10-Q: Citi Trends Reports Net Loss in Second Quarter Amidst Strategic Inventory Reset

Citi Trends experienced a net loss of $18.4 million in the second quarter of 2024, driven by increased markdowns and shrink, despite a slight increase in net sales.

Summary

• Citi Trends reported a net loss of $18.4 million for the second quarter of 2024, compared to a net loss of $5.0 million in the same period last year.
• Net sales increased slightly by 1.7% to $176.6 million, with a $7.9 million benefit from the retail calendar shift, but comparable store sales decreased by 1.7%.
• The cost of sales increased significantly to 68.9% of sales, up from 61.8% last year, due to a strategic inventory reset leading to increased markdowns and higher shrink.
• Selling, general, and administrative expenses rose to 41.8% of sales, up from 40.1%, due to one-time CEO transition costs and increased corporate expenses.
• The company recorded a non-cash impairment expense of $1.3 million related to underperforming stores.
• For the first twenty-six weeks of 2024, the net loss was $21.8 million, compared to a net loss of $11.7 million in the same period of 2023.
• Net sales for the first twenty-six weeks increased by 2.7% to $362.8 million, with a $10.2 million benefit from the retail calendar shift, and comparable store sales increased by 0.7%.
• The cost of sales for the first twenty-six weeks was 65.0% of sales, up from 62.5% last year, driven by markdowns and shrink.
• The company's cash and cash equivalents balance was $59.3 million at the end of the quarter, down from $79.7 million at the beginning of the period.
• Capital expenditures for the first twenty-six weeks were $5.6 million, and the company anticipates approximately $13 million in capital expenditures for fiscal year 2024.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to increased losses, decreased comparable store sales, and rising costs. While there are some positives, the overall tone is concerning from an investment perspective.

Positives

• Net sales increased by 1.7% in the second quarter of 2024 compared to the same period last year.
• Net sales for the first twenty-six weeks of 2024 increased by 2.7% compared to the same period last year.
• Comparable store sales increased by 0.7% for the first twenty-six weeks of 2024.
• The company has a $75 million revolving credit facility with no borrowings and $1.4 million in letters of credit outstanding.
• The company has $50 million remaining available under its stock repurchase authorization.

Negatives

• The company reported a net loss of $18.4 million in the second quarter of 2024, a significant increase from the $5.0 million loss in the same period last year.
• Comparable store sales decreased by 1.7% in the second quarter of 2024.
• Cost of sales as a percentage of sales increased to 68.9% in the second quarter of 2024, driven by markdowns and shrink.
• Selling, general, and administrative expenses increased to 41.8% of sales in the second quarter of 2024.
• The company recorded a $1.3 million non-cash impairment expense related to underperforming stores in the second quarter of 2024.
• The net loss for the first twenty-six weeks of 2024 was $21.8 million, compared to a net loss of $11.7 million in the same period of 2023.
• Cash and cash equivalents decreased to $59.3 million at the end of the quarter.

Risks

• The company's operations are influenced by general economic conditions, including inflation, which particularly impacts low-income families.
• The company is monitoring the impacts of unemployment levels, wage inflation, interest rates, housing costs, and energy costs on its business.
• The company's business is seasonal, with higher sales in the first and fourth quarters.
• Sales are impacted by weather patterns.
• The company is facing ongoing challenges related to a cyber disruption that occurred in January 2023, including legal and financial risks.
• The company is subject to inventory risks due to shifts in market demand and the ability to gauge fashion trends.
• The company faces competition within the industry and in its markets.
• The company is exposed to transportation and distribution delays or interruptions and changes in freight rates.
• The company's ability to attract and retain workers is a risk.
• The company's ability to negotiate effectively the cost and purchase of merchandise is a risk.

Future Outlook

The company expects that its operations in the short-term will continue to be influenced by general economic conditions, including on-going inflationary pressures. The company expects low-income families to remain under pressure and to tightly manage their discretionary spend through the remainder of fiscal 2024. The company anticipates capital expenditures in fiscal 2024 to be approximately $13 million.

Management Comments

• The company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.
• The company is monitoring the impacts on its business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions.

Industry Context

The retail industry is currently facing challenges due to economic uncertainty, inflation, and changing consumer behavior. Citi Trends, as a value retailer, is particularly sensitive to these factors, as its customer base is more likely to be impacted by economic downturns. The company's focus on cost management and inventory optimization is crucial in this environment. The company is also facing increased competition from other value retailers.

Comparison to Industry Standards

• Comparable store sales growth is a key metric in the retail industry. Citi Trends' comparable store sales decreased by 1.7% in the second quarter of 2024, while some competitors may have seen positive growth or smaller declines. For example, Ross Stores reported a 5% increase in comparable store sales in their most recent quarter, while Burlington Stores reported a 1% increase.
• Gross margin is another important metric. Citi Trends' gross margin decreased significantly due to markdowns and shrink, indicating a potential weakness compared to industry standards. Companies like TJX have been able to maintain relatively stable gross margins despite economic pressures.
• Operating expenses as a percentage of sales are also a key indicator of efficiency. Citi Trends' operating expenses increased, which is a concern compared to companies that have been able to control costs more effectively. For example, Dollar General has been focused on cost control and has been able to maintain lower operating expenses as a percentage of sales.
• The company's inventory levels are roughly flat compared to last year, which is a positive sign given the current economic environment. However, the company's strategic inventory reset led to increased markdowns, which is a concern. Other retailers have been focused on managing inventory levels to avoid markdowns.
• The company's capital expenditures are expected to be approximately $13 million for fiscal year 2024, which is relatively low compared to some competitors that are investing more heavily in new stores and remodels. For example, Dollar General is planning to open over 1,000 new stores in 2024.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, landlords, employees or former employees.
• The company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.
• Several putative class action lawsuits have been filed against the Company and several inquiries have been made to the Company with respect to the January 2023 cyber disruption.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and decreased profitability.
• Employees may be impacted by cost-cutting measures.
• Customers may be impacted by changes in product offerings and pricing.
• Suppliers may be impacted by changes in purchasing strategies.
• Creditors may be impacted by the company's financial performance.

Next Steps

• The company will continue to monitor the impacts of economic conditions on its business.
• The company will focus on managing costs and optimizing inventory.
• The company will continue to invest in new stores and remodels.
• The company will continue to evaluate its capital allocation strategy.

Key Dates

Keywords

retail, apparel, value retailer, financial results, net loss, sales, cost of sales, markdowns, shrink, inventory, comparable store sales, operating expenses, cybersecurity, economic conditions