Citi Trends' Q2 2025 Earnings Call: Contradictions in Off-Price Strategy, Expense Run Rate, and EBITDA Goals

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 26, 2025

Financials Results

• Revenue: $190.8M, up 8% YOY
• Gross Margin: 40%, up 890 bps YOY (highest Q2 rate since FY2021)

Guidance:

- FY2025 comp store sales growth now mid- to high single digits (raised from mid-single digits).- FY2025 gross margin expansion ~210–230 bps vs 2024 (slightly above prior outlook).- FY2025 SG&A expected to leverage 60–90 bps vs 2024; full-year SG&A ≈ $310M (includes incentive comp).- FY2025 EBITDA outlook $7–$11M; $21–$25M above FY2024.- Effective tax rate ~0% for FY2025.- FY2025 real estate: open 3, close 3; ~60 remodels.- FY2025 capex $22–$25M.- 2H SG&A run-rate about $78M per quarter; Q4 ~3% above Q3 due to holiday.

Business Commentary:

Sales and Market Performance:* - Citi Trends reported strong comparable sales growth of 9.2% for Q2, marking the fourth consecutive quarter of mid-to-high single-digit comps, and year-to-date growth of 9.6%. - The growth was driven by transaction increases, broad-based product strength, and disciplined execution across climate zones and store volumes.

• Gross Margin Improvement:
• The company achieved a 40% gross margin rate in Q2, the highest since fiscal 2021, with an 890 basis point expansion versus Q2 2024.

• This improvement was due to faster sell-throughs of regular priced product, reduced markdowns, operational controls for shrinkage, and favorable inventory efficiency.

• Operational Efficiency:

• Average in-store inventory decreased by 5.7% compared to last year, while supporting a 9.2% comp growth.

• Improvements in supply chain speed, better in-season allocation execution, and work process enhancements led to better inventory turns and reduced freight costs.

• Financial Performance and Outlook:

• Citi Trends increased its outlook for full-year 2025, expecting mid-to-high single-digit comp store sales growth, a gross margin expansion of 210 to 230 basis points, and SG&A leverage of 60 to 90 basis points.
• The improved outlook reflects strong sales in the first half, effective execution of the turnaround plan, and better inventory efficiency.

  Sentiment Analysis:

  • Management reported 9.2% comp growth (fourth straight quarter), said August marks 13 consecutive months of comp gains, and raised FY2025 guidance. Gross margin reached 40%, up 890 bps YOY (highest Q2 since 2021). Inventory dollars down 12.9% with sales up 8%, and no debt with $50M cash. Guidance increased for comps, gross margin, SG&A leverage, and EBITDA ($7–$11M).

  Q&A:

  • Question from Michael Allen Baker (D.A. Davidson): How should we think about SG&A and incentive comp going forward—roughly $78M per quarter in the back half and into 2026–2027?
  • Response: Yes—~$78M per quarter in 2H; Q4 about 3% higher than Q3; 2026 details to come.
  • Question from Michael Allen Baker (D.A. Davidson): What is the right incremental EBITDA flow-through on sales for 2026–2027?
  • Response: Target 20–25% EBITDA flow-through; normalized 2H 2025 is about 25%.
  • Question from Michael Allen Baker (D.A. Davidson): What impact will the new trend director have on merchandise?
  • Response: She’s translating consumer signals into focused trends, improving curated assortments; early benefits in men’s, broader impact expected by Q4.
  • Question from Jeremy Scott Hamblin (Craig-Hallum): What’s driving sustained Q3 momentum despite tougher compares—more branded deals or broader assortment?
  • Response: Stronger preseason planning, disciplined category focus, improved branded assortments (e.g., True Religion), and better field/DC execution.
  • Question from Jeremy Scott Hamblin (Craig-Hallum): Remodel costs/lifts and the path to unit growth; what are new-store economics?
  • Response: Remodels average ~$100k/store with sales lift and fleet refresh; targeting 25–40 new stores in 2026 (≥25); aiming ~$1.45M sales/store, ~10% rent, mid-teens 4‑wall flow-through.
  • Question from Jeremy Scott Hamblin (Craig-Hallum): Update on supply chain initiatives to cut days and costs?
  • Response: UPS routing cut DC-to-store by 3–4 days; vendor-to-DC sped up; AI allocation in September removes ~1.5–2 receiving days; more DC process gains expected by Q4.