Greetings, and welcome to the Citi Trends Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends Second Quarter 2025 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 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-Ks 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?

Thank you. Well, good morning, everyone, and thank you for joining us today on our second quarter earnings call. I'm pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation remains guided by a clear three-phase framework designed to deliver sustainable profitable growth. First, Phase One is Repair, that's restoring our fundamentals and establishing a strong foundation. Phase Two is our Execute phase, embedding consistent best practices and driving reliable performance. And we are going to be entering in the future Phase Three, which is Optimize, leveraging new systems and expansion capabilities to accelerate our growth. These three phases create the foundation for a disciplined approach to capture the near-term and long-term opportunity of growth for Citi Trends. Now turning to our results. In the second quarter, we generated strong comparable sales growth of 9.2%, marking our fourth consecutive quarter of mid to high single-digit comp sales growth. Year to date, we delivered year-over-year comp growth of 9.6%. And I'm happy to report that sales momentum consistent with our first half top-line trends has continued into the back-to-school season. This August, we'll be representing thirteen consecutive months of comparable store sales growth. Gross margin dollars have increased meaningfully, achieving our highest rate performance in the last several years. As our buying teams have fine-tuned assortments for our core customers, we've experienced faster sell-throughs of regular-priced product, reduced markdowns, and improved operational controls for shrinkage and transportation rates. Our SG&A was slightly deleveraged in the quarter due to the inclusion of incentive compensation for the consistent financial performance of our employees. It's been quite a few years since the company achieved its bonus targets. So I'm excited to add performance-based bonus back to our financial profile. Excluding the new performance…

Thank you, Ken, and good morning, everyone. I'm excited to have the opportunity to walk you through the details of our second quarter and first half results as well as our improved outlook for the year. Before I do that, let me echo some themes from Ken's comments. The transformation of Citi Trends is underway and is driving significant improvement in both top and bottom line results. As I've said in previous calls, there's a new energy at Citi Trends and the results we get to share with you today are proof that our team's hard work is paying off. Turning to the specifics of second quarter results. Starting with the top line, Q2 sales were $190.8 million, up 8% compared to Q2 2024 with comp store sales growth of 9.2%, our fourth consecutive quarter of mid or high single-digit comps. We delivered high single-digit comps in each month of the quarter and saw growth to last year in each of our retail metrics, traffic, basket, and conversion as the impact of our revised merchandise assortment, including off-price deals and more branded extreme value products continues to resonate strongly. As Ken mentioned in his remarks and similar to our first quarter results, second quarter top-line improvement to last year is a story of consistency. We saw consistent results across climate zones and across store volumes, and we drove consistent broad-based strength across most product categories. We produced a 40% gross margin rate in the quarter as planned, our highest Q2 rate since fiscal 2021 and an 890 basis point expansion versus Q2 last year. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open to buy for our revised product…

Thank you, Heather. Before we open the call to Q&A, I do want to share a few thoughts about our longer range of growth for Citi Trends. So looking forward, we are preparing for store expansion growth. We expect to remodel approximately 50 stores per year and expand square footage in the mid single digit range. We have engaged a third-party analytics team to assist us with dissecting the demographics, psychographics, and geo proximity location of our current customers right down to the individual household level. These insights, coupled with a robust financial pro forma, will greatly improve our accuracy and real estate site selection, leading to improved new store return on investment performance. We've identified several MSAs that are attractive expansion opportunities for Citi Trends in 2026 and beyond. Long range, our goal at Citi Trends is to achieve $40 million or more of EBITDA in 2027. This will be driven by consistent single-digit sales growth, gross margin dollar expansion, leveraged SG&A, and new store expansion. Each initiative within our value creation plan is supported by clear accountability, key performance indicators, and execution rigor. Our leadership team is highly engaged in building out the detailed plans to execute and is fully committed to making these plans a reality. In summary, Citi Trends has delivered four consecutive quarters of comp growth underpinned by transaction increases, broad-based product strength, and disciplined execution. Our strategy is working, our operational capabilities are advancing, and our customer connection is strengthening. But there's still a lot of work to do. We have processes to refine, we have categories to optimize, and more systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value, and expand our role as a leading neighborhood retailer for African American families. I'll say thank you to our Citi Trends team for their discipline, their dedication, and great results, and thank you to our shareholders for your continued confidence and support. And with that, I'll turn the call back over to the operator, for questions. Donna?

Thank you. The floor is now open for questions. Our first question today is coming from Michael Baker of D.A. Davidson. Please go ahead.

Okay, great. Thanks. Hopefully, you can hear me. I wanted to ask great quarter. Thanks. Two one question, one follow-up. Let's first just talk about the expenses and the incentive comp and how that plays out going forward? And just sort of how should we think about expenses on a quarterly basis? I think the math implies about $78 million in SG&A for each quarter in the back half on average. Is that the right run rate going forward as we think about 2026 and 2027?

Hey, Mike. Hear you loud and clear. A question on SG&A, sure. 78 per quarter, I think that's exactly right. The thing that I will remind you of though, that's a good average per quarter, but Q4 ticks up about 3% versus Q3 because of holiday sales. So just kind of think about that as you calendarize. And as we go forward into 2026, we haven't conveyed that yet broadly. I can help you with modeling in our follow-up call.

Well, I guess I don't want to waste my follow-up on this, but let me ask two more if I could. One, just thinking about that and the gross margin outlook, what's the right sort of incremental margin flow through on incremental sales? I understand there's a lot of noise this year, particularly as you cycled some things last year, but more about 2026 and 2027. How do we think about incremental margins?

Yes. So we've mentioned before that our goal is 20% to 25% EBITDA flow through, which we define as the change in EBITDA over the change of sales versus the prior year. This particular fiscal year is a little choppy because of some odd compares in the last year period and the build of the incentive comp this year. So if you try to normalize that, then you end up at about 25% certainly in the back half of the year of 2025. But that's what we're looking at going forward is 20% to 25% profit flow through.

Got it. All right. If I could sneak in one more. I'm intrigued by the trend director, I think you called her, or fashion creative director or him. I guess I don't know if it's her. Any examples of what you're learning from that new hire? How we think that might show up in terms of what the merchandise looks like?

Yeah, a couple of things on that, Mike. Thanks for the question. Since she's joined, she's really been acutely focused on really interpreting and understanding the consumer voice. But more importantly, the current landscape around the consumer. And what we've been able to gain from her insights is really taking what I call the voice of the consumer and starting to translate that into tangible style and tangible trends. So looking at obviously all the emerging things that are happening culturally around, on the landscape, it's pretty difficult to sift through all But she's done a nice job of sifting through all the things, all the noise out there, and distilling it into a handful of key focus trends. And what that has allowed our merchants to do then is to go to market with very specific filters on curating against this trend. And so we're starting to see some of that show up. Gave props to our men's team earlier. They've done a nice job of embracing, the concept right out the gate, they're getting good results in addition to the work that they're doing in their core programs, which has been good work. So these two things kind of coming together give us a sense that we're onto something. And I believe that, you'll start to see the results of better, more accurate, and more thoughtful curation as we get into Q4. I'm really excited about where we're headed there.

Awesome. Great. Appreciate the time.

Thanks, Mike.

Thank you. The next question is coming from Jeremy Hamblin of Craig Hallum. Please go ahead.

Thanks and congrats on the impressive results. I wanted to get into the commentary about, it sounds like the momentum has really continued here in Q3 even as you're lapping much, much tougher compares. Wanted to see if you can provide a bit more color on what's driving that sustained momentum? I know you talked about broad-based execution in Q2. But are you seeing more branded deals potentially driving the sustained strength for more well-rounded assortment? Any color you might be able to share on that would be helpful.

Yes. Sure, Jeremy. Thanks for the question. And it literally is all of the above. What's happened I think in the course of the last year is we've continued to refine starting first with I mentioned on the call earlier our preseason planning capabilities where we've really been thoughtful about how do we go in and attack the season, as we call it. So we really we put a good roadmap out there for winning in Q3 and what do we need to do to get Q3 off to a good start from a back-to-school perspective. And then that was supported with very thoughtful plans from all of our merchant teams. We do something in a category review process where we're trying put stakes in the ground on what categories can grow. And then behind that, when we back that up with the finances, right, and the open to buy and the amount of receipts required to support those ideas. And it's a very basic program, to be honest with you. Most retailers do it, but I think we're doing it better than ever and very disciplined and very thoughtful about it. And then the bottom line is you can put a good plan together, but then it comes down to execution. So that's where our teams have been out, in in the market, finding the better product, finding the better styles. So I'd give you a combination, and you can see this in our store. But to give you one example, the team really embraced the brand True Religion, which has been around for a while, but it's actually resonated across the board with our consumers. And it was shared against multiple categories. And it's showing up across the store in all lines versus just in one category where…

Very helpful. I wanted to shift gears then and talk a little bit about the store base. So you've increased the number of remodels, from 50 to 60 that you planned for this year and I think it sounds like 50 on an ongoing basis. And then as you plan to get back into a unit growth mode, should we be thinking that FY 2026 is a mid single digit type unit growth. And then if you could just share some of the economics behind how much the remodels cost, what type of lift you're getting from them and then what you expect kind of the new store economics to be on new openings on a go forward basis?

For sure. I'll give you some of the strategy then and have Heather fill in some of the color on the results there for you. Yes, a couple of things. So this year, we did adjust. We actually added a few more remodels. I think we previously announced 50 and and we had line of sight to add 10 more for strategic reasons. Actually, to let you know what we're up to, we added some stores in our Jacksonville market and Columbia, South Carolina market to complement a couple of new store openings we have in those markets. We're going to try to go in and revitalize those markets and refresh the brand on an entire MSA basis. I'm excited about what that might do. We're going to learn a little bit more about that. Our new stores open up in October, and all of those remodels will be completed there. So the reason we added 10 more stores was just to accomplish a full remodel in both of those marketplaces. Going forward on a new store growth perspective, we are going get into mid single digits. We have line of sight to a number of sites already for 2026. We don't have an exact number of where we're going to be in there, but there'll be some number between twenty five and forty new stores in 2026. I would expect at least 25 in that mix and then maybe more, we'll see. We'll have I'll be able to announce that on future calls more specifically, but it'll be in that range. And then the out years after that, we'll have the flywheel built. So we're still kind of building our pipeline. And as I mentioned earlier in my remarks, we're looking very specifically at opportunistic MSAs across the nation. We've identified many of those already as places to go. And now we have the hard work of trying to get in and find the right site inside of the market. So that work is underway as we speak as well in a lot of key markets. The final thing that I'll say in terms of return on investment at a high level, our new stores, we're putting them under a financial rigor. And I want you to think about our new store growth going forward as a triangle, right? There's on one side of the triangle is, the rigor and discipline around making sure that we have the right site selection, consumer demographics, and so forth. The other part of the triangle is the actual end market site itself, being an attractive center and so forth. And then the third part of the triangle, is financial rigor, which is making sure that we hold ourselves to a high standard of return on investment. And so with that, I'll turn that over to Heather to let her fill in a little bit of color on that as well as the remodel question you had.

Yes. I'm going to start with a remodel, if you don't mind, Jeremy. Good morning, by the way. You asked about remodel expense and results. So remodel expense, you'll remember, I think it was 2023. We cut the expense of a remodel in about half, right? So on average, we're at somewhere between $85,000 per location to $130,000 I can tell you that the remaining remodels for this year are averaging at $100,000 per store. And these are high volume stores, like $1.9 million per. And then from a results perspective, we continue to see sales lift when we remodel stores. It varies by market, but we're still very comfortable that we're getting return. I think it's important though that on a store by store basis that amount is going to change store by store. So in some locations, it's really a matter of refreshing the fleet and doing a market presentation, right? So Ken just talked about Jacksonville, talked about Columbia, South Carolina. We're going to touch stores in that market to make sure that we are doing a full market press on here's the new iteration of Citi Trends. We want excitement in every door. We want excitement with our associates. We don't want anybody to feel left behind. So we're thinking about remodels maybe a little bit differently in that it's about fleet maintenance as much as it is about driving incremental sales. For new stores, the financial rigor that Ken spoke of, yes, We are applying financial metrics, making sure we've got the right return on investment. We've got the right payback period. We've got the right with the right, the right. We're looking at it very closely in partnership with our real estate team. Top line, you've heard Ken talk about this before. Ideally, we want our per store average at about 1.45, not to put too fine a point on it, but $1.45 million per door. Are we going get that every time? No, but that's what we're striving for, right? And rent at 10%. We've got control payroll, all of that, right? So from a four wall flow through, we look for mid teens and up to make sure that we're supporting the financial performance of the full chain. So that's kind of a look behind the curtain there.

That's great color. If I could sneak in just one more. Ken, on the last call you had mentioned some supply chain initiatives that you're working on trying to reduce, I think, the number of days in supply chain and that would allow you to save some money and cost. And I wanted to just understand where are you on that initiative? I know it sounds like as you make progress, you realize you have more progress to make. But I was hoping for a quick update on where that initiative stands. Thank you.

Yes, for sure, Jeremy. We are in, again, use the term early stages, but I think it's fair to say early stages there. We've, what I would call taking out the low hanging fruit. Obviously, we're much faster now. And so think about the supply chain in three big parts, okay? Part number one is vendor to DC. And we're better at managing that in our transportation routing and speed of picking up. From there, we've taken out a few days of that moment. Then you have your in DC processing. And then the third part is DC to store. And we've actually sped up the DC to store considerably. That we've changed, our routing, to, actually UPS carrier. And it's taken three or four days out of supply chain from DC to store. So the team did that really at the beginning of the year. We learned how to optimize that, and so we're significantly faster there. The area that we're really focused on right now is what I would call the NDC portion. And some of the work that is underway is in our receiving characteristics. I mentioned earlier Invent Analytics, the AI-based system, when we throw the switch on that in September, that will save two days out of our receiving process, a day and a half right there. And then we're gonna be adding to that better ticketing standards, which are already being worked on and getting in place right now. That will speed up our ticketing portion. And then there's a processing portion which will speed up as well. So those things have been designed now. We understand what we need to do. Now it's a matter of getting them implemented. And so we're at different stages of implementation. But I would expect over the third quarter that the majority of these ideas will at least be implemented in our DC. And then we'll start to kind of see and feel better optimization as we get into Q4. So it definitely is a work in progress, but we've made good steps forward with a lot more to do there in the DC.

Thank you so much for all the color. Appreciate it.

Karen. Thanks for the question, Jeremy. Appreciate it.

Thank you. At this time, I would like to turn the floor back over to Mr. Seipel for closing comments.

All right. Well, I want to thank everyone for joining us today. We look forward to keeping you updated on our progress. Goodbye.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.