Citi Trends, Inc. Q2 FY2025 earnings call

Three-Phase Framework

• Phase One: Repair, restoring fundamentals and establishing a strong foundation.
• Phase Two: Execute, embedding consistent best practices and driving reliable performance.
• Phase Three: Optimize, leveraging new systems and expansion capabilities to accelerate growth.

Q2 Results

• Comparable sales growth of 9.2% in Q2, fourth consecutive quarter of mid to high single-digit comp sales growth; year-to-date comp growth 9.6%.
• Gross margin dollars increased meaningfully, with highest rate in recent years due to fine-tuned assortments, faster sell-throughs, reduced markdowns, and improved operational controls.
• SG&A slightly deleveraged due to inclusion of incentive compensation, but excluding that, SG&A leveraged consistent with guidance.
• Top line broad-based and healthy, with transaction growth and units per transaction growth while maintaining stable average unit retails.

Product Performance

• Broad-based and balanced across categories; women's plus and big men's apparel had strong performance; men's improved; children's continued strong; work underway on CRM and loyalty platform.

Operational Progress

• Foundational improvements in preseason product planning, in-season allocation execution, and supply chain speed; inventory down 5.7% from last year; AI-based allocation system test results above expectations; supply chain stable with progress on productivity and steam goals; work on AI-based merchandise planning system for early 2026.

In the second quarter, Citi Trends generated $190.8 million in sales, up 8% compared to Q2 2024 with comp store sales growth of 9.2%, its fourth consecutive quarter of mid to high single-digit comps. Gross margin was 40% in the quarter, the highest Q2 rate since fiscal 2021 and an 890 basis point expansion versus Q2 last year. Top-line improvement was broad-based, with consistent results across climate zones, store volumes, and product categories. Transaction growth accounted for the majority of sales gain, and product performance was balanced across apparel, non-apparel, family basics, home and lifestyle, and children's categories.

2025 Outlook

• Full year comp store sales growth expected in mid to high single digits, above previous mid single digit outlook.
• Full year gross margin expansion expected to be approximately 210 to 230 basis points versus 2024, slightly above previous outlook due to improved inventory efficiency and supply chain progress.
• SG&A expected to leverage in the range of 60 to 90 basis points versus 2024, inclusive of incentive comp accrual build.
• Full year EBITDA expected in the range of $7 million to $11 million, an increase to previous outlook.
• Expected to open 3 new stores, close 3 stores, remodel approximately 60 locations, and full year capital expenditures in range of $22 million to $25 million.

Q: How should we think about expenses on a quarterly basis, particularly with SG&A and the incentive comp?

A: Heather Plutino said $78 million per quarter is a good average, but Q4 ticks up about 3% versus Q3 due to holiday sales. For 2026, modeling details to be shared in follow-up call.

Q: What's the incremental margin flow through on incremental sales, particularly for 2026 and 2027?

A: Heather Plutino mentioned goal is 20% to 25% EBITDA flow through, which is the change in EBITDA over change of sales versus prior year, with back half of 2025 at about 25% and looking forward to 20% to 25% profit flow through.

Q: Examples of what's being learned from the trend director and how it shows in merchandise?

A: Ken Seipel said the trend director is interpreting consumer voice and distilling into key focus trends, allowing merchants to curate specific styles. For example, men's team embracing trends and getting good results, with expected results in Q4 from better curation.

Q: What's driving sustained momentum in Q3 despite tough compares?

A: Ken Seipel said it's a combination of refined preseason planning, thoughtful merchant team plans, better product curation (e.g., embracing brand True Religion across categories), and improved execution in the field like faster freight movement and better presentation standards.

Q: Store base, remodels, and unit growth economics?

A: Ken Seipel said 2025 has added more remodels for strategic reasons, with remodels averaging $100,000 per store and seeing sales lift. New store growth expected in mid single digits for 2026, with focus on site selection, financial rigor, and aiming for $1.45 million per store average. Heather Plutino added remodel expense averages between $85,000-$130,000, with new stores having financial metrics and payback period considered.

Q: Supply chain initiatives progress?

A: Ken Seipel said supply chain is in early stages, with improvements in vendor to DC, DC to store, and focus on NDC portion. AI-based allocation system to be implemented in September, saving two days in receiving process, with further improvements in ticketing and processing expected in Q3 and Q4.