnaround and turnaround timing, I mean, the answer to that question varies greatly on each company situation and depending upon the depth and breadth of some of the initiatives. My thoughts are is to take a few moments, as I mentioned earlier, really kind of evaluate what's going on, do a lot of listening and learning. It's a little bit of a go slow to go fast philosophy. And then by the point of getting into about 30 days of learning and listening, your themes really do emerge. And what I found is that there's often some low hanging fruit that can be enacted right away, and you'll start to see some improvement in some areas of the business. I touched briefly on transportation as a good example of something that can be done, and we can see some results of that sooner than later. Whereas, when you get into some of the assortment decisions or some of those things, it takes a little bit longer for the training to take effect and for those to really impact the marketplace. So the answer to your question is, I view it a business journey, and it's difficult to give an exact time frame on that, but that's essentially, that would be where I would go. I think in terms of your second question, which was in EBITDA margin rates, as you go back and you look at the history of the business, I think we've been kind of in that -- we should be in that mid-single digit range for sure. And I do think that as you look at the industry, particularly in value and off-price, again, the market actually sometimes will pay for a better EBITDA margin rate. But I certainly see an opportunity for us to get back into mid-single digits, and that is certainly a goal and focus we have. Hopefully, that answered your question, okay.

Yeah. Thank you. I appreciate that. Thank you.

Thanks, Mike. [Operator Instructions] Our next question comes from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks, and congrats, Ken. Looking forward to working with you. I wanted to first start with some sense of what you're seeing in terms of current trends in the business, you're lapping compares that are not as easy in Q2 as you saw in Q1. And just in terms of with the performance in Q1, $186 million in change on total sales, There's a kind of a typical or historical seasonality to the business in which Q1, Q4 are your strongest quarters. You noted that tax season was a little bit slower than normal this year because the filing started a week late. But wanted to get a sense, Ken and Heather, in terms of what you are expecting in terms of how that seasonality plays out this year, and to get to your low-single digit comp guide, how you might see that kind of flowing throughout the year?

Yeah.

Jeremy, thank you. Go ahead.

Yeah. Thank you. Sorry, Ken and I are doing airplane signals to each other. Jeremy, you can't see us. But we are -- thanks for the question. Always good to hear from you. As far as the lap in Q2, look, May is a tough one to say that is a read for the full quarter. It is the least important month of the quarter. June and July are by far more impactful as we get into summer and we get into early back to school, very important seasons, as you know. So yeah, maybe a little bit more difficult lap, but as I mentioned in my prepared remarks, we're set up, we're ready. We know that our earlier set works. Our customer needs some time to plan out their spend for important time frames like the ones that are coming up, so we feel good about that. As far as how the balance of the year looks, I hear you that Q1 is usually looking like Q4. Our intent is that Q4 this year will be stronger than Q1 from a dollar sales perspective. The builds are based on history, but with some breaking in there, because that's our challenge is break the build, right, build more sales quarter-to-quarter. And then let's remember, there are some -- we've talked about this before with the calendar shift. There's some sales that move into Q2 out of Q3. So it's going to be a little bit different throughout the year, but we're planning, we're watching. The most important thing is that our inventory is right and that it's set up correctly in the store. We've got product that's compelling and our customer will respond. All of the initiatives that we have in place will support that as well. You've heard us talk about it, remodels, marketing and the testing and learning that we've been doing, and have been enhanced with our ERP system and our ability to better analyze data and to react and act much more quickly. So we feel good about hitting our target top line for the year. Ken, do you want to add anything?

Yeah. Thank you. Yeah, Jeremy. Thank you. It's a good question and I'll certainly add to everything that Heather said there. Your central question is what are we seeing in the current trends? And it kind of goes back to what I said earlier in the script. I mean, there are certainly some things going in the business right now that look good, and we have a lot to build on and then we can accelerate those results. And I mentioned earlier the remodels, we're just getting those completed. You'll see some momentum in those moving forward, which is exciting. We have a handful of categories that have had a reasonably good start for the year and appears to be continuing and we can accelerate those things. So from my desk, I have good deal of confidence that we can continue to accelerate our business going forward.

Got it. That's helpful. And then wanted to come back to the point that you made on your SG&A and expense management. So it looks like, I think by my math, your SG&A dollar guide for the year, you have about $2 million lower than what you were previously expecting. It sounds like you feel like there is more opportunity than that over time here over the next year or two. Can you give us a sense of what you think, obviously, you're not new to the business, but can you give us a sense for what you think the magnitude of range might be on that opportunity? I mean, are we talking about something that's on the order of $10 million in annualized savings or something bigger than that? Any way to square it up?

Yeah. Jerem, I'll start with that and then certainly give it to Heather for follow-up on that. I think, a couple of things I'd say about that. Obviously, we, as you mentioned, have lowered our guide for the back half in terms of expenses, which is a good start. As I mentioned in my script, the answer to your question is TBD. We're going to be going through each of our expense centers, taking a really deep look at where we are at and looking for opportunities for efficiencies. And I think that there's going to be some things that'll unfold over time that we'd be more equipped to better share, a solid answer to your question in the future here. We have some immediate line of sight in some areas, as I mentioned, transportation that we're encouraged about and DC processing, but there's a whole lot more there. So we definitely know that as we step back and think about our SG&A rate, it needs to be lowered. It's certainly untenable, as I mentioned in the script earlier, and we're going to continue to work on it. But I believe the answer to your question will be just over time here, we're going to find, bits and pieces here that'll make us a much more efficient organization. And, Heather, if you'd add anything to that?

Yeah. And not surprising, Jeremy, your math is spot on, right? It's about 1.4 to 2.8 on my math in the range, the amount that we've reduced SG&A in our guide. We were able to do that because we're showing our Citi Trends chops. We're a nimble, agile team. We're able to find savings across the board on discretionary spend, nothing that will harm our ability to achieve our initiatives, nothing that will harm our ability to achieve our financial goals for the year. So to Ken's point, longer term, this is a moment of, he talked about let's get the data, study and analyze. So that's what we will be doing with Ken's leadership and more to come as we learn and uncover. But I think we've proven that we are able to control our SG&A and can make the adjustments that need to be made in order to bring that line down is something that we'll partner with Ken on over time. It's going to be great.

Great. Last one for me. In terms of getting back to, let's say, that to get to a mid-single digit operating margin or even just to get to that 4%, where do you think your gross margin needs to be to get there? I think as you look at it, there's been some nice improvements that have been made versus where the business was, let's say, in 2018 or 2019. And obviously, you just made the implementation on the systems upgrades that is creating some opportunity. But really to get to that plan, I mean, are you targeting 40%, something higher than that? Any color that you might be able to share would be helpful.

Yeah. For sure, Jeremy. We've been in the high-30s, right? We're very proud of our gross margin rate, but we think we've got room to grow. We're shooting to have that start with a 4, over time on the backs of freight rates and improvements. Our supply chain team, shout out to them, are tireless in being able to find opportunities to improve that line. Markup expansion, we've been talking about that throughout the call, plus markdown management, right? And that's where the ERP system comes in. And then finally, of course, getting shrink back to nice low levels, it's all in the mix. So certainly starting with the 4, and we're going to keep pushing to make that happen.

As a follow-up on that shrink comment, I think previously because you had noted on the last call on March that there was some elevated shrink. And it sounds like maybe that's not only remained elevated, but maybe is a little bit worse than you had expected. So I think previously, Heather, you'd quantified it as maybe a 25 basis point to 30 basis point impact for FY ‘24 is what you had expected. Can you give us an update on where that expectation is on shrink? And I gather that that's probably not something that can be cured incredibly quickly. But how long do you think -- how many quarters or possibly longer than that do you think before we can see significant improvement and get it to a level where you're content?

Yeah. Thanks, Jeremy. And I'm going to have to make this the last question so we can move on to our next analyst. But thanks for the call – the questions. Really appreciate it as always. Look, shrink is continuing to be a concern, right, I will say and remind you that this is not new for Citi Trends. We have managed shrink well over our history, but it is a bit of a sign of the time. It's a bit of some we can't control external. We do what we can. It's all about safety when it comes to external theft. So we've been very much focusing on internal theft, as I mentioned in my prepared remarks. So was it another surprise in the quarter, disappointing surprise? Yeah, it was. We expect it to come down over time, but this takes time, right? Because shrink is a function of physical inventory count. We do, as you know, count a portion of our fleet each month. So I expect this to still be a headwind, but we'll start to see it mitigating in the second half of the year as we are lapping the beginning of what I would call our surprise period, right? And then into the following year, we'll start to see it improve even more based on all of the levers that we're pulling to put controls in place and to get ahead of it. So wish us well, please.

And Heather, I'm [Multiple Speakers]

Thank you for taking all my questions. Good luck.

Yeah. Thank you. Go ahead, Ken.

Just to add to that a little bit. Yeah. Just going to say on the backside of that, I know you guys have been really, really focused on shrink, which is good. And certainly it would appear that you've taken the right steps to get those shrink rate accommodated in the accrual rate going forward and is contained inside of our guidance. And so it's an opportunity for us to continue to improve, but you should feel confident that it has been accounted for appropriately by the business.

Good point, Ken. Thank you so much. Christine, do we have any other questions?

Our next question comes from the line of John Lawrence with The Benchmark Company. Please proceed with your question.

Thank you. Good morning. Ken, can you talk a little bit about, when you were at Gabe's, and looked at that transition, I know it's a smaller store base, etc. Could compare and contrast a little bit when you got there, you know the business, what's happened, and I assume that that's how some of these business cases are coming about. Can you talk about that and, what you were able to adjust to get that business back to the level you wanted it and what were some of the major steps to make that happen?

Yeah. For sure, John. Happy to talk about that. Yeah. When I came into the business, as you might remember, private equity firm, A&M Capital (ph) had purchased it and they had bought it from the family themselves. And so, as with a family business at times, you've run into a situation where some things are good, but not everything. And so, I mentioned earlier the five balanced approach that I take in the business and actually applied all of those principles there and found that, yeah, as with every business, there are some things that are going quite well. Engaged, they have to be quite good at deal making, and they were amazing at putting treasure in the treasure hunt. However, the replication and accuracy that was not there. So what we embarked upon was really first and foremost there. It was getting operational excellence. And I really found that -- find that to be the foundation of a great company, which is and you heard the old saying, retail is detail, right? You have to get in there, just make sure that everything you do is replicable, and consistent and shows up for the consumer in that way. So that's really kind of step one. And then step two, actually is helping, get the teams, really fully engaged. And what that means basically is really getting people, excited about winning. Sometimes when you are working in turnarounds, people have been kind of used to seeing negative numbers, and it kind of can wear on individuals over time. So there's a key ingredient here about creating some little wins and getting folks excited, and the more that tends to kind of breed higher engagement. So that was kind of the next piece of the of the puzzle. And then as I mentioned earlier, dialing in and getting the branding and the value proposition right, marketing is a key piece of this. Now it's not necessarily a marketing standard. It's actually a voice of the company and making sure that it's crystal clear so the consumer can see and understand it. So I can kind of go on a little bit, but you kind of get the idea here that really working through those five tenants that I mentioned earlier are really in a sequential order. Now I am still yet evaluating Citi Trends to decide, which and what we need to be focused on. I would not suppose for 1 minute to walk in with all the answers, but I do have a lot of questions. And then couple that with my past experience, I think we're going to find and the internal team's knowledge, we're going to find the right formula for Citi Trends and I'm incredibly confident, that we can replicate some of these past experiences that I've had and perhaps even beyond.

Great. Thanks for that. And just a quick follow-up. Can you give -- Heather, can you give any kind of little deeper dive into those stores that have been remodeled, that might have had that marketing spend as well, in the right categories, and how significant, were some of those better stores' performance? The average, it was a 3, but, how well did some of those successful stores really perform in the quarter?

Yeah. Thanks, John for the question. I appreciate it. I know you're a big supporter of our CTx format. I won't disclose exact details, but what I will tell you is that, as you know, with these, we're calling them our incremental initiatives, right, marketing remodels, inventory rebuilds, etc., etc. I mean, we're tweaking the dials as we learn and that combination of remodel and marketing has had a particularly exciting results, that we're looking at and saying, as we always do, how do we replicate that, where do we replicate that. So it's small yet, it's a learning, but it's an exciting one, and we'll apply it going forward in a measured manner. But yeah, I mean, it's helping lift for sure.

Great. Thanks. Good luck.

Thanks, John.

Thank you. We have reached the end of the question-and-answer session. Mr. Seipel, I will now turn the floor back over to you for closing comments.

Thank you. I certainly appreciate everyone joining us today on our call. Thank you for the good questions and your time and attendance here. We look forward to updating you in the future on our progress. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.