Citi Trends, Inc. 2027 Q2 Earnings Call

Thank you, and good morning, everyone. Thank you for joining us for Citi Trends' second quarter 2026 earnings call. On our call today, Chief Executive Officer, Ken Seipel, and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 A.M. Eastern Time. If you have not received a copy of the release, it is available on the company's website at ir.cititrends.com. You should be aware that prepared remarks made today during this call may contain non-GAAP information and 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 and other subsequent filings 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 statement. I will now turn the call over to our Chief Executive Officer, Ken Seipel.

Ken? Thank you, Lynn, and good morning, everyone.

Thank you for joining us today for our second quarter 2026 earnings call. We're building on the momentum from Q1. Our second quarter results were defined by consistency, consistent sales trend, consistent execution, and a consistent customer response across every month of the quarter. I'm pleased to report that consistency has continued into the back to school season. Our year-to-date performance on top of strong 2025 results further validates that our strategy is working and our execution is improving. We remain keenly focused on our three 2026 strategic priorities, consistent execution, sales flow through to profit, and accelerated growth. As we noted in our sales press release on August 10th, our second quarter comparable sales increased 10.5%, which is 19.7% on a two-year basis.

This marked our eighth consecutive quarter of comparable store sales growth with the last six quarter momentum of +9% growth or better. The performance demonstrates the consistency and durability of our strategy. This focused and disciplined approach is driving a continuation of our two-year stack comparable store sales trend of approximately 25% into Q3 to date during our important back-to-school season. Heather will cover the Q2 and P&L to-date results shortly, but I would like to highlight and thank our team for driving results, driving sales along with controlling the expenses which have converted sales to profit. Speaking of profit, adjusted EBITDA for the quarter was $5.5 million, which was a $6.6 million improvement over last year's loss of $1.1 million. For the first half of 2026, we delivered EBITDA of $19.4 million, which is a $14.1 million improvement compared to the prior year.

In fact, we've generated more EBITDA in the first six months of 2026 than we generated the entire year last year in 2025. I am very proud of the total team effort that resulted in strong sales flow through to profit of 28% year to date. Beginning with the gross profit line, which has improved 50 basis points to date due to the hard work of our merchandising team. I'd like to recognize the entire product team for improving our selling margin rate while continuing raising the bar on quality and maintaining sharp pricing. Also, thank you to our loss prevention team, who's really led efforts to reduce shrinkage. Improved selling margin and reduced shrinkage have helped offset the cost pressure of transportation fuel charges in gross profit. Store payroll has been leveraged by 70 basis points year to date.

I want to recognize our store teams who have raised the bar on store standards with consistent execution, keeping our stores neat, clean, and organized, while at the same time driving productivity gains. Distribution center productivity has also increased to keep pace with our growing business, and the team has found ways to lower our distribution center cost by 60 basis points in the first half through improved efficiency. I also want to recognize our sales support teams in IT, finance, merchandise support, human resources, and legal for very strong expense controls. The work in achieving cost efficiencies allowed us to invest in incremental marketing on social media to build brand awareness, while at the same time, we were able to leverage SG&A by 260 basis points year to date. In summary, job well done, Citi Trends team. I'm really proud of the work here. Thank you. Now for a few more comments on sales.

Q2 marked another quarter of balanced growth, with both transaction counts and basket size increasing over last year. The growth in basket size was also balanced with customers purchasing more units per transaction and higher average unit retail on mix shift, which continues to validate the strength of our trend right assortment and the value we deliver across the three merchandising tiers. Q2 is one of our lower sales volume quarters, so it's really good to see the consistency of transaction and sale growth during our non-peak periods. We delivered second quarter sales increases over last year in every merchandise division and across all store climate zones and store volume deciles.

That growth was driven by a more trend-right assortment and an improved value proposition, as well as our heightened focus on delivering wear-now product for the summer, enabling us to capture demand during non-peak weeks and capitalize on key moments like Juneteenth, Fourth of July, and the early back-to-school season. We plan to apply a similar playbook for the non-peak period performance this fall between back-to-school and holiday, building on the strategy that worked so well for us last year. From a merchandising perspective, apparel, non-apparel, and home all increased over Q2 last year and year to date. Our men's team, children's team, and family basics produced consistently strong results in the quarter and year to date. In addition, I'd like to highlight and congratulate our family shoe division.

The shoe team delivered very strong performance in the quarter by focusing on summer wear-now product, elevated on-trend styles, and sharp price value offerings. I'm often asked by our investors about Citi Trends' long-term ability to continue to grow sales. Our product momentum continues to be the result of ongoing refinement across our good, better, and best pricing tiers. Each quarter, our assortments have become more balanced as we sharpen the quality for price equation on our core product, introduce updated trend product, and ensure that we have a good flow of well-known brands at extreme value pricing. While we're really proud of the progress, we do remain humbly aware of the opportunity for continual improvement, and we see a long runway for continued growth in nearly every product category. As a company, we remain sharply focused on our primary Black customer.

Our brand promise to our customers is styles that see you, prices that amaze you, and trends that tell your story. What's important to highlight again is that our customer base spans a wide range of income levels, including a meaningful portion of middle and higher income shoppers. In fact, customers with household incomes between $75,000 and $150,000 represent about 25% of our customer base and generate more than 40% of our revenue. This creates a significant opportunity for us to expand our offering of recognizable brands at compelling prices that align with their style and trend expectations. You often hear of us refer to good, better, and best product tiers as a way of describing how we build merchandise assortments.

However, it's really not quite that linear for our customers, who tend to move fluidly between all three good, better, and best tiers rather than staying confined to a single pricing and style level. As an example, during a recent visit, I observed two young male shoppers who fit our top tier customer come into one of our stores and in a single visit, purchase items from across all three pricing tiers, beginning with buying a trendy outfit from our best product tier, shopping for everyday items in our better tier, and wrapping up the trip with an opening price point T-shirt. In another instance, an older male customer purchased from our core assortment, then at his wife's urging, also purchased a trend item. These moments reinforce what we're seeing daily across and in our stores and in our shopping basket analysis.

Balanced, good, better, and best assortments are important to round out the shopping basket and are a key component for consistent long-term growth. These product strategies, combined with our improved discipline in our open-to-buy process and the continued benefits of our AI-driven allocation systems, are driving stronger inventory productivity and margin performance. I mentioned earlier that we made incremental investment in marketing on our social media platforms, building on our first quarter CITI jingle refresh contest, in which we invited customers to help modernize the Citi Trends jingle, and we received a meaningful volume of submissions. In the second quarter, we transitioned to the customer voting phase. Engagement has continued to exceed our expectations, generating strong social reach and viral moments while also driving incremental store traffic, and the winning jingle is expected to be deployed in the second half of the year.