Release Date: August 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Citi Trends Inc (CTRN, Financial) achieved growth in customer traffic versus last year, indicating strong engagement with the brand.
- The home and impulse categories delivered double-digit comparable sales growth.
- Back-to-school children's categories got off to a good start, with continued momentum into Q3.
- Citi Trends Inc (CTRN) remains in a healthy financial position with strong liquidity and no debt.
- The company has identified opportunities to improve preseason assortment planning and product allocation processes, which are expected to drive future growth.
Negative Points
- Inventory shrinkage has been a significant issue, with $4 million of unexpected shrink expense in Q2.
- The company had to execute $9.4 million in markdowns to clear aged inventory, impacting gross margins.
- Footwear continues to be a drag on the business, affecting overall performance.
- The transition to the Island Pacific ERP system has been challenging, with complexities in execution and a lack of robust future forecasting capabilities.
- Comparable store sales were down 1.7% in Q2, and the company faces pressure from larger competitors in the extreme value apparel category.
Q & A Highlights
Q: What drove the decline in the size of transactions? Was it fewer items per basket or lower price points due to markdowns? Which categories underperformed?
A: Heather Plutino, CFO: Transactions were up, but basket size was under pressure due to declines in units per transaction (UPT), although average unit retail (AUR) remained up. Categories like children's apparel, uniforms, and home performed well, while footwear continued to drag.
Q: Will the increased accrual for shrinkage remain a drag on gross margin in the coming quarters?
A: Heather Plutino, CFO: Yes, the increased accrual will continue to be a drag, but it will lessen in the fall season. This is incorporated into the 39% gross margin outlook for the second half.
Q: Can you elaborate on the aged inventory markdowns? How old was this inventory and what factors led to the write-down?
A: Ken Seipel, Interim CEO: The inventory was overpurchased for Q1 and didn't turn as needed, blocking new receipts. We took aggressive markdowns to clear this inventory, selling through 40-50% already. We are also improving our markdown process to prevent future issues.
Q: How is the new Island Pacific ERP system performing in terms of allocation and ordering?
A: Ken Seipel, Interim CEO: The system is complex and needs simplification. We are reducing the number of store clusters for better allocation and exploring AI solutions for future forecasting to improve the system's performance.
Q: What are the trends in same-store sales for Q3 and Q4? Are the compares getting easier or tougher?
A: Ken Seipel, Interim CEO: The assortment plan was out of sync with consumer demands, missing opening price points and branded products. We are adjusting this and seeing positive results in categories like children's apparel and home. Heather Plutino, CFO: Compares will be easier in the second half.
Q: Is the shrink issue more related to internal or external theft?
A: Heather Plutino, CFO: Internal theft is the primary focus, but we are also addressing administrative issues and external theft. We have engaged a third-party consultant to help improve shrink management across all categories.
Q: Was there a positive benefit from the shifted 13-week to 13-week basis in Q2, and how does it affect Q3?
A: Heather Plutino, CFO: Q2 had a positive impact from moving an important back-to-school week into the quarter. Q3 will be neutral as a pay week moves in.
Q: How are you addressing the assortment issues that led to lagging consumer sales compared to competitors?
A: Ken Seipel, Interim CEO: We are adjusting the assortment to include more opening price points and branded products. Early results are positive, especially in children's apparel and home categories.
Q: What steps are being taken to improve the markdown process?
A: Ken Seipel, Interim CEO: We are implementing a more thorough review of slow-selling inventory and updating in-store presentation to make it easier for consumers to shop. This will help keep inventories clean and ready for new products.
Q: How are you planning to enhance the effectiveness of the Island Pacific ERP system?
A: Ken Seipel, Interim CEO: We are simplifying the system's complexity and exploring AI solutions for better future forecasting. This will help make allocation a competitive strength.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
