Pat Watson - IR Jason Mazzola - President & CEO Bruce Smith - COO & CFO.

Patrick McKeever - MKM Partners Nick Hyatt - SunTrust Robinson Humphrey.

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends Second Quarter 2016 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 Wednesday, August 17, 2016.

I would now like to turn the conference over to Pat Watson. Please go ahead..

Thank you, Chris. Our earnings release was sent out this morning at 6:45 AM Eastern Time. If you have not received a copy of the release, it is available on the Company's Web site 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 Form10-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 Operating Officer & Chief Financial Officer. Please go ahead, Bruce..

Thanks, Pat. Good morning everybody, and thank you for joining us today. Also on the call is Jason Mazzola, President & Chief Executive Officer.

First, I will provide you with details related to the second quarter and year-to-date results, and then Jason will further discuss the results and our business outlook, after which we will address any questions you may have.

Total sales in the second quarter increased almost 1% to $155 million, with comparable store sales declining 1%, after being up nearly 4% in last year’s second quarter.

The lower comp store sales in this year’s second quarter reflected a decrease of 6.5% in the average unit sale, partially offset by a 5% increase in the average number of items per transaction, and a 0.5% increase in the number of customer transactions.

Comparable store sales by month in the second quarter were down 1% in May, down 4% in June, and up 3% in July. In last year’s second quarter comp stores sales were up 6% in May, up 8% in June and down 3% in July.

In our merchandise category sales in the second quarter in comparable stores were as follows, home was up 30% on top of the 17% increase in 2015’s second quarter. Accessories including footwear were up 4% in this year’s second quarter and up 6% last year. The men’s division was flat this year and down 1% in the second quarter of 2015.

Ladies sales were down 6% this year after being up 7% last year. And children’s sales were down 8% this year and down 1% in last year’s second quarter. For the first half of the year, total sales were up slightly, while comparable store sales were down 2%.

Cost of goods sold as a percentage of sales increased 70 basis points in the second quarter, with shrinkage freight and the core merchandise margin all contributing about equally to the higher rate of cost of sales. For the year-to-date cost of sales as a percent of sales is increased 60 basis points.

SG&A expenses rose only 0.7%, as the effects of a higher store count and normal expense inflation were almost entirely offset by a reduction in incentive compensation expense, resulting from the lower level of 2016 earnings. As a percent of sales, SG&A expenses declined 10 basis points to 36.1%.

For the year-to-date, SG&A expenses as a percent of sales have increased 80 basis points to 32.8%, due to the deleverage caused by the 2% decline in comp store sales. Depreciation expense decreased $300,000 during the quarter, as a result of opening fewer stores than in the past.

Net loss in the second quarter was $100,000 or $0.01 per share, compared with net income of $200,000 or $0.01 per share last year. Year-to-date the Company has net income of $8.6 million or $0.59 per share, compared with $11.4 million or $0.75 per share earned in last year’s first half. Now, I will turn the call over to Jason..

Thank you, Bruce and good morning everyone. While we were not satisfied with the comp store sales decrease of 1% versus a 4% increase last year, it did reflect progress in moving toward comp store sales growth. During the first quarter, we indentified the issues with our ladies and kids apparel businesses.

In the second quarter, we made solid strides at improving those businesses. On a positive front, our non-apparel sales were once again very strong and our customer accounts were up. We continue to manage our inventories well and our balanced transition strategy from spring to fall appears to be on-track.

We successfully opened four new stores and expanded or relocated two stores in the second quarter. Our ladies apparel business is still not where it needs to be but the ladies team is focused on improving results by offering more on-trend fashion merchandise at very compelling values.

As we move into the third and fourth quarters, we are taking additional steps to make that happen. In our kids' apparel business, we are working hard to improve the value equation and offer the appropriate balance of core and fashion merchandise. We are making good progress here as well.

Both ladies and kids had improved comp store sales results in July. We continue to be very excited about the performance of the non-apparel areas during the quarter, both home and accessories which includes footwear. Accessories delivered a solid 4% increase in the quarter.

Home however, was again a stand-out division delivering a 30% comp store sales increase on top of a 17% increase last year. It was our 16th consecutive quarter of comp store sales increases in home. We continue to broaden the home mix and find new merchandise to excite our customer.

We have good runway to continue to drive sales here and see strong growth ahead. We do see continued pressure on AUS as we move through the balance of 2016. We feel the range is somewhere between 4% and 7%.

The two drivers of the decrease are improved value and the increased penetration of home merchandise, both are critical to driving consistent comp store sales increases. Driving stronger values especially in ladies and kids is key to exciting our customer.

Expanding our breadth in the home area will help weatherize our business and create a more robust merchandise offering. We believe our customer is inside our store shopping two to three times a month or more.

If we offer her more compelling value and a broad assortment of on-trend fashion merchandise, she will spend more of her dollars with us and we will be able to deliver the results we expect. Now I'll provide an update on sales-to-date for the third quarter.

Sale for the first two weeks of August in comparable stores had increased over 4% on top of a 6% comp store sales increase last year in the same time period. These are the two largest weeks of the third quarter, so we were very happy to see strong comp store sales momentum in these important two weeks.

The sales are being driven by improvements in inventory management and more compelling value. We have a more balanced spring to fall transition strategy by weather zone that we did a year ago and thus far it seems to be on-point. Our improved values across the Company have created customer excitement and a good start to back-to-school so far.

Our inventories are in good shape heading into the third quarter. Total inventory was up 4.5%, while comp store inventory was up 1%. The primary use of the additional inventory is to fund next season buys, new store and the home expansion. We like the quality of our inventory and believe we’re positioned to drive sales.

For the balance of the year, we see total inventories up between 2% and 5% to better align with our sales trend. As of today, we operate 530 stores in 31 states. During the third quarter, we plan to open 7 to 9 stores and relocate or expand 5. For the full year, we plan to open between 16 to 18 new stores, relocate or expand 13 and remodel about 20.

Thank you all for your time. Operator we will now take any questions..

Thank you. [Operator Instructions] And our first question comes from the line of Patrick McKeever with MKM Partners. Please go ahead..

Just on the -- I know the business has always kind of choppy by month. But thinking about the down 1% in the first month of the quarter, then down 4% in June and then up 3% in July.

I mean can you talk about any potential factors that may have contributed to the volatility by month?.

Sure, sure definitely, one of the things benefited from in July is an improvement in our apparel businesses. Kids and ladies apparel improved from their overall trend and actually men’s was very strong. Accessories and home continued to do what they’ve been doing all year.

There also was a benefit in July from a little bit of the July 04th holiday, which is actually a very big week for Citi Trends. Some of those sales slipped into July and some of them slipped out of June last year predominantly all those sales fell into June.

So when you put those two together or when you look at that July 04th holiday, it hurt June a little bit and helped July. But overall I would say July benefited the most from an improvement in the ladies and kids businesses..

And then just on the August month to-date up 4%, I mean what -- I mean it's similar to the July number, so a couple months or at least a month and a couple weeks.

Anything we should be thinking about as it relates to just the back-to-school season and the fall, the next few weeks and a couple months of the quarter, differences this year versus last year, that sort of thing.

And has there been, so far, any -- were there any big shifts in terms of the timing of some of the back-to-school, the state holidays that are most important to your business that sort of thing?.

Sure, I’ll give you a little bit of color on the first two weeks and then talk about what we see sort of for back-to-school and forward, then I’ll hand it over to Bruce and he’ll give you a little bit on the timing of some of those things that you asked for, because last year there were some big shifts, not as many but they were some.

As I mentioned before in my script, we definitely had a more balanced spring to fall transition across all apparel areas. And I think we really saw the most improvement in men's and boys and I think that was a big difference, we have more buy now, wear now, fresh products for warm weather on the floor right this minute than we did a year ago.

Our planning and allocation capability has really helped us get more of the right product to the right stores at the right time, so we like that.

Also back-to-school is off to a good start and we saw improvement in the ladies and kids apparel businesses, which was definitely above their current trend that they were running in the first and the second quarter. And we actually saw some nice trends in men's, probably the most as a result of our transition strategy.

Overall, I think our improved value equation seems to be on point and resonating nicely with the customers, and I think we’ve made some nice strides to get the right trend merchandise on the floor in the third quarter for ladies. So we are certainly optimistic about the trajectory that we’re going at this point in back-to-school, we like it so far.

Why don’t I turn it over to Bruce to give you a little bit of color on some of the subtle shifts that we’re seeing so far..

Yes, and they truly were subtle, there was not a lot of movement this year. There was one state that had their tax free holidays week earlier and another state that had theirs a week later, other than that there was very little change at all.

And then as far as back-to-school goes, we had probably 3% or 4% of our stores that were in markets where schools opened up slightly earlier. But that was it..

[Operator Instructions] Our next question comes from the line of Pam Quintiliano with SunTrust Robinson Humphrey. Please go ahead..

Hi. This is actually Nick Hyatt on for Pam. We just have a few questions for you. First, I know you gave some commentary just now on back-to-school.

But I'm wondering if you could just give us a little more detail and maybe talk about any specific fashions the customer is responding to, anything that you are -- and then further, anything that you are planning as you get further into fall, anything you are planning on doing differently for holiday?.

Sure, I can give you a little bit color on some of the trends that we’re seeing for back-to-school. I would say the most exciting trend is really fashion denim across really men’s, ladies and kids and probably the best piece of fashion denim is really rip-and-repair denim.

We’re normally a very good denim house, so it's nice to actually see fashion denim working the way it is, so we are very happy with that particular trend. We also see another important trend for sort of this back-to-school timeframe into the third quarter our bomber jackets across ladies and men's in particular we think those are going to be strong.

And in addition, we think those are going to translate nice into the holiday timeframe as a good fashion piece of outerwear sort of, even if the weather stays rather warm it’s a good fashion piece. So we are very excited about that trend and we believe in that.

And just to give you some color on holiday, I would tell you probably the biggest shift in holiday is more, dare I say, non-apparel on the floor so really blowing up some of the businesses that drive good holiday traffic, gift giving and toys in particular we feel very good about that strategy and getting after that for the fourth quarter, so those would be some of the big macro things that I’d give you now..

Okay great. Just have a few more for you..

Sure..

Could you also talk about just I guess, I am sorry, any new developments in terms of your online strategy.

I know that this is something that you had been testing and expanding your assortments in, so any new developments there?.

Sure, basically as you said it’s still in that test phase, we’re moving strategically and steady on e-commerce this year. The primary goal, I think I might have mentioned this before is to broaden our merchandise mix in all areas and execute it better, improvement in photography, improve what we’re actually selling online.

By the end of 2016, I think we will be able to better determine if e-commerce is a real growth strategy for Citi Trends, that we can really put muscle behind or is it more of a marketing vehicle good to have in that vein.

We don’t want to be overly aggressive in pushing e-commerce, because we want to ensure we have a model that is scalable and profitable.

So right now we’re working out the pieces of profitability, understanding how to do it better, how to deliver excitement to the customer, so we’re still in that tweaking stage and testing stage and moving slowly and methodically. But we like the way it looks.

We like the progress that we’ve made in 2016, we’re very happy with where we are at this point. But I’d be a lot smarter on it as we get into 2017 about the real direction of it..

And you had mentioned weatherization in your prepared remarks.

I'm wondering if you can go into any more details there and what your initiatives are, just to better weatherize the business?.

Yes, sure. Right now we’re, Bruce tell me with the number is, we’re 65% apparel, 35% non-apparel..

Right..

I think the apparel piece of the business is really affected by the weather, especially with our type of customer who is buy now/wear now. So really over the past several years, we’ve really grown that non-apparel business up to over 35% right this minute.

We really want to keep pushing those businesses to really minimize that effective weather, we’ll never get rid of weather completely obviously, but we’d like to be more weather immune than we currently are.

I think with a more robust holiday, gift giving offering and toy offering, it does provide some insulation if the weather doesn’t go our way in November and December there is some great products in the store that is not weather dependent. So we really plan on pushing those businesses, especially the home business.

I think the bigger we can make the non-apparel businesses, the better we will weatherize the Company. Because right this minute, I still feel we’re still too reliant on the shifts in weather and we’d rather control our own destiny than let the weather do it..

And just one last one for you, could you also just talk about the health of your consumer given some more favorable macro trends, which has often been offset by some of the headlines that we see, so just wondering if you could give us any commentary there?.

Yes, overall the macro environment for our customer definitely seems to be positive in comparison to a year ago. Both African/American unemployment, as well as low income unemployment are low, gas prices continue to be low, I think even lower than last year. Actually food prices are steady and maybe even a tick lower than last year as well.

Also in addition to that some of the wage increases that have happened over the past two years would likely benefit our customer. So these macro trends really point towards sort of a positive for our customer, so we see our customer in a pretty healthy place right now..

And actually just one last one, would you say your -- how do you feel about your level of carryover?.

Carryover, in terms -- what does that [Multiple Speakers]?.

In terms of inventory, I am sorry of inventory?.

No, in terms of this, now in terms of our -- and we really don’t do a whole lot of carryover we -- because of the model that we have and the way we take markdowns we really don’t carryover inventory, we sell it and move on or mark it down and move on, one of the other, so we feel very good about our inventory position..

And there appears to be no further questions on the phone lines at this time..

Okay, terrific. Thank you everybody for all of your time and have a great rest of the day..

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..