Greetings. Welcome to Citi Trends Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 Nitza McKee, Senior Associate, ICR. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' fourth quarter and fiscal year 2024 earnings call. On our call today is Chief Executive Officer, Ken Seipel, and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 06:45 AM 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 within 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, Ken Seipel. Ken?

Well, good morning, everyone, and thank you for joining us today for our fourth quarter earnings call. At Citi Trends, we continue to make significant progress on our strategic journey. We delivered fourth quarter comparable store sales growth of 6.4%, a sequential improvement from the third quarter and strong acceleration on a two-year basis. This performance reflects the strength of our highly differentiated position in the marketplace as an off-price value retailer focused on our African-American customer, which in combination with the 591 neighborhood-based stores creates a defensible moat against competition. This strategic advantage, combined with our renewed focus on delivering trendy fashions, great brands and amazing prices, has resonated strongly with our customers, who have shown remarkable loyalty and responsive to our improved product offerings. We leveraged recent extensive customer research to sharpen our focus on understanding both the demographics and ethnography of our African-American customer base. We now have a much better understanding of customer income profiles and, as a result, we have learned that we have a significant group of average- and higher-income customers, creating a tremendous opportunity for expanding our product assortment to meet their fashion and style needs. As I shared at the ICR Conference in January, our business journey is structured around three distinct phases that prepare us to become a strong growth company. First is the repair phase, where we focused on reestablishing fundamental practices and foundational improvements. This includes implementing a three-tiered product plan with opening price points, core value products and familiar brands, while also developing our extreme value product capabilities that offer us -- that enable us, excuse me, to offer well-known brands at 50% to 70% below competitive pricing. The repair phase also included building on improving foundational retail processes across the organization from merchandise allegation and planning to…

Thank you, Ken, and good morning, everyone. First, I'd like to echo Ken's comments about the recent positive momentum building at Citi Trends. Our refined strategy and focus have resulted in a fundamental shift in our business that led to another quarter of positive results, building on our success in the third quarter. The fourth quarter featured sales momentum with 6.4% comparable store sales growth coupled with gross margin expansion to last year. While we still have a lot of work ahead of us, our strategic initiatives, supported by our healthy balance sheet have positioned Citi Trends for continued improvement as we head into fiscal 2025. Turning now to the specifics of our fourth quarter results. Our product assortment updates were more pronounced in the quarter as we focused on delivering exciting products at great value for the holiday season. The resulting 6.4% comp represents the second quarter of sequential improvement. Importantly, top-line momentum was driven by broad-based improvement across our retail metrics with strong gains in traffic and conversion along with basket growth. We also saw a positive inflection in AUR as customers showed a willingness to trade up into higher-ticket extreme value product procured as part of our strategy shift. From a cadence perspective, comp store sales were positive each month of the quarter with the strongest performance during the nine-week holiday period in which comps were up 7.1%. We estimate that weather disruption in January had a 250-basis-point headwind to comp sales for the month. Adjusting for that impact, January was only slightly behind holiday sales performance. During the quarter, we closed two stores as part of our ongoing fleet optimization efforts, bringing our quarter-end store count to 591. Gross margin in the quarter was 39.7%, a 60-basis-point expansion compared to last year. The primary driver of…

Thank you, Heather. Before we open the call for questions, I wanted to take a moment to express my sincere gratitude to our dedicated team members across the organization. Your tireless efforts in implementing our renewed strategy have just been instrumental in the progress that we're seeing today. I'm particularly impressed by how quickly our teams have embraced the fundamental changes we introduced from our improved allocation practices to enhanced merchandising strategies. With our focus on the African-American customer, our strength in product value proposition, our expanding branded assortment and our operational excellence initiatives, we have a very clear path to restoring EBITDA into the $40 million to $50 million range long-term. We have a line of sight to achieving these targets and we're excited about the substantial upside potential. The combination of these strategies position Citi Trends to generate meaningful free cash flow and drive significant shareholder returns. And with that, I'd like to turn it over to the operator to open the lines for questions.

Thank you. [Operator Instructions] Our first question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed.

Thanks, and congratulations on the impressive momentum here. I wanted to start by talking about sales trends. You guys on a two-year stack basis, you've seen about 2,000 basis points of improvement over the last year on your two-year stack trends. And I wanted to just get a little bit more color on what you see as Citi Trends doing different from the industry that's allowing you to kind of sustain that momentum here into 2025, while you've seen a lot of other retailers reporting softening results.

Thanks, Jeremy. Appreciate your questions. A couple of things I'd say about what we're doing a little bit differently. First, as you know and probably have heard me talk a lot about because I do speak about it quite often, the addition of off-price to our business model and really sharpening up the overall price value equation across the board in our core product has been really one of the key unlocks for the business. And our customers really have resonated quite well. And I believe that we are -- well, in fact, there's no question, we're gaining market share as a result of this sharper improved assortment pricing strategies. And the other piece that I believe and I mentioned at the very beginning of the call, our competitive position in the marketplace, we have 591 stores, very strategically positioned in neighborhoods and literally around our customers. And so, we become kind of their first alternative. And, once we get it right, they are clearly responding. So, there's more work ahead for sure. We're just really in early innings of this, but I think it's pretty crystal clear that our positioning in neighborhoods along with our price value equation being sharper is really resonating and will be an opportunity for us to continue to get shareholder -- excuse me, market share advances for sure.

Great. And as a follow-up to that, on the off-price portion of the business you noted as a key driver, where was off-price, let's say, a year ago? Where is it today? And where do you expect off-price as a kind of portion of your inventory, let's say, maybe a year from now or at some point in 2026?

Yeah. I'm trying not to cut this with [indiscernible] of a scalpel, Jeremy, because off-price is a large term that has been used in a lot of different ways. Like for example, sometimes it's referred to as end-of-season closeouts. And in that regard, the company has always participated in end-of-season closeouts. What we're doing now, when I'm defining off-price is really looking at more in-season, pretty aggressive deals in fact, where we're getting extreme value. And right now, we're doing about between 1% and 2% of our business in these extreme value items. We're really just getting started. It's adding a lot of energy to the business and a lot of energy to our customer base for sure. I see long-term, that growing to around 10% of what we do, and that will be all additive. That's not a replacement business, so just this one extreme value portion. Then, on top of that, the other portion that I mentioned earlier, which is end-of-season type deals, which the company has historically done, our entire merchant team is more acutely aware of those opportunities and are getting sharper at their negotiations. And we expect that in addition to the end of the growth avenue. I don't really have a firm number on that, but it's pretty clear that, that will be the two ways that we attack off-price, extreme value and then end-of-season closeout type deals, both of which will be additive to the overall business.

Great. And I want to follow-up. You're also pursuing a bit more kind of brand name deals, which is a strong motivator for your customer. I think probably looking at maybe footwear and apparel is two areas to attack. And any color you might be able to share on the types of brands that you might be looking at? I think you had some new brands in stores in Q4, but any color you can share there?

For sure. Because of other relationships that we're developing with some of these larger brands, I'm prohibited to really speak directly about the brand names externally. But I would say this, that we are paying very close attention to your favorite brands, the brands that you would know, as top of mind across the board, whether it's in shoes or outerwear or denim or what have you. Think about your top-selling brands. Those are the brands that we're focusing on. And in many cases, we have deals either in the pipeline or in store or about to head to stores, that would be a composite of those particular brands. And what makes them unique and special for us is the fact that they're often done at extreme pricing, that is very unique to the marketplace. Because of our size of company, we have the ability to access these deals, and we're a little bit more nimble, and we can get some pretty good preferential opportunities that way. But from a from a brand portfolio, we're fairly flexible, but just know that we're only going after the big names and we're only going after the great deals. We're pretty selective. We frankly probably pass on more than we can even look at right now. There's so many out there. But certainly that is the focus is to be really, really high aware brands.

Great. Last one for me. So, you noted this kind of longer-term adjusted EBITDA target $40 million to $50 million. That's obviously pretty significant uptick from where you're looking at in '25. Wanted to get a sense to get even to the low end of that range, the $40 million, what's the sales level that you need to achieve you think to kind of get the business up towards that, let's say, $40 million range on EBITDA?

Yeah. We're working through our long-range plan right now, Jeremy, to get more [indiscernible] in front of the Board for their approval. So, I'll speak a little bit more generically. But if you can think about it this way, the EBITDA margin of our business is really below industry standard right now. And I'm thinking about getting it north of 5% in that 5% to 7% EBITDA margin range, and that kind of would be essentially the top-line sales, if you can kind of think about it in that regard. That's generally the range that we're going to. And obviously, we have to go beyond that, but that's step one is to restore that $40 million to $50 million, and I want to do that at a rate that's in that 5% to 7% margin rate initially.

Great. Thanks so much for the color, and best wishes on the continued success.

Thanks, Jeremy. Appreciate it.

Our next question is from Michael Baker with D.A. Davidson. Please proceed.

Okay. Thank you. I'll ask one question and one follow-up. Question is, can you just walk us through the building blocks of the EBITDA increase of $19 million to $23 million? I mean, you get $15 million just by showing up because of cycling the one-time issues and low- to mid-single-digit comp, let's say, that's going to add $25 million, $30 million in sales. So, what's the flow-through of that incremental sales? And are there any sort of givebacks or investments such that the $15 million one-timers, the flow-through from the sales increase minus something? Thank you.

Yeah. I'll give you a little bit of a high level, Mike, on how we're approaching this in terms of turnaround, then I'll let Heather fill in some of the specific numbers that you're asking about there where we can. A couple of things that we've taken a look at this year to kind of get started is we set up an operating budget that's fairly low base of -- cost for a low base of sales, cost for a low base of expenses. And that really is really just truly a foundational number that we have basically bare-bones operate the business. And then, from there, we've put together a sales plan that we believe is higher than that, which actually is higher than that, that will generate something in the neighborhood of about a 25%-ish flow-through once we hit those numbers. And then, we have a stretch plan that's above that even, that has a much higher flow-through rate. So, the point here, as you've heard us talk a lot about is that the handicap of the business, maybe in this case, it'll be our advantage now because we have a fixed cost base. And so, as we are starting to grow the business, we can get pretty substantial flow-through. And so, part of the math kind of works that way. It's really a generation of the top-line. And I'll turn it over to Heather to fill in any facts there.

Yeah. The only thing I would say, Mike, is, yes, sales growth, margin expansion, let's not forget that too, right? We'll continue to drive improvement there with a minimum of 220 basis points in the guide. So, that flow-through strength, as you mentioned, is there. And then, to Ken's point, as is included in our guide, we'll continue to leverage our SG&A base being very careful about that in 2025 to make sure that that flow-through is at the levels that he mentioned. So, that's it. No other secret sauce, just all the hard work embedded in doing those three things: driving sales, expanding margin and leveraging SG&A.

Okay, great. Well, I guess the perfect follow-up then, I'll just hit on that, so that low base of sales, low base of SG&A, is that the comp guidance that you gave of low- to mid-single digit? Is that the sort of baseline? And then, the sales above that 25% flow-through, is that needed to comp above that low to mid? Or does that sort of added sales and then the stress plan, is that within the low- to mid-single digits, if that makes sense?

It kind of does. Let me tell you how I'm going to think about that, and then, again, I want Heather to fill in anything there that I may have missed. But in terms of the guidance that you have out there, we're seeing low- to mid-single and that really kind of encompasses that portion that I mentioned earlier, we're seeing a fairly low sales base to make sure that we can achieve that number. We don't get our expenses overboard. That's really kind of the point is we've got a point here where we have a business SG&A base that can handle that minimum sales. And then, we have a little bit of that range that we have in EBITDA is based upon, the flow-through, right? It's not all of it, but that's how you go from low to kind of a high on our range is just simply looking at that second tier of sales that I mentioned earlier. And then, we have available to us another tier of sales above that. And I don't want to get too over our skis yet. I mean, it's early stages. The business is looking really, really good. But as we talked about earlier, there's some uncertainties. So, I'll have more confidence as we go -- as the year progresses, but we are hopeful that we'll see that range for sure that we've put out there and then there's a potential that we could outperform that if business continues to move at its current pace.

Got it. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Ken for closing remarks.

Well, I just want to simply say thank you everybody. We really appreciate your continued interest and support of Citi Trends. We look forward to talking with you next quarter. Bye-bye.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.