Citi Trends, Inc. (CTRN) Earnings

Management highlights

- **Strategic Priorities & Core Performance** - City Trends marked its 8th consecutive quarter of comparable store sales growth, with the last six quarters posting 9%+ growth, validating the company's current strategy. Q2 2026 comparable sales increased 10.5% (19.7% on a two-year basis), with year-to-date 2026 first six months EBITDA already exceeding full-year 2025 total EBITDA. - The company's primary focus is serving its core Black customer base, which spans all income levels: customers with household incomes between $75,000 and $150,000 make up 25% of the customer base and generate over 40% of total revenue, creating meaningful opportunity to expand premium branded offerings. - Growth has been balanced, with increases in both transaction counts and average basket size; basket growth comes from both more units per transaction and higher average unit retail, validating the company's trend-right three-tier (good/better/best) assortment strategy. Customers shop fluidly across all three pricing tiers rather than sticking to a single level, so balanced assortments support larger baskets and long-term growth. - **Operational Improvements** - Gross profit improved 50 basis points year-to-date, driven by improved selling margins from the merchandising team and reduced shrinkage from the loss prevention team, which offset higher transportation and fuel cost pressures. Store payroll leverage improved 70 basis points, and distribution center costs fell 60 basis points in the first half via improved productivity. - Improved cost efficiency allowed incremental investment in social media marketing while still delivering 260 basis points of SG&A leverage year-to-date. Inventory grew only 7.5% year-over-year despite 10.5% comp sales growth, reflecting improved inventory productivity from better open-to-buy discipline and AI-driven allocation tools. - **Strategic Initiatives** - The CITI Jingle Refresh Contest customer engagement campaign moved to the voting phase in Q2, exceeding engagement expectations, driving strong social reach and incremental store traffic; the winning jingle will launch in H2 2026, part of a broader strategy to deepen customer connections and community ties. - The company continues steady expansion of AI across the business: a new enterprise AI tool for data extraction and analytics has been rolled out, complementing existing AI tools for product allocation and real estate site selection, with early work to apply AI to merchandising and assortment planning. - The new Insiders Club customer loyalty CRM platform launched on July 15, 2026, aimed at converting store traffic into repeat customer loyalty, with plans to build engagement through Q4 2026 and 2027, and generate customer insight to refine strategy. - New store expansion is on track: 9 new stores have opened since Q4 2025, all exceeding performance expectations, with each new store evaluated via AI and strict return criteria. The company targets ~$1.5 million in mature annual sales per new store and mid-teens four-wall contribution margins.

Guidance

- **Comparable and total sales growth**: Management raised full-year 2026 comparable store sales growth guidance to 9% to 11%, up from the prior 8% to 10% outlook. Total sales growth is now expected to be 10% to 12%. - **Gross margin**: Gross margin expansion guidance is maintained at 50 to 70 basis points over fiscal 2025's 39.6%, with improved markdown and shrink management expected to offset ongoing higher freight costs from fuel surcharges. - **Adjusted EBITDA**: Full-year adjusted EBITDA guidance was raised to $38 million to $42 million, up from the prior guidance range of $35 million to $40 million. Adjusted SG&A leverage is now expected to be 160 to 180 basis points versus fiscal 2025. - **Store expansion and capital expenditure**: New store guidance was revised down to ~20 new stores in 2026 from the prior 25 store target, due to timing delays, with capital shifted to expand the 2026 store remodel program to 60 to 65 locations from the prior 50 store outlook. The long-term plan to accelerate new store openings to ~40 per year in 2027 and beyond remains unchanged. Full-year 2026 capital expenditure guidance remains unchanged at $35 million to $40 million, and approximately 4 store closures are still expected this year. Management maintains expectations that year-end 2026 cash will be approximately flat with 2025's $66 million balance.

Segment performance

City Trends does not break out formal product segment financial results with absolute revenue or revenue contribution percentages in this call. All merchandise divisions, across all store climate zones and store volume deciles, delivered year-over-year Q2 2026 sales growth. Strong consistent performers noted include men's, children's, and family basics. The family shoe division delivered particularly strong performance in Q2 driven by Summer Wear Now product, on-trend styles, and strong price value offerings. Early Q3 back-to-school season has maintained this broad-based growth momentum, with a noted step-change improvement in women's apparel performance after consistent trend-focused assortments were rolled out.

Risks & headwinds

No explicit material risks or operational failures were discussed in this earning call. Management noted ongoing headwinds from higher freight costs due to increased fuel surcharges, but confirmed this impact has already been incorporated into full-year guidance and is being offset by existing gross margin and cost efficiency initiatives.

Analyst Q&A

• Q: Jeremy Hamblin asked for a granular breakdown of Q2 10.5% same-store sales growth, specifically how much growth came from increased transactions versus basket size components (units per transaction and average unit retail). /

  A: Ken Seipel responded that the growth split has been consistent across recent quarters, with approximately half of total Q2 same-store sales growth coming from higher transaction counts. He noted that strong transaction growth in a typically slow non-peak quarter is a very positive signal for the business. He declined to release full public details on the split between average units per transaction and average unit retail for the remaining half of growth.

• Q: As an early Q3 back-to-school sales acceleration has been seen while lapping tough prior year comparisons, Hamblin asked which categories are driving this uptick, after strong prior performance from footwear, men's, and kids categories, and whether women's business is improving. /

  A: Seipel confirmed that the 25% two-year stacked comp growth seen in early Q3 is broad-based, with all categories that performed well in Q2 carrying that momentum into the back-to-school season. Men's, children's, and family basics remain consistent strong performers. He highlighted a notable step-change improvement in the women's business, the first consistent quarter of delivering trend-aligned assortments to stores, with strong customer reaction across women's Missy categories and other segments that has created more balanced overall category growth.