Pat Watson - SVP and Principal at Corporate Communications Bruce Smith - CFO and EVP Edward Anderson - Chairman and CEO Jason Mazzola - Chief Merchandising Officer and EVP.

Anna Andreeva - Oppenheimer Evren Kopelman - Wells Fargo.

Ladies and gentlemen, thank you for standing by. And welcome to the Citi Trends' Third Quarter 2014 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Tuesday, November 25, 2014.

I would now like to turn the conference over to Pat Watson with Corporate Communications. Please go ahead, sir..

Thank you, operator. Our earnings release was sent out this morning at approximately 6:45 a.m. Eastern time. If you have not received a copy of the release, it is available on the company's website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks made during the 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 filed 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'd now like to turn the call over to Bruce Smith, Chief Financial Officer. Please go ahead, Bruce..

normal inflation, an increase in store count and the incremental impact on expenses from an expected fourth quarter comp store sales increase this year against a decrease in the same quarter last year. Now I will turn the call over to Ed. .

Thank you, Bruce and good morning everyone. We are happy to report another strong quarter. There were a lot of positives to report. The highlight was the 6.7% comparable store sales increase. That’s the best quarterly sales increase in more than four years. The next big highlight was the fact that the ladies business increased 4% in the quarter.

The last sales increase in ladies was the first quarter of 2010. Because of the major decline of traditional urban brands in ladies, the ladies team has had to rebuild their business to a fashion-driven mostly unbranded business. The team has been successful and we are proud of their accomplishments.

Again the accessories division, including footwear, was the leader with an 18% sales increase on top of a 13% increase in last year’s third quarter. We have built a strong footwear business in men’s, ladies and children’s and we expect to see continued growth in these areas.

The home business was strong as well with an 11% increase on top of a 15% increase last year. New businesses were the drivers in home. The additional checkout line or Queue Line merchandise has been very successful. It has new merchandise in what we call functional home.

Home is still just 3% of our total but we see it continuing to grow as we fund the successful new businesses. Sales in the third quarter were strong across all weather zones and geographical regions.

With the strong sales, we delivered a 40 basis point improvement in cost of goods sold and a 100 basis point improvement in SG&A, apart from the impact of the lawsuit settlement. We’re limited in what we can say about the lawsuit which has been settled, resulting in a $1.7 million expense in the quarter.

The lawsuit was the FLS-8 matter previously disclosed in our financial statements. Another significant accomplishment in 2014 was the implementation of our new inventory planning and allocation system. This new system gives us the capability to plan inventory by class, by weather zone, by store.

We’re now able to allocate merchandise to these new more detailed and better plans. We completed the development and testing of the system in the first half of the year and rolled it out now to about 50% of our merchandise classes. We’re very happy with the results so far.

We will continue to roll out in 2015 and believe this is a major development in our capability to manage our inventory. We also launched our online sales site in the third quarter. We want to emphasize that we are in the early phase of a test to see if our customers will respond to our e-commerce offering. But so far the results are encouraging.

We’re offering a very limited assortment of ladies dresses and footwear, about hundred items in total. Based on the preliminary positive results, we plan to add more items to the test and go from there. We opened four stores in the quarter, finalizing our new store program for the year. We opened a total of eight stores in 2014.

Shortly after the end of the third quarter, we closed one store, bringing our closings for the year to two. So we now operate 511 stores in 29 states. We’re optimistic about the fourth quarter. As Bruce reported, sales were off to a good start. We believe we have a stronger merchandise offering than last year, especially in ladies and in outerwear.

But colder weather has clearly been a factor in the positive sales in the first three weeks of the quarter. The comp preparation [ph] for the fourth quarter should be fairly easy as we had a 3.5% decrease last year. We believe that we will have a successful fourth quarter.

Looking forward to 2015 and beyond, we believe the best driver of increased profitability is comp store sales increases.

Our new inventory management system could be a driver of better sales and gross margin and I expect our non-apparel businesses, accessories including footwear and the home businesses, to be the largest contributors to comp store sales increases. Comp store sales increases are expected to be the biggest driver of total sales as well.

We do intend to grow stores, although at a fairly conservative pace. We plan to open 10 to 15 stores, remodel 20 to 25 stores, and expand or relocate 7 to 10 stores in 2015. Additionally, our e-commerce business could become a contributor to total sales increases. In closing, we feel very good about the state of our company.

We believe that all of our businesses are now on sound footing and we expect positive results going forward. Thank you ,and operator, we will now take any questions..

[Operator Instructions] Our first question comes from the line of Anna Andreeva with Oppenheimer..

Hi everyone. This is Janet Lane [ph] on for Anna. Congrats on the great comp and thank you for taking our questions. Our question today is on gross margin.

It seems like the beat has moderated a little bit and in the past we know you’ve had a goal of around 38 and we’re wondering if this is still the goal and how do you see getting closer to there?.

Yes, our goal is still in that 38% to 38.5% range that we used to experience before we started having the merchandising challenges back in 2011. When you look at the way the year has played out so far and think about the fourth quarter, we will probably be somewhere in the mid 37 range by the time we get to the full-year. And so we’re getting closer.

We said all along this year that we don’t expect to get all the way back to 38% this year but we thought we’d get close. And then as we look out into the future we think that possibly next year we can get to 38%.

If there is a quarter where maybe there’s some opportunity, it is most likely the first quarter, when you look back historically that has always been the highest gross margin quarter for several reasons, including the fact that it's our biggest sales quarter and because it's the start of the spring summer season.

And therefore we don't take quite as many markdowns as we do in the other quarter..

[Operator Instructions] Our next question comes from the line of Evren Kopelman with Wells Fargo..

So first question is on that topic. Can you talk a little bit about – maybe some of the categories within women’s that drove the business, maybe touch on denim, I think you talked about some fashion denim that was doing well early in August.

How did that kind progress? And then secondly, can you talk about – to the extent you can on how you’re positioned for Q4 from a merchandise category fashion perspective and maybe for cold weather categories, how you’re positioned?.

Sure, sure, I will start with ladies. Overall specifically the ladies, we did a much better job transitioning from spring to fall this year than we did last year. In the third quarter we were very happy with the transition and how we moved into the fall classification. Specifically denim was the highlight in the third quarter.

There was a lot of new fashion washes and looks in denim that really drove some strong denim sales. So we were very happy with denim and we expect that to continue in the fourth quarter as well. I would say in addition to that cold weather classifications in ladies, like sweaters and hoodies and velour sets have done extremely well.

So we feel we are positioned well to drive fourth quarter sales in ladies. I would say macro level, if you look at the company I think as a whole we did a much better job transitioning from spring to fall than we did in 2013.

As we talked about our strong November comp for the first three weeks, a lot of that is driven by outerwear and cold-weather accessories and then cold weather product or fall-driven product across the store. So we’re optimistic about the fourth quarter. .

Great.

The November you said up 12 the first three weeks; what’s the comparison, what was that comp last year?.

Well, it’s not exactly a clean comparison because last year we only reported what we did in the first two weeks of November versus the same two weeks the prior year. The reason for that was that 2012 Thanksgiving fell on November 22 and last year, fell on the 28th.

So the third week really wasn't comparable year-over-year but as a reminder, the two week comp last year was up about 3.5% and then the full month was flat, by the time we get done with November. So that will give you an idea of what we are comparing against between those two numbers. .

And then lastly I wanted to ask on the e-commerce.

So what kind of investments are you making? Should we expect some SG&A pressure, I don’t know what line item that goes into, but maybe walk-through investments on the e-commerce side?.

On the e-commerce side, we do not foresee a material impact on SG&A or capital in the fourth quarter or even moving forward into 2015, I think we’re doing it in a very intelligent approach. We’re testing and moving forward slowly .So I don't anticipate anything significant. .

Are you using a third-party to process the orders?.

No, we are using our own distribution centers. So everything is pretty much done internal from a fulfillment point of view. .

Our next question comes from the line of Pam Quintiliano with SunTrust. .

Hi this is David Kwan [ph] for Pam Quintiliano.

Could you talk about plans for holiday, doing some differently this year versus last in terms of open to buy, marketing, pack away?.

Sure. I will give you a little bit on marketing, then I will talk about some of our gift giving strategies.

Specifically our overall marketing consists of local radio, in-store signage, in-store music, social media and our company website, and that’s going to be pretty similar to what we did last year, highlighting sort of the value equation at Citi Trends and what great values exist in the store every day.

In this year's fourth quarter, we do plan on doing some mobile advertising. We had some success in earlier quarters using mobile advertising and in some degree of digital advertising. So we do plan on spending a little bit of money there. I would tell you that for 2014 we have a very strong gift giving strategy across the store.

This year we’ve added Queue Lines to all of our stores which feature some impulse items that folks pick up as they are waiting in line to check out. And then we have really gift bars across the store featuring men's product, toys, kids product, ladies product and then sort of almost gifts for everyone.

So we have made a very conscious effort to really deliver a strong gift giving strategy in 2014 which I think is the most robust we've done in the past few years. .

In light of the efforts in e-commerce and mobile, any thoughts on testing a mobile app or, and/or a loyalty program?.

They are probably in our future. I would say in the short-term loyalty programs that's probably 2016 or beyond, it’s definitely on our radar. As far as an e-commerce app right now from a smartphone you can actually buy from our website and we think that could be somewhere in 2015 and ‘16.

I think we’re walking slowly in e-commerce to make sure that we do it right and ultimately do it profitably in the future. .

Great.

Last question, are you seeing any benefits from perceptions in the marketplace?.

During the third quarter we did not see a negative impact on our flow of merchandise due to the West Coast port’s slowdown .Moving forward unless the situation worsens we do not expect that the West Coast port’s slowdown will cause significant merchandise flow delays for us. .

[Operator Instructions] We have a follow up question from the line of Anna Andreeva with Oppenheimer..

Hi guys, sorry, just one more question.

Could you just tell us a little bit about your priorities for cash in the coming year and how much you plan to maintain on the balance sheet?.

Well, our priorities for cash include our normal investments and we were estimating that our capital expenditures for 2015 will be $18 million to $20 million, and other than that we intend to stay conservative and have no other plans for our cash. .

And our next question is also a follow up question from the line of Evren Kopelman with Wells Fargo..

Thanks. I forgot to ask about the average unit retail.

What drove the decline, is it a mix issue, how should we think about that going forward?.

Right. Just to give you some perspective. The negative 3.5% in the third quarter compares to a negative 2% in the second and the first quarter of 2015, and the 3.5% decrease in AUS was a bit lower than we anticipated. For the fourth quarter and 2015, we expect the AUS to be flat or very, very slightly down.

I would say some of the drivers of that is – we do have a lower penetration of brands than we did last year and some of the price points of the brands have been a little bit lower. And secondarily, we are consistently trying to offer extreme value with our customer, really wild prices work with our customer.

That being said, I do believe we have bottomed out with regard to further decline in the AUS. .

We do have another follow-up question from the line of Pam Quintiliano with SunTrust. .

Hi, just one more question. Could you provide additional color on footwear? Are you seeing higher AURs or –.

The AUR in footwear is one of the very strongest in the store and we certainly like that. We are very happy with the growth of shoes and actually the growth of accessories. And for the fourth quarter, we do see continued growth in both shoes and accessories.

The shoe comp store sales moving forward are beginning to moderate as we have penetrated the stores nicely. We like our position in footwear and still think there is nice opportunities but probably won’t see the growth that we have seen in past years.

However in accessories we still see strong growth as we are under-penetrated in certain areas and the customer is responding well to new offerings when we put them on the floor. So continued growth in both..

And I am showing we have no further questions at this time. Please continue with your presentation or closing remarks. End of Q&A.

Okay. Well, thank you all for joining the call today, and hope you all have a great day. Thanks..

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..