2026 Q3 Earnings Call Contradictions: Store Strategy, Merchandising Shifts, and EBITDA Margins

Date of Call: December 2, 2025

Financials Results

• Revenue: $197.1M, up 10.1% YOY
• Gross Margin: 38.9%, down 90 bps YOY (in line with expectations)

Guidance:

• Full-year comp store sales: high single digits (at the high end of prior outlook).
• Full-year gross margin expansion ~230 basis points vs 2024.
• FY SG&A leverage ~90 basis points vs 2024.
• Full-year EBITDA now expected $10M–$12M (up from $7M–$11M).
• Q4: comps up high single digits; Q4 gross margin 40%–41%; Q4 SG&A ≈ $82M; Q4 EBITDA $10M–$12M.
• FY capex ≈ $23M; 3 new stores opened YTD; 62 remodels complete; planning 4 closures.

Business Commentary:

* Sales Growth and Market Share: - Citi Trends reported comparable store sales growth of 10.8% for Q3, representing a 16.5% growth on a 2-year basis, marking the fifth consecutive quarter and 15th straight month of strong comp growth. - The growth was primarily driven by increased customer traffic, a strong back-to-school season, and robust performance in categories like Children's, Men's, and basic apparel, as well as strategic new store expansion.

• Mergers and Acquisitions:
  
• Citi Trends plans to open about 25 new stores in fiscal 2026 and 40 stores in 2027, focusing on backfilling existing markets and selectively entering new markets with strong demographic alignment.

• The expansion strategy is guided by advanced AI-driven analytics and strict financial criteria, aiming to replicate successful store profiles and minimize risk.

• Merchandising Strategy and Extreme Value Opportunities:

• The company is expanding its focus on extreme value opportunities, targeting them to represent an incremental 10% of total sales, driven by a robust off-price deal flow and strategic partnerships with well-known brands at steep discounts.

• This strategy is expected to drive both traffic and basket growth while improving gross margins.

• Operational Efficiency and Inventory Management:

• Citi Trends achieved a 3% reduction in overall inventory levels despite a 4.5% increase in average in-store inventory, indicating improved inventory efficiency.
• This was supported by a faster supply chain, reduced in-process inventory, and strategic inventory allocation using AI-based systems, which drove more efficient working capital optimization.

Sentiment Analysis:

Overall Tone: Positive

• Management: "pleased to report another quarter of consistent performance"; noted "we achieved better than planned EBITDA" and raised full-year EBITDA guidance to $10M–$12M; Q3 sales $197.1M, up 10.1% YOY and comps +10.8% (2-year +16.5%), signaling momentum and confidence in transformation execution.

Q&A:

• Question from Michael Baker (D.A. Davidson & Co., Research Division): If I think about the 2-year plan to get to about $900 million, it probably implies another $85 million or so in sales growth in '26 and '27. You talked a lot about some merchandising opportunities and categories. But a little bit more detail on where are the biggest holes or opportunities in your merchandising right now, either by product category or buy good, better, best or however you want to articulate, where does that -- those incremental sales come from?
  Response: Incremental sales will come from expanding better-trend product (notably young Men's), maturing Women's (including plus sizes and juniors), rebuilding footwear, continued investment in Kids, and scaling extreme-value branded deals toward the targeted ~10% of sales.

• Question from Michael Baker (D.A. Davidson & Co., Research Division): If I could ask a follow-up, I suppose, by virtue of the 10.8% comp, your trends are probably consistent throughout the month. You talked about consistency by product category and store cohort. Can you talk about the pace through the quarter? And if there was any impact from the government shutdown, SNAP, anything during those few weeks?
  Response: Comp performance was consistent across the quarter (roughly a 9.5%–12% band), with no material impact from SNAP/government actions; strongest periods were August and the last three weeks of October after pulling forward freight/inventory.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division): Where are you in terms of extreme value as kind of a portion of the product inventory and sales today? And I think you mentioned that you're expecting over the next couple of years to get that up to about 10%. How do you expect that to progress over time? And what type of visibility do you have on continuing to drive deal flow across kind of major name brands?
  Response: Extreme-value deals are currently ~2%–3% of sales; deal flow is robust but selective (many passes); management sees a clear path to scale toward ~10% as processes and supply-chain handling mature.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division): As you are rolling out stores for '26 and seeing a nice uptick in your unit growth, what do you expect the cadence of openings to be in '26? And then you mentioned 2027, is that going to be kind of consistent in terms of store openings now that you've got visibility on the number of units that you're planning to open?
  Response: Future openings will occur in three annual waves (early spring, July/back-to-school, October/holiday); 2026 will be lighter in spring and concentrated in July and October; 2027 target ~40 stores/year, roughly evenly distributed across those windows.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division): Any color you can share on the progress [on shrink mitigation]? What the impact is to your gross margin? And what do you expect to pick up from that kind of in 2026?
  Response: Rolled AI-capable cameras in ~1/3 of stores (heat mapping, traffic counting, facial recognition), plan >2x rollout in 2026; current break rate <1.5% of sales; expect lower shrink dollars and rate in 2026 and further improvement in 2027.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division): Can you elaborate on the CRM update timing and what you expect the outcome to be from that (loyalty program, digital marketing efforts)?
  Response: Phase 1 CRM ("Insider's Club") targeted for Q1 next year with Phase 2 in fall 2026; will drive targeted notifications of extreme-value deals, digital receipts, app features and loyalty engagement to increase frequency and incremental traffic among best customers.

Contradiction Point 1

Store Opening and Growth Strategy

It involves differing strategies and expectations regarding store openings and growth, which are key elements of the company's expansion and revenue strategy.

What's the expected store opening cadence for 2026, and how does it align with 2027 visibility? - Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division)

2026Q3: We will open stores three times a year: early spring, July, and October. In 2026, openings will be lighter in spring, heavier in July and October, catching up and gaining momentum for new store growth. - Kenneth Seipel(CEO)

What are the store base plans for 2026 and the economics of remodels and new stores? - Jeremy Scott Hamblin (Craig-Hallum Capital Group LLC, Research Division)

2025Q2: We'll have a really good understanding of what can be done from a revenue and earnings perspective in Q1 and kind of go from there. - Kenneth Seipel(CEO)

Contradiction Point 2

Merchandising Strategy and Product Focus

It highlights changes in the company's merchandising strategy and product focus, which are crucial for driving sales and maintaining brand relevance.

What are the largest gaps or opportunities in your current merchandising strategy given the 2-year plan targeting $900M and projected $85M sales growth in '26 and '27? - Michael Baker (D.A. Davidson & Co., Research Division)

2026Q3: We are seeing broad-based growth throughout all the categories. At the top level for all categories, we've sharpened our focus on better trend product. - Kenneth Seipel(CEO)

What's driving Q3's sustained momentum despite tougher comps? - Jeremy Scott Hamblin (Craig-Hallum Capital Group LLC, Research Division)

2025Q2: We are seeing good trends in several of our categories, particularly Men's and Kids, where we're seeing sales trends above the company average. - Kenneth Seipel(CEO)

Contradiction Point 3

Extreme Value Sales and Growth

It involves the company's strategy and expectations regarding the growth of extreme value sales, a critical component of their business model.

What is the current portion of extreme value deals in your inventory and sales, and how do you expect this to progress over time? - Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division)

2026Q3: Extreme value deal flow is robust, with a current sales performance of 2% to 3%. We are being discerning, passing on many deals. We see a path to getting closer to 10% as we mature. - Kenneth Seipel(CEO)

What is the growth trajectory of off-price in your business? - Jeremy Hamblin (Craig-Hallum Capital Group)

2025Q4: We're currently doing about 1-2% of our business with extreme value items, which is an addition to our business. I see this growing to around 10% long term. - Kenneth Seipel(CEO)

Contradiction Point 4

Store Remodeling Impact on Sales

It involves statements regarding the impact of store remodeling on sales, which is important for assessing the effectiveness of the company's capital expenditure strategy.

Could you clarify the quarterly pace and any impact from the government shutdown or SNAP? - Michael Baker (D.A. Davidson & Co., Research Division)

2026Q3: Including the 120 store closures, we have completed nearly 200 store remodels and store relocations over the past year, 110 of which were completed during the third quarter. Over 90% of our store base has been either remodeled or relocated in the past 5 years. We are seeing the positive impact from this initiative on sales. - Heather Plutino(CFO)

Can you quantify the performance uplift from recently remodeled units? - Unidentified Analyst (Craig-Hallum Capital Group)

2025Q1: We've closed 13 stores in the quarter, and 120 for the year, achieving our closure goal. We have opened 10 new stores and remodeled 37 stores and relocated 38 stores during the year. - Heather Plutino(CFO)

Contradiction Point 5

EBITDA Margin Targets

It involves the company's financial targets and strategic planning for EBITDA margins, which are crucial for investor expectations and financial performance.

What is the path to achieving your long-range plan of exceeding a 5% EBITDA margin? What are the key milestones and current status? - Jeremy Hamblin (Craig-Hallum Capital Group LLC, Research Division)

2026Q3: As we've said, we're working on our long-range plan. We aim to get our EBITDA margin north of 5%, ideally in the 5-7% range. - Kenneth Seipel(CEO)

What sales level is needed to achieve the $40 million EBITDA target? - Jeremy Hamblin (Craig-Hallum Capital Group)

2025Q4: We're working on our long-range plan. We aim to get our EBITDA margin north of 5%, ideally in the 5-7% range. This would be a step towards achieving our EBITDA targets. - Kenneth Seipel(CEO)