Citi Trends, Inc. Stock

[Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to [ Lynn Walter ] with ICR. Thank you, [ Lynn ]. You may begin.

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 need 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 statements. 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. So 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. And 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 that our execution is improving.

We remain keenly focused on our 3 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 2-year basis. It marked our 8th consecutive quarter of comparable store sales growth with the last 6-quarter momentum of plus 9% growth or better.

The performance demonstrates the consistency and durability of our strategy, and this focused and disciplined approach is driving a continuation of our 2-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 results shortly, but I would like to highlight and thank our team for driving sales along with controlling the expenses, which have converted sales to profit.

And 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. And in fact, we've generated more EBITDA in the first 6 months of 2026 than we generated the entire year last year in '25. 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. The team has found ways to lower our distribution center costs by 60 basis points in the first half through improved efficiency.

And 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. 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, higher average unit retail, and a mixed shift, which continues to validate the strength of our trend-right assortment and the value we deliver across the 3 merchandising tiers. Q2 is one of our lower sales volume quarters, so it's really good to see the consistency of transaction and sales growth during our non-peak periods.

We delivered second quarter sales increases over last year in every merchandise division 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. And 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 am often asked by our investors about Citi Trends' long-term ability to continue to grow sales. 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.

So 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. And 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 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 3 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 2 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 3 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, but at his wife's urging also purchased a trend item. These moments reinforce what we're seeing daily across 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 investments in marketing on our social media platforms, building 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. The winning jingle is expected to be deployed in the second half of the year. But beyond the fun of the contest itself, this initiative reflects our broader marketing objective: deepening our connection with our customers and reinforcing our role in the communities we serve. I encourage you to take a look at our Instagram channel, where we've been sharing some of the best moments from the campaign.

On technology, we continue to expand the use of AI across the organization, which I would describe as a steady evolution rather than a single milestone moment. We recently rolled out an enterprise AI tool to help our teams with data extraction and analytics. This closed AI environment is already helping associates across the business, including our buying teams, work smarter, more efficiently, and in a more timely manner. This complements the AI tools already in use for product allocation and real estate site selection, and we're in the early stages of applying similar tools to merchandising and assortment planning.

On July 15th, we launched our new customer relationship platform, which we're calling the Insiders Club. The Insiders Club turns traffic into loyalty, loyalty into frequency, and frequency then into EBITDA. This gives us the ability to speak directly to our best and most engaged customers and will generate insights about their shopping habits that we'll use to refine and fine-tune our strategies going forward. We're in the early stages of enrollment, and we expect to engage our customers later this fall and build momentum with our best customers during Q4 and well into 2027.

And speaking of early stages, we are building new store opening momentum this year. I'd like to welcome our 4 new stores opened at the end of July: 2 stores in Rochester, New York; an additional store in Baltimore, Maryland; and Jackson, Tennessee. We've opened 9 stores since Q4 of 2025, all of which are exceeding our expectations. Our goal this year is to open approximately 20 stores and accelerate new store growth to around 40 in 2027 and beyond.

Each new location is evaluated using our AI tools and held to strict financial return and investment criteria. For our new stores, we're targeting roughly $1.5 million in mature sales and mid-teens four-wall contributions. Now I'll turn the call over to Heather to walk through the Q2 financial results in more detail, as well as our updated outlook. I'll return after her remarks for some closing comments. Heather?

Thank you, Ken, and good morning, everyone. I'm pleased to walk you through our financial results for the second quarter and first half of 2026. Our Q2 results reflect strong top-line growth, continued gross margin expansion, and disciplined expense management, leading to adjusted EBITDA of $5.5 million, a $6.6 million increase compared to a year ago. These results are evidence that the transformation of Citi Trends is on track and that the operating model we've built can consistently deliver improved results.

Based on our second quarter performance, we are raising our outlook for the year. I'll walk you through that revised outlook shortly, turning first to the specifics of our second quarter results. Total sales for the quarter were $211.6 million, a 10.9% increase to Q2 2025. Comparable store sales increased 10.5%, or an increase of 19.7% on a 2-year basis.

Q2 gross margin increased 60 basis points compared to a year ago to 40.6%, driven by higher merchandise margin and lower shrink levels as we continue to leverage investments in improved floor-level technology and processes. These tailwinds were partially offset by higher freight expense. As we discussed last quarter, rising fuel surcharges are leading to higher freight. We expect this to continue throughout the year and have incorporated that impact into our outlook.

Second quarter adjusted SG&A expenses totaled $80.4 million compared to $77.4 million a year ago, with the increase to last year driven primarily by expenses to support $21 million in incremental sales. As a rate of sales, adjusted SG&A for the quarter was 38%, leveraging 260 basis points versus last year as a result of higher sales and our largely fixed expense base. As I mentioned earlier, adjusted EBITDA grew $6.6 million over Q2 last year to $5.5 million, with adjusted EBITDA margin expanding 320 basis points to 2.6%.

During the quarter, we opened 4 stores, as Ken mentioned, and closed 1 location, ending the period with 594 stores. We remodeled 26 stores in Q2, bringing total remodels so far this year to 51 stores. Before turning to the balance sheet, let me provide a few details on our performance in the first half of fiscal 2026. First half comparable store sales were 12.2%, with a 2-year comp of 21.8%. First half comps were driven by growth in basket and transaction count.

Adjusted first half EBITDA was $19.4 million, an increase of $14.1 million to last year. EBITDA growth was driven by $50 million of incremental sales, 50 basis points of gross margin expansion, and 260 basis points of SG&A leverage. And in the first half of the year, we improved our EBITDA margin by 300 basis points to 4.4%. Now turning to the balance sheet. Our initiatives to improve inventory efficiency continue to deliver returns. We generated 10.5% comp sales growth in the quarter, with quarter-end total inventory up only 7.5% to last year.

Our balance sheet remains strong with $55.9 million in cash at the end of the quarter, no debt, and no drawings on our $75 million revolver. We continue to expect our year-end cash balance to be approximately flat to last year's $66 million, and we expect to remain in a strong financial position throughout the year, affording us the flexibility to pursue strategic alternatives. Turning to our guidance, we are updating our outlook for fiscal 2026 to incorporate results of our second quarter while maintaining our outlook for the second half of the year.

Our updated outlook for the full year is as follows. We now expect comparable store sales growth of 9% to 11%, higher than previous outlook of 8% to 10%, with total sales now expected to grow 10% to 12%. Gross margin is expected to expand approximately 50 to 70 basis points compared to the 39.6% we delivered in fiscal 2025, consistent with previous outlook. As we discussed in our last earnings call, we are leveraging new systems and processes to drive improvements in both markdowns and shrink while managing the impact of higher freight expense due to the fuel surcharges I mentioned earlier.

We now expect adjusted SG&A leverage in the range of 160 to 180 basis points versus fiscal 2025, higher than previous outlook of 130 to 160 basis points of leverage due to the impact of higher sales, plus continuation of our disciplined expense control. Adjusted EBITDA is now expected to be in the range of $38 million to $42 million, an increase to our previous outlook of $35 million to $40 million. At the midpoint, adjusted EBITDA margin is now expected to expand approximately 230 basis points over fiscal 2025.

Our outlook for new stores has been revised slightly to approximately 20 new stores in the year. The change from our previous outlook of 25 new stores is due to timing. We remain confident in our long-range plan for footprint growth and in our ability to execute our store opening strategy. Importantly, our plan to accelerate our store openings to 40 stores in fiscal 2027 remains unchanged.

We will be shifting capital spend from new stores to expand our remodel program in 2026. As a result, we now expect to remodel approximately 60 to 65 locations versus our prior outlook of 50 remodels, and we continue to expect to close approximately 4 locations in the year. Finally, our outlook for full-year capital expenditures remains unchanged at a range of $35 million to $40 million.

To close, our second quarter results validate the direction we set out for the year. Inventory efficiency, disciplined expense management, and return-focused investments are showing up in our financial results, and we expect that trend to continue. I'm grateful to our teams for the continued hard work behind these results, and we look forward to updating you on our progress in our next earnings call. With that, I'll hand the call back to Ken. Ken?

All right. Thank you, Heather. As we look ahead, we're firmly in the execute phase of our growth plan, focused on delivering against our customer brand promise. Our customers are discerning. They understand that value is more than just price. And they're willing to spend more when the style is right, the trend is relevant, and quality meets their expectations. In short, value is not just price. Our brand promise is very clear: styles that see you, prices that amaze you, and trends that tell your story. Our teams are focused every day on bringing that promise to life for our customers.

Our priorities in '26, which are consistent execution, strong sales flow to profit, and accelerated growth. First, in consistent execution. With foundational practices now in place, we've identified clear product opportunities to sustain comparable store sales growth into the foreseeable future. Our product team has sharpened focus on trend identification, trend curation, and style development. From opening price points to premium branded fashion, our merchant team translates these trends into compelling styles that deliver exceptional value to our customers.

Each season, we're improving our product, trend, and style execution while delivering and leveraging AI to optimize allocation. This creates a long runway of growth as we continue to develop and refine our product execution. On the marketing front, we're focused on expanding our social and influencer presence and ensuring our brand is authentically represented in everything we do. This is not just about visibility. It's about deepening relationships and reinforcing Citi Trends' commitment to the communities that we proudly serve.

Our second priority is ensuring strong sales flow to profit. Our plan for 2026 calls for a 10% to 12% sales growth, while more than doubling EBITDA, making this a very pivotal year in the evolution of our profit profile. Foundational to profit flow is leveraging our fixed cost structure and improving productivity of our teams. In addition, we have several initiatives supporting this objective, including our AI-based allocation systems, enhanced store technology to reduce shrink, and ongoing supply chain improvements to increase capacity and efficiency.

And as I've highlighted on prior calls, we continue to leverage KPI dashboards across all functions to ensure disciplined execution. A benefit of our improved execution is our ability to absorb macroeconomic challenges, like increased fuel surcharges, into our business model while still achieving improvements as noted for our outlook in the year.

Our third priority is growth, which will be disciplined, return-focused, and strategic. This year, we're making a deliberate investment in owning our customer relationship and building a sustainable, data-driven growth engine that compounds over time. The objective is to invest early to build customer relationships, and as the CRM system learns and scales, it becomes a meaningful contributor to long-term shareholder value.

Insiders Club transforms Citi Trends from a transaction-based retailer into a relationship-driven brand. It allows us to know our customer, reward our customer, and grow with our customer, while reinforcing the treasure hunt excitement that makes shopping with us a unique and rewarding experience. In 2026, we expect to open 20 new stores, and as Heather mentioned, remodel approximately 60 to 65 locations while preparing to accelerate expansion in 2027. Our approach is grounded in data-driven site selection, local market expertise, and disciplined financial criteria.

Next, an important priority is ensuring our entire team has embraced the concepts of personal accountability for results and the ownership of continuous skill development. Citi Trends is evolving into a learning organization. We are a company that facilitates the continuous learning and development of all employees to transform, adapt to changes, and improve performance, positioning us to maximize growth opportunities as they arise. And as a part of this initiative, we are focusing on succession planning for our key leadership roles to ensure continuity of our transformation plan while strengthening our bench of talent.

Finally, our strong debt-free balance sheet provides us with flexibility to pursue growth beyond our current organic plan. We continue to evaluate acquisition opportunities that are strategically aligned, financially compelling, and capable of enhancing long-term shareholder value. Any potential transaction will be held to the same disciplined financial standards that have guided our turnaround.

To further enhance that flexibility, our board has approved the implementation of a $100 million shelf registration. We view this as a prudent corporate finance measure that provides additional capital capacity should we identify new opportunities to accelerate profitable growth, including potential strategic investments or acquisitions. Importantly, we expect our existing liquidity and operating cash flow to fully support our current business and our organic growth plans.

The shelf does not reflect a current financing need or an intention to raise immediate capital. Rather, it provides us with additional flexibility to efficiently access the capital markets, if and when we identify an opportunity where doing so would create compelling long-term shareholder value. Our existing share repurchase authorization remains in place with $40 million of authorization on the outstanding agreement.

Together, our balance sheet, the shelf registration, and our repurchase authorization provides us with a flexible set of capital management tools. We will deploy or return capital based on the opportunities available to us, market conditions, and ultimately where we believe we can generate the greatest long-term value for our shareholders. So in closing, progress at Citi Trends is well underway.

Our track record of consistent comparable store sales shows that our strategy is working, our execution is more consistent, and our customer connection is stronger than ever. We are debt-free, disciplined, and positioned for growth. We have a clear path to profitable expansion, stronger earnings, and lasting shareholder value. We're clearly focused on our customer. The foundation is stronger, and the opportunity ahead of us is significant.

But we still have processes to refine, categories to optimize, and systems to build. We are more than just a retailer. We are a neighborhood destination for Black families delivering style, trend, value, and trust that no one else can deliver. I'm confident in our strategy and our team's ability to execute. The foundation we built positions us well for continued growth throughout the rest of this year and well beyond. I'd like to thank you for your continued support. And now I would like to turn the call over to the operator for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Jeremy Hamblin with Craig-Hallum. Please proceed.

I wanted to see if I could get a little bit more granular on the same-store sales. In terms of what you saw in Q2, what portion of that 10%-plus comp in the quarter was driven by more transactions versus the breakdown on your average ticket of UPTs versus average unit retail?

Yes, for sure, Jeremy. Hi, Jeremy. Thank you for the question. In terms of our same-store sales growth in the quarter, and it's been fairly consistent for the last several quarters, actually, about half of our growth is coming through increased transaction count. We view that as a very positive sign, obviously, for the business. And as I mentioned in the call, that was also through a non-peak period, which I think is noteworthy, at a point where the consumer really didn't have a compelling reason to come in. We still maintain nice, strong traffic. And so we're quite pleased with that.

Now, we haven't publicly released the details around average unit retail and average units per transaction. But if you think about it this way, about half of the growth is really transaction count and the other half are the components of the shopping basket.

Fair enough. And then it sounds like you've seen a little bit of an acceleration here to start Q3, and you're lapping your toughest compares of the year, so quite impressive. I wanted to just understand in terms of category performance, where you're seeing that uptick. I know that you've talked quite positively about footwear, men's, juniors. I wanted to see if that's potentially the uptick being a result of maybe women's business picking up, or any additional color you might share on the momentum.

Yes, for sure. Yes, thank you, Jeremy. Good catch. We have seen increased momentum in the quarters. As I mentioned, we're looking at about a 25% 2-year stack at this stage, which is good. And we've got a lot of quarter to go, so more ahead yet. But the early results are good for back-to-school for sure. Again, the momentum that almost all of our categories experienced in Q2 literally has continued into Q3. And that's noteworthy because, again, you're kind of going from a non-peak to a peak period to kind of maintain that growth momentum is quite impressive.

And the teams that I called out, our men's team, our kids' team, and family basics are very consistent performers, and that has been the case here as well. I would highlight on your question, we did see a nice step change in our women's business. This is the first quarter that our women's team has been able to deliver trend modules to the stores on a fairly consistent basis. And so we were getting some strong reaction there, and it's a little bit more of a balanced assortment. We're enjoying growth in our misses categories and really across the board there. So it's been gratifying to see a nice step change in our women's business as a result of the trend effort.

Great. I'll hop out of the queue and let others ask questions. Thank you. Congratulations.

Thanks, Jeremy. Appreciate it.

Thank you. At this time, I'll turn the floor back to management for further remarks.

All right. Well, I'd like to just thank everybody for your time and attention today and your interest in our brand. And we look forward to updating you on Q3 results as we continue here. So thank you very much.

Thank you. This concludes today's conference. Thank you for participating. You may now disconnect. Have a wonderful day.

Greetings Welcome to Citi Trends First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Nitza McKee, Senior Associate at ICR. Thank you. You may begin..

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' First Quarter 2026 Earnings Call. On our call today is 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's available on the company's website under the Investors section at www.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 within 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 statements. I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken?

Thank you, Lisa. Well, good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings call. Simply stated, we had an excellent quarter. Building on the powerful momentum from 2025, nearly every metric accelerated during Q1 2026, and we're seeing strong momentum early in Q2 as well with quarter-to-date comps in the high single digits, which is validating that our strategy is working and our execution is becoming increasingly consistent. As noted in our pre-release last week, in Q1, we generated $13.9 million of EBITDA, which is more than doubling last year's $6.4 million. Our profit improvement was driven by exceptional comparable store sales growth of 13.9%, representing a 2-year stack of 23.8% and also marking 21 consecutive months of sales growth for the company. Our performance was broad-based. Sales increases across all product divisions and all store climate zones. While a portion of the quarter benefited from tax refund timing, I would like to highlight that our sales trends before and after the tax refund period on a 2-year basis is in the upper teens, consistent with the momentum we delivered in Q3 and Q4 of 2025 and in the upper -- in the 2-year upper teens growth trend has continued now in Q2. Our sales growth is being driven by refinements of trend, style and value of our core merchandising assortment. Plus we also utilize extreme value deals periodically to add excitement to the treasure hunt for our customers. The strong performance of our core merchandising strategy gives us confidence in the durability and sustainability of our top line performance. Our gross margin rate expanded by 40 basis points, driven by improved merchandise margin rate, partially offset by increased fuel surcharge expense in the freight line. SG&A was well controlled and leveraged by 250 basis points versus last year. I was particularly encouraged by our transaction growth. Consistent with 2025 performance, nearly 1/2 of our sales increase was driven by increased customer traffic, a key indicator that our product and brand are resonating. At the same time, we saw some meaningful improvement in our basket size, which is demonstrating that our customers are responding to the strength of our assortment and the compelling value that we're delivering. From a merchandise perspective, we saw disciplined execution across the business. Family footwear continued its momentum from Q4 with customers responding enthusiastically to expanded branded offerings at exceptional value across all genders. In footwear, off-price and extreme value strategy continues to gain momentum, driving both traffic and basket growth. Men's also delivered a very strong quarter, driven by increased relevance and streetwear trends for young men. Our updated strategy successfully balances trend-forward product for the younger customer while continuing to serve the style and preferences of our core male customer with updated styling, compelling values and improved in-stocks. Children's had another strong quarter, benefiting from improved in-stock levels and attention to the nail in product selection, which creates stronger value positioning. As I mentioned on the Q4 call, our children's business has become both a cornerstone of our company and a model of consistent disciplined execution. The team continues to deliver highly desired styles, consistent value and improved inventory and stock positioning. Women's accessories also posted meaningful gains, which is reflecting early success in our assortment adjustments to a more branded trend-right product. And we were encouraged by customer response to improvements of our women's apparel business, especially in missing. Women's apparel represents a significant opportunity as we continue to reposition our women's business to fully capture the style, trend and sizing opportunities that we do see in the market. This product momentum is the result of continued refinement of our 3-tiered good, better and best strategy across all merchandising divisions. What's important to note here is that we're serving customers across a wide range of income levels, including a meaningful portion of middle and higher income consumers. This creates a significant opportunity for us to expand our offering of recognizable brands at compelling prices that align with our style and trend expectations. At the opening price point, we continue to deliver strong value through our CityScore offering for budget-conscious customers. The foundation of our business remains the better tier, which is typically priced between $7 and $12, where we provide a broad assortment of trend-right product that drives consistency and loyalty. And at the top end, we're continuing to expand our best tier through both fashion-forward product and branded extreme value opportunities, often with extreme discounts of the 75% off MSRP. These product strategies, combined with improved discipline in our open-to-buy process and continued benefits from our AI-driven allocation systems are driving stronger inventory productivity and improved margin performance. In marketing, our objective is to really deepen the connection with our customers and reinforce the role in the communities that we serve. In Q1, we extended the momentum from our highly successful holiday Joy Looks Good on You campaign by inviting customers to help modernize the Citi Trends Jingle. Engagement exceeded expectations, generating strong social reach and viral moments while also driving incremental store traffic. By quarter end, we have received a meaningful volume of customer submissions. And in Q2, we will select the finalist from the submissions with the winning Jingle expected to be deployed in the second half of the year. Now turning to operations. The SG&A leverage we delivered in the quarter reflects more consistent execution across the organization. As we improve execution, we are able to better leverage the fixed portion of our cost structure without adding commensurate expense as the business grows. I'm pleased with the progress across our stores, headquarters and our distribution centers in controlling costs and improving overall operating disciplines. From a store growth point of view, we opened 2 new stores during the quarter, one in St. Louis and one in Baltimore. These 2 locations, along with the 3 new stores from last fall, are serving as test stores for us as we refine our processes and prepare for accelerating store growth. And I'm very pleased to report that our new stores are all performing above expectations. As a reminder here in stores, one of our primary points of differentiation is our neighborhood store locations, which are embedded in communities where we built trust over many, many years. The combination of these convenient proximity and strong word-of-mouth recommendations creates sustainable, powerful traffic drivers. Now I'll turn the call over to Heather to walk through the Q1 financial results in more detail as well as our updated 2026 outlook. And then I'll return after her remarks to discuss our priorities for the remainder of '26. Heather?

Thanks, Ken, and good morning, everyone. I'm pleased to walk you through our first quarter results and our updated and improved outlook for 2026. We delivered a strong first quarter, driven by top line growth, gross margin expansion and disciplined expense management, resulting in adjusted EBITDA of $13.9 million. A $7.5 million increase over last year's Q1 adjusted EBITDA of $6.4 million. These results reflect the continued progress of our strategic transformation and the strength of our operating model. Total sales for the first quarter were $230.9 million, a 14.4% increase to Q1 2025. Comparable store sales increased 13.9%, ahead of our expectations, driven by both increased transactions and higher average basket. On a 2-year stack basis, comps increased 23.8% and Q1 2026 marks our seventh consecutive quarter and 21st straight month of comp sales growth. As Ken mentioned, our comp sales growth trend on a 2-year basis before and after the tax refund season has been consistently in the upper teens, including Q2 performance to date. In the quarter, gross margin increased 40 basis points versus last year to 40%, driven by improved merchandise margin, fueled by our strategic investments in allocation and loss prevention systems and updated processes. These tailwinds were partially offset by higher freight expense. Freight in the quarter was higher than planned due to rising fuel surcharges. We expect that headwind to continue throughout the year, and we've incorporated its impact into the updated outlook I'll walk you through shortly. First quarter adjusted SG&A expenses totaled $78.3 million compared to $73.4 million a year ago. The increase to last year was mainly driven by expenses to support higher sales. In addition, we had higher store and corporate bonus accruals from improved performance. As a rate of sales, adjusted SG&A for the quarter was 33.9%, leveraging 250 basis points versus last year, demonstrating our ability to leverage our cost structure with higher sales. As I mentioned earlier, Q1 adjusted EBITDA grew $7.5 million over last year to $13.9 million with adjusted EBITDA margin, EBITDA as a rate of sales, expanding 280 basis points to 6%. During the quarter, we opened 2 stores and closed 1 location, ending the quarter with 591 stores. and we remodeled 25 stores, completing a significant portion of our full year program in time for the important Q1 tax refund season or taxis as we call it. In early Q2, we remodeled an additional 26 locations, completing our remodel program. Now turning to the balance sheet. I'm pleased to say that we drove our 13.9% Q1 comp with quarter end total inventory up only 4.8% to last year, reflecting our ongoing inventory efficiency initiatives. Our balance sheet remains healthy with $81.1 million in cash at the end of the quarter, no debt and no drawings on our $75 million revolver. As we've said in several prior investor presentations, we expect our year-end cash balance to be approximately flat to last year's $66 million, reflecting investments in inventory and capital projects, particularly new stores and remodels over the balance of the year. Throughout the year, we expect to remain in a strong financial position, affording us the flexibility to pursue strategic alternatives. Turning to our guidance. With the results of our first quarter, we are updating our outlook for fiscal 2026 as follows: -- we expect comparable store sales growth of 8% to 10% for the year. With our Q1 comp results, this implies high single-digit comps for the balance of the year. Total sales are expected to grow in a range of 9% to 11%, gross margin is expected to expand approximately 50 to 70 basis points compared to 39.6% in fiscal 2025 as we continue to leverage new systems and processes to drive improvements in markdowns and shrink, partially offset by higher freight expense due to the fuel surcharges I mentioned earlier. Our revised expectation for freight expense drove the decrease from our prior outlook of 100 basis points of margin rate expansion. We now expect adjusted SG&A leverage in the range of 140 to 160 basis points versus fiscal 2025, higher than previous outlook of 70 to 100 basis points of leverage due to the impact of higher sales as well as ongoing disciplined expense control. Adjusted EBITDA is expected to be in the range of $35 million to $40 million, with adjusted EBITDA margin expected to expand approximately 200 basis points over fiscal 2025. Our real estate plans are unchanged from previous outlook with plans to open approximately 25 new stores to close 4 locations and to remodel approximately 50 locations. Finally, full year capital expenditures are expected to be in the range of $35 million to $40 million, consistent with previous outlook. In closing, Q1 represents a strong start to 2026, reflecting the operational foundation we built last year and the continued execution of our strategic priorities. We remain focused on driving sustainable, profitable growth through disciplined inventory management, operational efficiency and targeted investments in our business. We are confident in our long-term trajectory and our ability to deliver meaningful value for our shareholders. I want to thank our teams across the organization for their continued dedication and hard work, which is enabling this transformation. We look forward to updating you, our investors, on our progress next quarter. With that, I'll hand the call back over to Ken. Ken?

All right. Well, thank you, Heather. So as we look ahead to the balance of 2026, we are firmly in the execute phase of our growth plan, focused on delivering against our customer brand promise. Our customers are discerning. They understand that value is more than just price, and they're willing to spend more when the style is right, the trend is relevant and quality meets their expectations. In short, value is not just price. Our brand promise is very clear. styles that see you, prices that amaze you and trends that tell your story. Our teams are focused every day on bringing that promise to life for our customers. To support this, we've established 3 clear priorities in 2026, consistent execution, strong sales flow to growth to profit and accelerated growth. So first, consistent execution. As I mentioned earlier, our sales growth is being driven by refinements in trend, style and value of our everyday core merchandising assortment. Consistent execution of our merchandise strategy gives us confidence in achieving upper single-digit comparable store sales growth this year and in the foreseeable future. A key focus will be repositioning our women's business to fully capture the style, trend and sizing opportunities in the market across juniors, plus and missing. We're updating our product offerings to ensure trend-right merchandise is front and center for all female customers. This represents a meaningful opportunity to drive both traffic and sales. Throughout '26, we'll maintain our disciplined focus on improved style, trend and value across all product categories, and we'll continue to apply the learnings from our strongest performing categories like men's and children's to elevate execution company-wide. Our product team has sharpened focus on trend identification, trend curation and style development. From opening price points to premium branded fashion, our merchant team translates these trends into compelling styles that deliver exceptional value to our customers and meaningful margin to the business. Each season, we're improving our product trend and style execution while leveraging AI to optimize product allocation to the correct store. This creates a long runway of growth as we continue to develop and refine product execution. We've also continued -- have continued opportunity to expand off-price and extreme value buying capabilities, ensuring a steady flow of compelling brands and products at exceptional value. Extreme value product is driving both traffic and basket growth while supporting margin performance. The off-price market remains robust, allowing us to be highly selective, which is a key advantage for our model and core to our competitive advantage. We've already secured several strong deals that will support continued momentum into the back half of the year. On the marketing front, we're focused on consistent execution throughout the year. This includes expanding our social and influencer presence, deepening community engagement and ensuring that our brand is authentically represented in everything we do. As I said earlier, this is not just about visibility. It's about deepening relationships and reinforcing Citi Treatment to the communities we proudly serve. Our second priority is ensuring strong sales growth through flow-through to profit. Incremental sales are going to translate into accelerated profit growth. Our plan in 2026 calls for about a 10% sales growth while more than doubling EBITDA, making this a pivotal year in the evolution of our profit profile. Foundational to profit flow-through is leveraging our highly fixed expense base as we grow. Best practices implemented during the repair phase and operational areas of the business are beginning to have a positive impact on our cost structure, enabling us to grow sales more efficiently. In addition, we have several tangible initiatives supporting this objective, including our AI-based allocation systems, enhanced store technologies to reduce shrink and our ongoing supply chain improvements to increase capacity and efficiency. And as I've highlighted on prior calls, we continue to leverage API dashboards across all functions to ensure we have disciplined execution. A benefit of our improved execution is our ability to absorb macroeconomic challenges, like increased fuel charges into our business while still achieving our profit flow-through objectives. Our third priority is accelerated growth, which will be disciplined, return-focused and strategic. First, beginning in July, we're going to launch our customer relationship management platform that we're calling the Insiders Club. The Insiders Club turns traffic into loyalty, loyalty into frequency and frequency into EBITDA. We're making a deliberate investment in owning our customer relationship and building a sustainable data-driven growth engine that compounds over time. The objective is to invest early to build customer relationships. And then as the CRM system learns and scales, it becomes a meaningful contributor to long-term shareholder value. The Insiders Club transforms Citi Trends from a transaction-based retailer into a relationship-driven brand. It allows us to know our customer, reward our customer and grow with our customer while reinforcing the treasure hunt excitement that makes shopping with us an experience. We'll begin activation of the Insiders Club this July and expect the program to build momentum rapidly. We also remain on track with our store growth plans. As Heather mentioned, we've completed 51 remodels so far this year, and we expect to open a total of 25 new stores for the remainder of the year, while preparing to accelerate our expansion in '27. Our approach is grounded on data-driven site selection, local market expertise and disciplined financial criteria. Using AI tools, we've analyzed 3 years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific customer and market characteristics that drive success. This AI data-driven approach has demonstrated approximately a 90% accuracy in sales prediction, helping us to identify and replicate our most successful store profiles while minimizing risk as we expand our footprint. Beyond the analytics, we're applying strict financial criteria to every new store, decisioning targeting mature store averages of approximately $1.5 million in sales and mid-teens 4-wall contribution margins. Our early results from our newest stores are exceeding expectations, giving us the confidence in accelerating to approximately 40 new stores in 2027. Equally important to our growth initiatives is the growth of our people. We're a company that facilitates the continuous learning and development of all employees to transform adapt to changes and improve performance, positioning us to maximize growth opportunities as they arise. And as a part of that initiative, we're focusing on succession planning for our key leadership roles to ensure continuity of the transformation plan while strengthening our bench talent. Our strong debt-free balance sheet enables us to explore multiple avenues of growth beyond our current 3-year plan. Our strategy is to build a strong organic growth foundation, accelerate expansion where the economics are compelling and selectively pursue transformational opportunities. We're beginning to evaluate synergistic acquisition opportunities that align with and complement our strategic priorities. We're committed to applying the same disciplined approach to our customer focus, product execution and financial returns that has driven our turnaround so far and has generated significant shareholder value creation. So in closing, progress at Citi Trends is well underway. Our track record of consistent comparable store sales increases shows our strategy is working. Our execution is more consistent and our customer connection is stronger than ever. We're debt-free, disciplined and positioned for growth. We have a clear path to profitable expansion, stronger earnings and lasting shareholder value. We are clearly focused on our customer. The foundation is stronger and the opportunity ahead is significant, but we still have a lot of processes to refine, product categories to optimize, systems to build and growth opportunities to maximize. We're more than a retailer, we are a neighborhood destination for black families, delivering style, trend, value and trust that no one else can deliver. I'm confident in our strategy and our team's ability to execute. The foundation we've built positions us well for growth throughout 2026 and beyond. Thank you all for your continued support. I'll turn it to the operator now for any questions.

[Operator Instructions] Our first question is from Michael Baker with D.A. Davidson.

Okay. So you kind of alluded to the impact of tax refunds, and it sounds like it probably helped, but certainly more to it than that. But you talked about the period before and after. But what do you consider the tax refund period? Or maybe some other way to ask is, can you just tell us your monthly trends?

Yes. Mike, probably the best way to think about the tax refund trend for us is really from about mid-February up to -- and this kind of right up to Easter period that for the most part, about 6 to 7 weeks there is what we would account for the majority of the tax refunds that flowed into the market. And so when we talk about sales trends prior. That includes a little bit of the January performance as well. But going into Feb 15 and then coming out after Easter and even into really even through last week, our trends have remained very consistent with what we experienced, as I mentioned, in Q3, Q4. So we've been very encouraged about the overall underlying health of the business. And as we noted in Q1, obviously, our sales spiked up to 23.8% on a 2-year, which is better than we had been performing. So we believe that gap between our baseline and that upside is probably attributed dominantly to the tax refunds in that period, but very encouraged about the health on either side.

Yes. Okay. That makes sense. And then I guess I'll keep it to one question, one follow-up, and this does follow up on that. I think, Ken, I think I heard you say high single digits for the "foreseeable future -- did I hear that right? And what to you is foreseeable future?

Yes. You actually didn't. That's a pretty good nuance in the script, Mike. That's a good catch. Yes, we did say that. We -- what we're talking about in the foreseeable future right now is our merchandising plans that we have in place all the way through the balance of this year through 2026. We're taking a hard look at 2027 right now, and that may moderate a little bit and get into more of the mid-singles as we go forward. But the point here is that we see a long runway of continued increases. I'm often asked by investors, can we continue to comp the comp, right? And we have a great deal of confidence in that. There are so many merchandising opportunities that we have on the table. We can kind of go store by store, category by category and take a look at various ways that we can continue to get better executing our 3-tiered assortment and delivering better value to the consumer. So we see a big ramp-up this year, and that will continue. And then we do see continued success beyond. But to be more clear, I was speaking very specifically about the foreseeable future being through the end of this year.

Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group.

On the strength of the business. So as a follow-up question in terms of -- you noted men's category very strong, children's very strong, women's accessories, footwear. In terms of thinking about where you see the biggest opportunities, not just the remainder of '26, but as we get into '27, what are the categories where you feel that you can really attack and improve? And what are the drivers of that? Is it more consistency of the merchandise? Is it more national brands or kind of closeout off-price deals? Any color you might be able to share in terms of the merchandising strategy?

Yes, for sure. We have done a good deal of analytics to really kind of think about what is the long-term opportunity for store productivity and which categories inside of our box really have an opportunity to provide outsized growth along that continuum. And you can kind of go through literally department by department and find significant opportunity across the board. For example, I called out our shoe department who has done a nice job the last 2 quarters, very pleased with their results. And they're at the very beginning, I think if the team around the table we're just getting started. We actually see a path there to probably more than double that department over time. And we've got quite a bit of work to do to get that done, but there's certainly significant growth there. And I can kind of go around the store and do that same sort of thing. But I would also step back and say that the other area of growth that's probably the most significant. It's just more broadly appealing to our higher income consumers. So they've been responding extremely well. And as we continue to reposition fashion and trend, we're getting good response. You might remember in Q4 last year, we launched young men's trend, highly successful and has continued into today, and we're just beginning to kind of understand how large that business can be. There's a significant opportunity there just to continue to mature what is a fairly new business for us. The same is true in our women's division, as I mentioned briefly on the call, we're just launching some trend. I'm very excited about -- the teams work for Q3. We've looked at it. The styles are right on, the trends are right on. We're making some different investments there. And there'll be a little bit of a breaking out moment, I think, for our women's fashion team. And then complementary to that, right, behind that, we're just exploring the implementation and now ultimately, the expansion of missy category of product. And I don't mean to take a the entire call going through here, but there's -- the point here is that there's a lot of significant opportunity just getting better doing what we're doing in our 3-tiered strategy, good, better, best around the store. And I speak from time to time about extreme value, and I'd like to talk about it because it's fun to talk about. But the reality is it's actually the icing on the cake for us. That's the stuff that drives the excitement, the treasure hunt and is really kind of compelling. It will drive traffic for us. But we're not reliant on that as our growth engine. That's complementary to our overall core merchandising strategy.

Got it. And then switching gears to talk about unit growth. So you're starting to really exercise that muscle accelerating to mid-single digit and potentially beyond as we get into '27. I wanted to understand the cadence of openings. You opened 2 in Q1. How should we be thinking about the remainder of the year? And then as you get into a more consistent unit growth algorithm, how should we be thinking about unit -- the timing of unit openings throughout the year?

Yes. Perfect. I'll talk a little bit about the last part of your question, and I'll ask Heather to kind of fill in on the balance of 2026 for you. But how we're thinking about unit growth going forward, we're going to put our new store cycle on 3 cycles a year. Our goal here is to kind of open new stores up into peak periods so that we have our best foot forward in merchandising, we can invite new customers in and really kind of get the new stores off to a good start. And so in our model, that would mean we're going to open up a block of stores in February in advance of the tax period. We're going to open up a block of stores in the summer, mostly mid-July in advance of back-to-school. And then we're going to open up again another block of stores in October in advance of going into holiday. And those 3 opening cycles will allow us to, a, number one, improve our execution and discipline of opening new stores. Secondarily, it will allow us to make sure that when we open up a store that we have our very best foot forward on new product going into a peak season. And we believe that we can use that as a springboard then to mature those stores at a much more rapid rate. In 2026, we're just getting started, obviously. So our opening cadence is a little bit irregular in 2026. I would not use that as a proxy. 2027 will be and beyond is what I just described. So Heather, would you be able to fill in the blanks there for Jeremy relative to the remainder of the year opening cadence?

For sure. So we did the 2 in February and for Texas. We're thinking 3 to 5 in July period and then the balance in October this year. So again, that speaks to Ken's 2026 is not what we consider kind of "normal" for go-forward periods, but that's us getting our legs under us.

Great. That's helpful. And if I could just sneak one more in, just on some of the margin color. So you noted the fuel surcharges that we're seeing across the industry. Can you speak a little bit to your inventory shrink performance? And then given the really strong comps you're doing and comping the comp, can you give us some color on incentive compensation and whether or not accrual for that also went up for the year given the strong performance?

Yes. Ken, I'll grab the mic, if you don't mind. So -- so 2 things. I'll start with the gross margin question. No doubt, fuel surcharges were not in our initial guide, certainly an industry issue. We're not alone that caused our change in our outlook for gross margin from an expansion of 100 basis points to our updated guide, and that is entirely due to those fuel surcharges, okay? So we're seeing positive movement as expected from both markdowns and shrink. Those are the tailwinds I spoke about in my script. And then the offset is these fuel surcharges. So shrink is getting better, markdown is getting better because of the investments that we've made, and you've heard us speak about quite a bit in these calls about AI-based allocation systems, AI-based camera systems. Both of those are driving goodness in the gross margin line. But fuel surcharges are real. And as I said, we expect that to continue for the balance of the year, and it's all incorporated in the guide. And then your second question, Jeremy, I'm sorry.

On incentive comp, given the strong comp performance and profitability?

Yes, we did something a little bit different this year, and we adjusted the incentive comp accrual in quarter 1. You'll recall last year, we were chasing quite a bit throughout the year, and it caused catch-up accrual adjustments. So we decided we were going to take a hard look at it in the first quarter, which is much earlier than usual. So yes, we did adjust up the incentive comp accrual. We were at 100% when we started the year. Right now, we're at about 12% not mad about that, and I'm sure the whole team is pretty happy about that, too.

There are no further questions at this time. I would like to turn the floor back over to Ken for closing remarks.

All right. Well, thank you again, everyone, for joining us for our call. We appreciate your continued support of our brand. Look forward to talking to you next quarter. Thank you.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Greetings. Welcome to Citi Trends Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll hand the conference over to Nitza McKee, Senior Associate at ICR. Thank you, Nitza. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends Fourth Quarter and Full Year 2025 Earnings Call.

On our call today is 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's available on the company's website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks made today during this call may contain 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 within 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 statements.

I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken?

Thank you, Nitza. Well, good morning, everyone, and thank you today for joining us today on our fourth quarter and full year fiscal 2025 earnings call.

I'm proud to report that our fourth quarter performance caps an exceptional year of transformation at Citi Trends. The progress we delivered in 2025 really reflects the disciplined execution across the organization and a renewed focus on serving our customer with style, value and authenticity. Our team has worked incredibly hard this year to strengthen the foundation of this business. As a result, we're entering 2026 with growing momentum, a clear strategic direction and increased confidence in our long-term growth trajectory.

Let me begin first with our fourth quarter results. So the Citi Trends delivered an 8.9% comparable store sales growth in Q4, representing a 15.3% growth on a 2-year basis and marking our sixth consecutive quarter of positive comparable sales. And in the quarter, I'm also pleased to report that we achieved EBITDA of $11.9 million which is a 67% increase over Q4 of the prior year. What's particularly encouraging about our fourth quarter performance is the broad-based nature of the growth.

We saw strength across all store volume tiers, all geographic regions in both apparel and our non-apparel categories. Customer traffic drove the majority of our growth. Transaction counts grew mid- to upper single digits during the quarter, and we also saw continued improvement in our basket size, demonstrating that our merchandising strategy is resonating. More customers visit our stores and once inside, they continue to respond to our improved merchandise assortment and our value proposition. Our customers are telling us when we deliver compelling product at great value, they show up and they purchase.

Encouragingly, that momentum has continued into fiscal 2026. The quarter-to-date, Q1 comparable store sales are trending in the high single digits, supported by increased traffic and basket size during this important tax refund season. In Q4, Children's once again delivered an outstanding quarter, posting high single-digit growth and extending consistency and momentum for the year. This business has become a cornerstone of our company and is a model of disciplined execution. The team continues to deliver highly desired styles, consistent value and improved in-stock positions.

As we refine our merchandising strategies and Children's, the category continues to strengthen and remains one of our most reliable traffic drivers. Men's also posted another solid quarter of growth. Our updated strategy balances trend forward product for younger customers, while serving the sound preferences of our core male customer, good values and also improved in-stocks. The results validate that a balanced approach, and we believe there is a significant runway for continued growth in our Men's category.

Women's footwear continued to show early signs of progress. The off-price and extreme value strategy is beginning to gain traction in our shoe area, and we're seeing improved customer response. We're also pleased with the progress across the board, and we believe that the modern footwear category represents significant growth potential going forward. Family basics and sleepwear was one of our top growth areas in the quarter.

Our merchants introduced better styling and trend to complement the already strong values. The combination of trend relevant styles and improved inventory position generated a strong top line sales performance and help drive both traffic and conversion. And from a marketing brand perspective this year, this holiday season, we marked an important moment for Citi Trends with the launch of our Joy Looks Good on You campaign and refreshed social media presence under the @wearecititrends. The results really exceeded our expectations. Our flagship Joy video generating over 55 million views and engagements demonstrating the power of authentic storytelling that reflects the communities we serve. Maybe you haven't seen it yet, I really kind of encourage you to get to cititrends.com by the original video and original content celebrate real moments of joy across the Black community.

This campaign represents more than marketing. It brings to life our brand promise, which is styles that see you, prices that amaze you and trends that tell your story. Going forward, the customer brand promise guides everything we do as we continue to strengthen our relationship with the communities we proudly serve.

Now let's turn our attention to the full year 2025 results. In '25, we executed against our 3-phase strategy framework, repair, execute and optimize. Our first priority was the repair phase, which is restoring the fundamental and foundational business disciplines required to run a successful retail company. I'm very pleased with the work our team accomplished to strengthen our foundation, sharpen our merchandise strategy and improve the operational disciplines required to support long-term profitable growth.

For the year, comparable store sales increased 9.7%. The two-year comparable growth was 13.1%, and net sales reached a total of $820 million. In addition, we achieved more than 200 basis points of gross margin improvement 120 basis points of SG&A leverage and EBITDA growth of $26 million on a year-over-year basis to $11.8 million. Our EBITDA growth was achieved while also funding an above-target annual bonus for our team for the first time in several years.

These results represent a significant achievement in a relatively short period of time and reflect the early success of our transformation strategy. Our fiscal 2025 growth was really driven by 4 factors, a sharper focus on core Black customer, stronger merchandising assortments, better value communication and a more engaging in-store experience.

As I've shared previously, our rapid turnaround is enabled by Citi Trends' clear points of differentiation. First, our laser focus on serving Black customers, a customer segment that we understand deeply. Second, a strategic advantage of neighborhood-based locations that put us in the heart of the communities we serve. Citi Trends holds a unique position as the only off-price retailer dedicated to Black consumers and its cultural relevance is a significant competitive advantage.

Black customers are trendsetters. They're early adopters of fashion, which enables us to curate assortments with immediate authentic appeal. Our connection to this customer has been strengthened through the comprehensive consumer insight study we conducted, combined with the expertise of our trend director who identifies and translates current and relevant trends into actionable merchandising strategies.

This dual approach allows us to not only reflect our customers' style preferences with greater precision, but also anticipate emerging trends before they hit the mainstream of popularity. This work is a key reason that we generated consistent comp store increases for the past 19 months. Transaction counts grew mid- to upper single digits year-over-year every quarter in fiscal 2025, while basket size expanded throughout the year.

We're attracting more customers and they're spending more per visitor, powerful evidence that our updated product assortment strategy is resonating. Our customers are discerning shoppers who recognize that true value extends beyond price alone. When we deliver on-trend fashion, the right style and quality merchandise, they're willing to invest more, and this on-site guides our merchandising strategy.

But beyond merchandising, we've also made some major strides operationally in '25. And we leveraged SG&A by 120 basis points through foundational business practices that drove better execution. The inventory management reached new levels of efficiency this quarter. We supported comp store sales growth with less average store inventory than last year, which is a testament to our improved buying processes, supply chain improvements and smarter allocation.

This efficiency creates a powerful flywheel effect optimizing working capital, greater flexibility to respond to emerging trends and protecting our gross margins. Speed improvements in our supply chain allowed us to maintain optimal in-store inventory while reducing overall inventory levels. Enhanced work processes, productivity standards and day-to-day management enable us to significantly reduce the in-process inventory.

In late second half of this year, we implemented the AI-based allocation system across all of our merchandising categories. The results have exceeded our expectations. We're now deploying AI-based planning systems to streamline sales and inventory planning for our merchant teams and further enhancing their effectiveness. Throughout 2025, we fundamentally transformed how we operate, we now run the business through standardized KPIs, real-time dashboards, structured business reviews and performance-linked incentives.

As I often say, retail is detailed and execution without management is just guesswork. So our KPI data-driven approach provides visibilities that keeps team aligned and drives continuous improvement, which is the cornerstone of our execution strategy. In 2025, we also executed a strategic expansion and modernization program that positions us well for accelerated store growth. Our stores are embedded in communities where we built trust over the many, many years. The combination of the convenient proximity and strong word-of-mouth recommendations creates powerful and sustainable traffic drivers.

We opened 3 new locations and remodeled 62 stores in 2025, bringing approximately 30% of our fleet to an updated format. These refreshed stores inspire our teams elevate brand perception and signal our commitment to investing in model neighborhoods. Our late fall openings in Jacksonville, Florida; Columbia, South Carolina and Bainbridge, Georgia exemplified our pilot market backfill approach, strategically opening new stores while simultaneously remodeling existing locations to capture greater market share.

We remodeled 9 additional stores across these markets, 5 in Colombia and 4 in Jacksonville and amplified our presence through local marketing initiatives, including branded city bus wraps. After a full holiday season, these new locations have performed well above our expectations, validating that our data driven site selection methodology and giving us confidence to scale and accelerate our store growth.

Before I turn the call over to Heather for a little bit more information on 2025, I do want to take a moment to recognize the Citi Trends team. A turnaround of this nature is just hard work. There's a lot of speed and a lot of dedication that's required there. So I'm really proud of our team to a person that's highly engaged, very focused on our customer and focused on building a better and more profitable company. I simply want to say thank you to everybody for all the long hours, the consistent energy, the unwavering dedication and the commitment to continuous improvement.

I'll now turn the call over to Heather to review Q4 F'25 business results in more detail. And then I'll return to talk more about 2026 outlook. Heather?

Thank you, Ken, and good morning, everyone. I'm excited to walk you through our financial results for the fourth quarter and for fiscal 2025, a highly transformational year for Citi Trends. We've accomplished a lot in a short period of time, but as Ken say, we're just getting started.

Our momentum will continue through 2026, and the guidance I'll share with you shortly will demonstrate that our objective of increasing shareholder return remains at the core of our transformation. Our performance in the fourth quarter demonstrates significant progress in our business transformation. We achieved robust top and bottom line results with comparable store sales increasing 8.9% and adjusted EBITDA of $11.9 million, both at the high end of our guidance range, confirming that our turnaround strategies continue to gain traction.

Total sales for the fourth quarter increased 9.1% compared to Q4 2024 to $230.4 million. Comparable store sales increased 8.9%, with about 2/3 of comp sales growth from increased transactions and the remaining 1/3 from a higher average basket. On a 2-year stack basis, comps increased 15.3%. As Ken said, this marks our sixth consecutive quarter of positive comp growth. Gross margin increased 20 basis points versus last year to 39.9%, driven by lower markdowns, reflecting the impact of our improved merchandise assortment and value proposition, upgraded allocation process and our inventory efficiency efforts.

While we're pleased with our gross margin rate, it did fall a bit short of our expectations for the quarter due to slightly higher-than-expected freight expense and slightly higher markdowns to ensure we exited the quarter clean. Fourth quarter adjusted SG&A expenses totaled $80 million compared to $76.7 million a year ago. The increase to last year is due to increased store and DC expenses to support higher sales and $1.8 million of incremental incentive compensation expense. SG&A was lower than expected in the quarter due to store and DC closures during January's winter storms and a true-up of our year-end bonus accrual on actual KPI results. Adjusted SG&A as a percent of sales was 34.7%, leveraging 160 basis points versus last year. Adjusted EBITDA grew $4.8 million over last year to $11.9 million with adjusted EBITDA margin, EBITDA as a rate of sales, up 180 basis points to 5.2%. And during the quarter, we closed 3 stores.

During our full year fiscal -- I'm sorry, turning to our full year fiscal 2025 results. Total sales for the year increased 8.9% over last year to $820 million. Comparable store sales increased 9.7%, 13.1% on a 2-year basis. Consistent with each quarter of the year, full year comps were driven mostly by increased transactions with increased average basket contributing the balance.

Gross margin expanded 210 basis points to 39.6%, driven by fewer markdowns and lower shrink as we anniversaried last year's strategic inventory reset as well as a reduction in freight expense rate versus last year. Adjusted SG&A expenses were $312.8 million compared to $296.3 million in 2024. The dollar increase to last year includes $9.7 million of incremental bonus and equity expense plus added store and DC expenses to support $67 million of incremental sales.

As a percent of sales, adjusted SG&A rate leveraged 120 basis points versus last year. Adjusted EBITDA for the year grew to $11.8 million, a $26 million increase compared to a year ago. EBITDA margin grew 330 basis points, driven by gross profit expansion and SG&A leverage. During the year, we opened 3 new stores, remodeled 62 locations and closed 4 stores, ending the year with 590 stores.

Now turning to the balance sheet. We are pleased with our inventory position, ending year with total inventory down 7.4% compared to a year ago. We remain focused on improving our inventory efficiency through faster turns and enhanced supply chain speed and because of these ongoing initiatives, year-end average in-store inventory declined 2% versus last year. Our balance sheet remains healthy with $66 million of cash at the end of the year, no debt and no drawings on our $75 million revolver. This financial strength gives us the flexibility to invest in growth while providing operational stability as we execute our transformation.

Now turning to our outlook for fiscal 2026. As Ken mentioned, one of the areas of focus in the new fiscal year is consistent execution of our model. By delivering on our execution priorities, we expect to produce strong sales flow through to profit in 2026. Before I get to the details of our outlook, let me spend a moment on a change we are making to 2 non-GAAP metrics.

Beginning in fiscal 2026 we will be excluding equity-based compensation from adjusted SG&A and adjusted EBITDA. Equity-based compensation is a noncash expense, and we believe its inclusion will increase clarity for -- its exclusion, excuse me, will increase clarity for our investors about our operating results. While providing greater transparency on cash generation from operations.

To help with modeling, fiscal 2025 equity-based compensation expense by quarter was $1 million in Q1, $1.5 million in each of the second and third quarters and $1.4 million in Q4, totaling $5.4 million for fiscal 2025. In fiscal 2026 the expense is estimated to be in the range of $5.5 million to $6 million. The outlook, I'm about to walk through for these 2 non-GAAP metrics, adjusted SG&A and adjusted EBITDA reflect this change for both 2026 and the prior year period.

With that, in fiscal 2026, we are planning total sales growth of 6% to 8% with comparable store sales growth of 5% to 7%. And gross margin expansion of approximately 100 basis points, driven by continued improvement in markdowns from our ongoing inventory efficiency efforts and leverage of our new merch planning and merch allocation systems, lower shrink as we continue to leverage new camera systems and lower freight rate from planned supply chain enhancements.

Adjusted SG&A leverage of 70 to 100 basis points versus the adjusted rate of 37.5% in fiscal 2025 due to ongoing disciplined expense control, enabling us to leverage our highly fixed cost base and sales increase. Adjusted EBITDA to be in the range of $34 million to $38 million compared to $17.2 million in fiscal 2025, and with an increase in adjusted EBITDA margin of approximately 200 basis points from the 2.1% delivered in 2025.

For the year, we plan to open approximately 25 new stores utilizing the data-driven site selection methodology we developed in fiscal 2025. These stores will be a mix of existing and new markets. We are anticipating 4 store closures in the year, and we will continue our remodeling program, updating 50 locations bringing the percent of fleet in an updated store format to approximately 42% by year-end.

Finally, full year capital expenditures are expected to be in the range of $35 million to $40 million with the majority of spend on new stores and remodels. In closing, we are proud of the significant progress we made in 2025, which has fundamentally transformed our business. We successfully executed on our key strategic priorities strengthened our operational foundation and delivered solid results. We are well positioned to capitalize on the strong foundation to build momentum throughout 2026, focusing on consistent execution driving operational improvement and investing in the initiatives that will fuel sustainable profitable growth.

We remain confident in our ability to deliver our long-term financial targets and firmly believe that the work we're doing today positions us to achieve those objectives while creating meaningful value for our shareholders. Ken said it really well, but I just want to add my thanks to our dedicated teams across Citi Trends, whose unwavering commitment continues to drive our success. Their talent, resilience and focus on delivering results have been instrumental in our transformation journey.

With that, I'll hand the call back over to Ken. Ken?

Thank you, Heather. Now let me turn to our business initiatives for fiscal 2026. As we enter '26, we're firmly in the execute phase of our growth plan, focused on delivering the customer brand promise. Our brand promise is clear, styles that see you, prices that amaze you and trends that tell your story. So every one of our internal team members is acutely focused on bringing the brand promise to life for every customer, every store, every day. And in support, we've developed 3 priorities for 2026, which are consistent execution, sales flow-through to profit and accelerated growth.

So first is consistent execution. With established practices now in place, we have identified several very specific product opportunities to continue our comparable store sales growth. A key focus for 2026 will be repositioning our Women's business to fully capture the style, trend and sizing opportunities we see in the market. We're updating our product offerings across juniors, plus and missy categories to ensure the trend right merchandise is front and center for our female customers. This represents a significant opportunity to drive traffic and sales growth.

Throughout '26, we will remain focused -- we will maintain our disciplined focus on improved style, trend and value across all product categories. The success we've seen in Children and Men's demonstrate what's possible when we execute consistently, and we're applying those learnings company-wide. Our creative director has significantly improved our focus on key trends in the market and is working with our buyers to curate a refined assortment of styles from opening price points to premium branded fashion, our merchant team translates these trends into compelling styles that deliver exceptional value to our customers. We have opportunity to grow our off-price buying strategy to ensure continuous flow of exciting brands and products at incredible value.

The off-price market remains robust, giving us the advantage of being highly selective. This is core to our competitive advantage and customer value proposition. Off-price buys fueled growth in family footwear, and we see a path of continued improvement in shoes and throughout the store. We remain excited about our extreme value initiative featuring compelling brands at discounts of up to 75% off MSRP, which is driving increases also in traffic and basket size while protecting margins.

We've completed several exciting deals so far this year, and we're excited to get the product -- we're excited about getting the product into our stores here really soon to add excitement to the treasure hunt and shopping experience. Building on our strong marketing campaign efforts from holiday, in 2026, we will consistently execute marketing throughout the year. Our plans include expanding our social media engagement and influencer partnerships to maintain strong brand awareness, developing community-focused initiatives throughout the year that create meaningful connections with customers, whose stories were honored to help tell continuing to invest in marketing that authentically represents and celebrates our core customer.

This isn't just about visibility. It's about deepening relationships and reinforcing Citi Trends as an essential retail partner for the communities that we proudly serve. Our next priority is generating strong sales flow to profit. Which means incremental sales must convert to disproportionate profit growth. Our plan this year calls for top line growth in the mid- to high single digits, while more than doubling our adjusted EBITDA performance.

No question that 2026 will be a pivotal year in the profile for our company. We have several tested and validated initiatives underway to help us deliver exceptional profit growth. And then more important than our recently implemented AI-based product allocation system. More accurate store-by-store product allocation is not only improving sales, but we're seeing significant reduction in markdowns and reduction of inventory working capital. In addition, by the end of Q2, we'll have advanced AI-based facial recognition security cameras in place in our stores. Our test this past fall indicated a significant change in [ test ] and accountability.

In conjunction, we're updating store product scanners and communication equipment to help improve work productivity and increase customer service in our stores. The supply chain is focused on transportation cost efficiency and is in the process of implementing improved best practice standards to help increase the capacity for product growth while working more efficiently. And as I mentioned, we now have KPIs for each of our functions and dashboard reporting to ensure we execute as planned. Our third priority is growth. Our growth will be disciplined. Return focused and strategic.

Our plan is backed by the tangible, actionable initiative that will generate over $50 million of EBITDA by the end of 2027. In '26, we will remodel 50 stores, opened approximately 25 new stores and prepared to open 40 new stores in 2027. Our new store expansion is guided by a disciplined approach that combines analytics, market expertise and financial metrics. Using AI tools, we have analyzed 3 years of actual transaction data from every store, combined with comprehensive geolocation studies to understand the specific customer and market characteristics that drive success.

This data-driven approach has demonstrated approximately 90% accuracy in the sales prediction. This is going to help us identify and replicate our most successful store profiles while minimizing risk as we expand our footprint. Beyond the analytics, we're applying strict financial criteria to every new store and decision, targeting mature store averages of approximately $1.5 million in sales, mid-teens 4-wall contribution margins. This 3-part approach, advanced AI-driven analytics and local market expertise from our real estate team and disciplined financial hurdles positions us to expand intelligently while maximizing returns on investments.

Next, one of our growth priorities is ensuring our entire team has embraced the concepts of personal accountability for results and the ownership of continuous self-development. Citi Trends is evolving into a learning organization which is a company that facilitates the continuous learning and development of all employees to transform itself, adapt to changes and improved performance, positioning us to maximize growth opportunities as they arise. And speaking of growth opportunities, our strong debt-free balance sheet has enabled us to explore growth beyond the 3-year plan.

We're in early stages of reviewing synergistic acquisition opportunities that are complementary to our strategic plan. So in closing, progress at Citi Trends is well underway. Our track record of consistent comparable store sales increases shows our strategy is working. Our execution is more consistent and our customer connection is stronger than ever. We're debt-free, disciplined and positioned for growth. We have a clear path to profitable expansion, stronger earnings and lasting shareholder value.

We are clearly focused on our customer. The foundation is stronger and the opportunity ahead is significant but we still have processes to refine, categories to optimize and systems to build. We're more than just a retailer, we're a neighborhood destination for like families delivering style, trend, value and trust that no one else can deliver. Citi Trends is executing with discipline, growing with purpose and unlocking sustainable growth and shareholder value. I'm confident in our strategy and our team's ability to execute. The foundation we built positions us well for continued growth in 2026 and well beyond.

Thank you for your time. I'll turn it over to Rob now to facilitate questions and answers. Rob?

[Operator Instructions] And our first question is from the line of Michael Baker with D.A. Davidson.

I'll run through a couple real quick. First, just weather/cadence looks like maybe a little bit of a slowdown in January, but a better February. So A lot of retailers saw weather issues in January. Can you talk about that? And then I presume February was helped by tax refunds? That's the first question.

Secondly, if you could talk about closeout percent of sales where you are in that, how much that can grow? And then third, if you could touch on the -- the last thing you said there, the synergistic acquisitions, a little bit more detail on exactly what that could be? Is that a real estate play? Is that a different concept, if you could help us there?

Thanks, Mike. Yes, in terms of weather, a couple of comments on that. As we all know, the January weather got a little bit tougher towards the tail end. And we track, obviously, an impact that last 10 days or so that probably impacted our comp line a little bit more.

It's a little bit offset by -- we should be honest about that and say that we did have a bit of an advantage in early January of a noncomparable weather event for the prior year, right? So there's a little bit of an offset there. But there was a bit of an impact there. I believe at one point, I may be wrong on this, Heather, or correct me, but I think we had nearly half of our stores closed for multiple days. So all of that was really kind of it. But interestingly enough, beyond the snow, the trends picked right back up immediately. And as you point out, February and early March have been running through our past trends.

Anything you'd add there, Heather...

No...

I think the next question is on closeouts. We are -- closeouts actually the answer to that is a little complicated to give you because it varies a little bit by category. As I called out on our call today,our shoe team has actually had a pretty high penetration of closeout. So they're continuing to kind of work deals and finding some pretty exceptional deals out there.

And it's actually one of the reasons that business is really starting to turn around quite nicely. So it's a high penetration in shoes and a little less penetration that we're seeing in -- like our Men's category has been moving out of closeouts, and we had a really good Q4. But part of their Q4 success actually was driven by closeouts. So from a percentage point of view, it actually depends on the category itself, very specifically.

My point that I'm making is that is the deal market is really robust out there right now. And as we're learning how to manage these deals running through the DCs and be more efficient there and be a little bit more expedient around even the deal-making process. We see a real path here to adding -- this is a complementary additive thing. So you've heard me say in the past, I think the extreme values can grow to about 10% over time, we're less than halfway there. And in closeouts is about overall 30% of our mix, and we're not quite there either. So these items -- these are 2 big items of growth for next year that will keep our comps moving in addition to the discipline that I referred to.

And I think your last question there was around acquisitions. Obviously, as I mentioned, it's completely early stages. We are just really literally at a point where we're starting to get a banking team aboard. They're kind of surveying the landscape for us kind of considering options. And there's a question about as we go forward, we see a path that because we're doing so well, and we have such a great marketplace cornered here that we're being pretty selective about items that might help us accelerate our growth.

And I want to be really clear about that. This is not an idea of just going in and doing a bunch of acquisitions, not even interested in that. What I'm interested in is what can we do to complement our overall success. So I got to get -- I don't mean to be sidestepping your question. I really don't have a clear answer for you yet. We literally are in early stages. I hope that by summer time, I think going to come back with a little bit more color for you and can you give you a little bit more. But just appreciate we broadened our lands now, and we are thinking about that mix phase of growth for Citi Trends beyond our LRP.

Mike, the only thing I would add is that the reason that we've added it to the script and start talking about it is just in keeping with our goal of always being very transparent with our investors about what what's on our mind and what's the longer term for Citi Trends.

So we are keeping our focus on the stated goal of EBITDA growth of $60 million versus 2024. But oh, by the way, what's around the corner. So it's a testament to what Ken talks about as bifocal vision, right? We're looking at what's in front of us and then what's longer term. So just wanted to call that out.

Our next question is from the line of Jeremy Hamblin with Craig-Hallum.

This is Will on for Jeremy. I just wanted to start going back to the comp trends here in Q1, off to an impressive start and lapping the plus 10% from last year. I guess could you give us any color on how the rest of the quarter shapes up in terms of the April lap from last year?

Yes, for sure. As I mentioned in the script, we're kind of anticipating high single digits at this stage. The April -- this year, as you would understand, March, April are a little tricky. There's a little bit of a calendar shift of Easter coming out of April and so forth.

And so we're looking at it really on a combined quarter plus the addition of tax refunds on that. There's a lot of moving parts in Q1 this year, and that's why we're pretty confident in our guide and they're trend right now upper single digit. And that's -- as you point out, thank you for mentioning that, it is on top of our 10% last year. So it's a really nice 2-year stack trend.

Okay. Got it. And then it sounds like unit growth plan remains on track. I guess just wondering what you're thinking on expected cadence for the 25 openings this year and then maybe any color on kind of your visibility into the 40 openings expected for next year and how that pipeline is shaping up?

Yes. I'll take 2026, and I'll turn that back to Ken for the longer term. We've actually already opened 2 stores in February. So our goal to get to 25 stores this year is well underway. We anticipate about 10 more stores opening in the July time frame and then the balance opening 13 opening in October. So still this year, we'll consider 2026 as a bit of a transition year to what I will ask Ken to describe for the 2027 cadence.

Yes. And we'll just kind of going forward strategically, what we're going to be doing is grouping all of our store openings around 3 time periods throughout the year. And so it will be fairly easy for you to model as we go forward. We'll be opening up a block of stores in the spring period, typically around the first part of March.

That leads us into the tax refund time and into Easter. Then the other opening period will be middle of July. That's prepping that block of stores to move right into the back-to-school period and be right into peak. And then the third opening period will be mid-October, obviously, to get ready for holiday and to open up into peak and you can kind of see the right reason here is that we are strategically opening up the stores going into a peak period.

That allows us to have some of our best product out there, of course. Also the customer reason to shop is stronger. And I believe over time, it will help us really introduce our stores very successfully to a new marketplace. So we don't have any exact cadence worked out for 2027 yet. But in my mind, I think you could literally divide that by 3 and get pretty close. We're trying to have a balanced attack. And you won't be far off of how we're thinking about it, if you just take the 40 divided by 3 in those time periods, I mentioned.

Got it. That's super helpful. And then just last one for me. I'm just wondering if you could share any update on the rollout of loyalty program and maybe some of the ways you're planning to leverage that program in the near and longer term?

Yes. No, thanks for asking. We're very excited about the loyalty program. It's actually out and in testing right now. We have it in a few stores what we're learning there, and we ran into a couple of hiccups, actually, to be honest with you, we're not really excited about some of the messaging and some of the marketing that's going to it.

And I think it's mostly because we've been so busy doing some things we just didn't give that the right energy. So I put that on pause for just a little bit. We want to get the messaging and the marketing correct and make sure that our consumer reason to shop is very strong. We have to build a great value proposition around CRM. There's no question, this will be a panacea of success for us. I've seen it in the past, and we're already seeing that there's high engagement in this program.

So -- but I want to be careful. I just don't want to do it because we're doing it. I want to do it really, really well. So our teams right now are working on that. And I do expect that in the back half of the year, we'll be in a full-blown rollout of CRM. And of course, all the wonderful data that flows from those type of programs.

At this time, I'll turn the floor back over to Ken Seipel for closing comments.

All right. Well, thank you, everyone. We appreciate you joining us today, and we look forward to giving you an update here in June. Take care now.

Thank you. Ladies and gentlemen, thank you for your participation. This will conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.

Good morning, everybody. I'm Jay Sole, UBS' Retailing Department Services and Specialty Softlines Analyst, and welcome again to the UBS 2026 Global Consumer and Retail Conference.

We are super pleased in our us today. Ken Seipel, CEO of the company is here; Heather Plutino right here as CFO of the company; and Ken's going to go through a presentation today and talk to us about the company. And so without any further ado, Ken, please take it away.

Thank you, Jay. I appreciate it. Good morning, everybody. How's everybody today? I appreciate -- I'm going to probably just do this a little bit more informally here, if that's okay. And I think you can hear me fine. I've got a few notes on my laptop, and we're doing a presentation today because I know some of you maybe aren't familiar with our brands. So I'm going to kind of walk you through our brand just a little bit, talk about where we are. And then certainly at the end, we'll have plenty of time. So if you have any questions or anything, Heather and I will be up front here. We're more than happy to engage with you in question. So I want to do that.

So anyway, thanks for joining us today. And as I just mentioned, Heather Plutino is our Chief Financial Officer. She's joining me today for the presentation, and we really appreciate all of your interest in CITIRENDS. Obviously, before I get started here, I want to remind you the forward-looking statement. I think you all know that. So I won't get into the details there, but I just appreciate that does guide our presentation today. So a little bit about me and a little bit about the history of the business next. So since I took the helm, about almost 2 years ago now, at CITIRENDS, we've been able to deliver industry-leading comp sales. Which we're excited about.

This is driven largely by transaction increases, our broad-based product strength and disciplined execution across our business. So far, our transformation strategy is gaining some momentum. Our capabilities are building and advancing and our customer connection is getting much stronger. But really, we're still in the early stages here. We're not done. We have a lot to do, processes to refine categories to optimize systems to build. So today, I'm going to kind of walk you through where we are and outline, if you will, the path forward, where we have a really clear focus on a disciplined growth plan to deliver sustainable value creation over time for our shareholders.

So over the past 40 years, my career has been kind of dedicated to value retailing. C-level jobs back in the early days. JCPenney, I was a buyer, started there and kind of grew up in those days in the '80s. All of the '90s with Target kind of get involved in their brand development and brand explosion and the development of that brand in those periods. 2000s, almost all of that was with Old Navy, very specifically involved with the growth and maturation of that particular brand over time. And then since about 2010, though, I stepped away from some of the bigger companies and wanted to get into private equity.

A little bit of an entrepreneurial side. I mean I wanted to really kind of realize. And since I've been in private equity-backed retail, I served as both the CEO and co-investor and almost every adventure that I've been in. And I've kind of found that, that ownership structure has really kind of enabled me really successful lead three, and I dare say we're working on #4 successful turnarounds. We've delivered returns anywhere from 3x to 6x initial investment. And so I bring that same commitment today to CITIRENDS. And I just want to let you know that so far, since I've taken the chair, we've more than doubled our market cap, and we see a path to do that again in the future. There's a lot more on the table here.

A little bit about the company, if you're not familiar with us, we're headquartered in Savannah, Georgia. We do have buying offices here in New York, and we're an off-price retailer. We specialize in family apparel, accessories and home categories. Our annual sales are about $820 million. This is fiscal 2025, and we operate currently 590 stores -- 592 stores in 33 states. And there are about 12,000 square feet boxes overall. We have a strong penetration in the Southeast, and we're strategically positioned in our customers' neighborhoods. I'll speak more about that in a moment, but it's a key point of our business. So we're in the early stages of our transformation, as I mentioned. We've got a clear line of sight to achieve about $45 million of EBITDA in fiscal 2027, which is driven dominantly by consistent comp sales growth, gross margin expansion, operating expense leverage and a strategic new store expansion.

So I'll get into each of these here just a little bit, I wanted to kind of give you the framework. So far, our customers have really kind of quickly responded to the improvements that we've made. We're delivering consistent comp store performance as a result. In early January, we released holiday sales, which were at 9.3%, which is on top of the 7.1% of the prior year. So we've got about a 16.4 2-year stack. Year-to-date through December, and by the way, we haven't released our annual sales yet. That will be next week. Our comp is running about 7.1% increase to last year -- excuse me, $9.8 million. I should have said that for the year, which is a 2-year stack of $13.3 million.

And as you can see here in the graph, we have a very consistent quarter-over-quarter sales performance. Really, it's been 5, it was about to be 6 quarters that we've had very good consistency. So the transformation is guided by a 3 phased framework designed to deliver sustainable profit growth. So in the initial phase there, repair, we focused on restoring fundamental and foundational practices to make sure that we have a really strong foundation for our business. This has kind of included building a sharper, more refined clarity on the Black customer. A 3-tiered product assortment to appeal to these customers at all income levels, style and their trend sensibilities. Implementation of AI both software to -- for product allocation to improve our in-stocks reduced markdowns and faster inventory turns and there are many more practices that we put into place to enable consistency.

In the execute phase, we're focused on implementing our best practices so that this is all areas of the business to improve our productivity. This includes enabling SG&A leverage. And so we're focused on increasing the speed of our supply chain to reduce cost and also leverage our operating cost of working capital. We have also introduced a pay-for-performance program, which helps us kind of make sure that our employee performance is aligned with EBITDA and EBITDA is associated with driving specific KPIs in each area of the business.

As a result, the teams are incented more than ever to drive measurable results and continuous improvement. In addition to our long-term incentive program, it's linked to the EBITDA objectives and further ensuring that our management and shareholders remain aligned. And although we're kind of in the early stages of our progress, we do see significant work ahead, and I look forward to providing a little bit more details here in our annual report coming out next week. So CITIRENDS has built a differentiated competitive position within the high-performing off-price retail sector.

We're the only off-price retailers specifically focused on the black customer, delivering styles, brands and trends at compelling prices that resonate with this really underserved demographic. This focus has created a very uniquely loyal, high-frequency consumer base, it's enabled us to build over 600 locations or nearly 600 locations, I should say, where our customers live and shop. Our stores are embedded in communities that we've been for years. This is proximity and word-of-mouth really are powerful traffic drivers for the business. and we operate a debt-free balance sheet with ample liquidity.

This financial strength gives us the ability to invest in growth initiatives while maintaining our operational stability. And we developed a clear, tangible and internally controllable path to accelerate our shareholder growth. The up-price retail sector has demonstrated consistent strong fundamentals. The off-price model works if you're not familiar, by capitalizing on supply chain inefficiencies and vendor overstocks. Our merchant team source quality products at significant discounts in manufacturers face surplus inventory delivery timing or any other type of disruption. We turned this inventory quickly and frequent product newness and scarcity creates urgency to purchase, which drives higher visit frequency.

Our research has shown that this treasure hunt element really resonates particularly well with our customer, who views shopping both as a practical necessity but also an enjoyable activity. Off-price retailers have historically grown significantly faster than traditional retail. They've generated the highest returns, commands the highest multiples. And we believe that CITIRENDS has a clear path to improve operating margins, and we believe there's an opportunity for the market to assign a multiple to our business commensurate with the off-price sector, which gives us an additional path of growth.

So our product strategy really centers on a 3-tiered approach designed to serve customers across all income levels. At opening price point, we offer value-focused basics clearly signed in store with Citi Score for our most budget conscious customers, excuse me. The core of our business is the better tier. These are quality products with the breadth of selection and fresh styles, typically priced in that $7 to $12 range. This assortment drives customer loyalty, consistent performance across the categories of men's, women's, kids, footwear and our home categories.

And at the very top end, we're expanding our best tier with two distinct approaches. So first, we're adding more trend-relevant product, fashionable styles at prices well below retail in specialty. And second, we're building our extreme value capabilities. These are well-known brands that we go out and purchase at extreme value discounts, often 75% of MSRP. And these deals really capitalize on supply chain disruptions that I mentioned a moment ago. Our goal is to grow this extreme value segment to about 10% of our overall mix. and these branded treasurers drive both traffic and basket growth, while still delivering exceptional gross margin performance.

So our strategy is built around a clear and unwavering focus on style, price and trend's abilities of the black customer. It's really at the center of everything that we do. The average age is around 40 years old, often families with children or multi-general households. Our neighborhood locations create proximity and convenience that drive engagement and more than 1/3 of our customers shop with us weekly or biweekly. These are our most frequent shoppers with household incomes ranging 75 to 150 and account for about 40% of our revenue. Our next tier visits monthly, and these are typical incomes that are about 50 to 75, and this makes up about 50% of our customer base while driving 45% of our revenue. And we serve a third segment, which is a little bit less frequent but more budget conscious customers that have a little lower household income. I really think what's important to understand in all of this is that we're serving customers across all income levels, right?

With our 3-tiered product strategy. We have a significant portion of average and higher income customers of recognizable brands, exceptional prices that align with their style and trend preferences, and our customers have really, really responded positively some of these changes, and we've been excited to see the traffic growth in our business. So cultural relevance is really a competitive advantage of our business.

Flat customers have historically been trendsetters, and early adopters of fashion, music and culture. And understanding this dynamic allows us to curate assortments with both immediate appeal to our core customer and broader market relevance to the secondary customer. Our customers really are discerning. They understand that value is more than price and they're willing to spend more when the style is for them. The fashion is on trend and the quality is right. So in short, value is not just price.

So it really shapes our brand promise, which is styles that so, prices that amaze you and trends that tell your story. This past holiday, you might have seen it out there because it was really widely accepted, but we launched our Joy Looks Good on You marketing campaign. This is where we refreshed our branding and social media and online. Our objective here was to kind of ensure that CITIRENDS is an important part of the black community by connecting with our customers in the terms of their lives. So I'm excited today to share with you the video, and then we'll talk a little bit after that.

[Presentation]

Always enjoy watching that. Kind of gives me a little bit of a lift. And since we've launched this video, it's had over 55 million viral views and engagements online. So first of a series of videos that we released. We have some other segments that we've released as well, and you can see them all at cititrends.com. And we're still seeing some additional leverages from this future advance in our marketing, really good. So prior to the video release for holiday, our growth really has been driven largely by word of mouth, as I mentioned earlier, shopping visits.

Beginning in 2026, though, we're going to be adding external marketing. And during our selling key weeks during -- to increase our brand awareness and drive incremental traffic. So as I noted, we've refreshed our social media efforts as you see here on this slide. We also are using targeted marketing in select markets to drive local awareness. For example, in December, we wrapped brand messages on city buses and added branded moments and bus stops. We had good results, and we look forward to continuing to refine our localized marketing efforts as we go forward.

I think it's important to understand that CITIRENDS locations are really at the heart of their neighborhoods. They're more than just a retail location. They're community anchors. This is where our customers will know they'll find value in product and belonging with friends. Our store managers and associates are often friends and family and neighbors. They grew up together. They've created genuine trust and the connection really extends beyond the transaction in our store.

The community connection is a competitive advantage that drives measurable results. Transaction growth has consistently accounted for the majority of our comp sales increases over the past 6 quarters. Word-of-mouth remains a powerful traffic driver in our community, and this is fueled by relationships our teams have built over the many, many years in these communities. Our neighborhood positioning also creates a defensible market position. Stores have been embedded in these communities for years. And in many of these communities, we are the primary and often the only value retailer, making us both essential and irreplaceable to the families that we serve.

So in fiscal 2025, we refreshed 62 of our high-volume stores, averaging about $2 million in annual sales. This is a remodel cost was about $100,000 per store. So the remodels transform the look and the feel of our stores, updated fixtures. We've improved the signing. We've added better lighting, enhanced the presentation standards that really just make it a much more enjoyable and easier experience for the consumer. The impact though goes well beyond the sales lift. These refreshed stores really inspire our teams, they elevate the brand and the community, and they send a really strong signal to the customer that we're investing in their neighborhood.

So looking ahead, we'll continue remodeling about 50 stores per year as part of our ongoing fleet maintenance program and the market share investment strategy that we have in place. This disciplined approach allows us to progressively upgrade our fleet and our store base while achieving the planned returns well on our invested capital. So looking forward, we're positioning CITIRENDS for strategic new store growth.

In 2026, we plan to open approximately 25 new stores. And from 2027 onwards, we expect to continue opening about 40 stores per year. taking our store count to about 650 at the end of 2027. Our expansion strategy really focuses on 2 approaches. One is backfilling our existing markets where we have brand awareness and proven performance and selectively entering new markets with strong demographic alignment to our customer base. We've piloted successful market backfill approach this fall in Jacksonville in Jacksonville, Florida and Columbia, South Carolina. We opened two new stores in conjunction with remodeling the existing stores in the market. And our objective here is really to increase market share by strengthening the brand presence and the store presence and reinvigorating brand awareness.

Both markets are off to a great start, and they're serving as good testing and learning grounds for us for our future expansion plans. So our new store expansion is guided by a disciplined approach of analytics, market expertise and financial metrics. So using AI tools, we've analyzed about 3 years of actual transaction data from every single store location combined with comprehensive geo location studies, to understand the specific customer and the market characteristics that drive success. So this AI-driven data approach has demonstrated approximately a 90% accuracy in sales prediction. This will help us identify and replicate our most successful stores and profile while minimizing the risk that we have with expanding our footprint.

But beyond analytics, we're applying strict financial criteria to every store. Targeting mature store averages of around $1.5 million in sales and about mid-teens in our 4-wall contribution. This 3-part approach of AI-driven analytics, local market expertise, and disciplined financial hurdles, positions us -- okay, positions us to expand intelligently while minimizing the returns on our investments. Our balance sheet provides significant strategic flexibility. As I mentioned, we have a debt-free facility with ample liquidity. This financial position allows us to invest in growth opportunities while maintaining operational stability.

Over the past 3 years, we've invested in capital projects with demonstrated return on investment, primarily new store remodels or openings, technology infrastructure and AI-based system. The total capital spend is expected was $23 million in 2025 and is expected to be $40 million to $45 million as we get forward in '26 and '27. Our disciplined approach to capital allocation emphasizes investment of operating cash flow to fuel growth while preserving our financial strength. Over time, this strength will enable the company to selectively pursue strategic roll-ups and synergistic acquisitions to further drive enhanced shareholder value.

CITIRENDS has a clear and tangible path to creating shareholder value, one that is grounded in discipline detail and execution. Our strategy is not aspirational, it's actionable. It's backed by a very measurable set of initiatives that are designed to deliver results. Compared to fiscal 2024, we are targeting total store sales growth of about $150 million, achieving $900 million or more in sales in fiscal 2027. Our gross profit expansion rate is 400 basis points. It takes us up to 42% and SG&A leverage of about 200 basis points, resulting in a planned EBITDA increase of $60 million which is achieving finally a $45 million overall EBITDA profit margin of around about 5% in fiscal 2021.

And I want to emphasize, these really are not distant goals. These are achievable outcomes that are backed by a very specific strategy that we're well underway executing. So, looking ahead, we're expecting consistent store sales growth to be in the range of 6% to 8% annually. This results in sales of well over $900 million, as I mentioned. And at the core of this strategy is the continued refinement and execution of our 3-tiered product assortments that I mentioned earlier and to accelerate our growth in the better-end product. We have added a highly regarded trend director in 2025 to assist our merchants in developing, procuring the emerging trends and really accelerating this exciting part of our business to expand better sales and better product.

Plus, we'll improve store productivity by intensifying our efforts in key categories with double-digit growth like footwear, plus size, big man, young men's and Missy while continuing consistent growth in kids and our family-based the core categories. A lot of opportunity inside the box to really mature and in our company. Incremental to our plan, we build the external internal capacity to fully capitalize on this fast-moving world of deal making. And as I described earlier, extreme value deals are more than just transactions. They do create a lot of excitement in our store. They deepen our price perception. They set us apart as a retailer that bring style brands and prices that others just simply can't deliver.

Our gross profit rate is on track to expand 42% in 2027 and to achieve this growth, we're leveraging technology and innovation. Our newly implemented AI-based planning system, I mentioned earlier, is transforming how we manage inventory. It's improving our inventory efficiency. It's reducing our markdowns and aligning our product assortments with customer demand at individual store level. So this is resulting in fueling growth where the opportunity is the strongest, while minimizing excess inventory in our lower volume locations. Plus in the near future, we're implementing markdown optimization to further optimize our profitability.

Additionally, we see an opportunity to improve margins through reduced shrink and lower freight costs. Think rates are expected to improve as we adopt enhanced practices, including stronger internal data accuracy, new investments in facial recognition camera systems. And on the supply side, we also have ongoing efficiency work in our DCs to improve both our operations there as well as the freight rates of transportation. Our plan will deliver strong profit flow-through as sales growth, fueled by margin rate expansion and disciplined cost controls. We anticipate over 200 basis points of improvement in SG&A, which will create meaningful operating leverage. All of this leads up to a significant step change in EBITDA of about $45 million at the end of 2027.

And importantly, this is just aspiration. This is tangible, detailed road map, but that really does backed by a lot of measurable initiatives. And in the end, it will generate tremendous shareholder value. So the progress I mentioned here at CITIRENDS is well underway. As I noted today, we're in the early stages with significant opportunity to head. We have processes to refine, categories to optimize and systems to build. Our tracker record of consistent comp store sales increases does prove that our strategy is working, our execution is more consistent and our customer connection is stronger than ever. We're debt free, disciplined and positioned for growth. We have a clear path to profitable expansion, stronger earnings and lasting shareholder value.

And we're more than just a simple retailer. We're a neighborhood destination for black families designed and delivering style, trend and value and trust that no one else can deliver. The CITIRENDS is executing the discipline. We're growing with purpose and unlocking sustainable growth minimum. I really do appreciate your time today. The future is ours, and we're just getting started.

So thank you all for joining us today. And again, we'll be available up here for any questions that you might have. Thank you all.

It's 10:00. Let's get it going. I'm Mike Baker, one of the consumer analysts from D.A. Davidson. Very happy to introduce the management team from Citi Trends. We have Ken Seipel, who is the CEO. He's been the CEO on a permanent basis since November 2024, so a little bit more than a year, but been on the Board since 2019. We also have CFO, Heather Plutino, given some hugs down there. She's been with the company since 2022. Prior to that, she was at Bed Bath & Beyond and Sally Beauty.

I think this has been one of the most compelling turnaround stories we have -- we've seen in a long time. I cover 30 consumer names, 3 have outperformed the market in 2024 and 2025. I'll tell you the other two, find me after, I'll tell you the other two, but this is one of the three. And by the way, massively outperforming already this year, even though it's off a couple of percent today, still, so that's going to be 3 years in a row. I'll let Ken tell you why that's happening.

All right. Well, good afternoon, good morning, I should say. I'm Ken Seipel, Chairman and CEO of Citi Trends, and I'm joined with Heather Plutino and -- our Chief Financial Officer; and Lisa Powell, our Chief Merchandising Officer. And today, I'm very pleased to represent the hard work of our talented management team, and I might ask your forgiveness. My voice is a little bit off today. So bear with me as I get through this.

Before I begin, I'm going to remind you, of course, of our forward-looking statement. Dispense with the details here, but just advise you that this does guide our presentation today.

So since I took the helm about 19 months ago, Citi Trends has delivered industry-leading comparable sales growth, driven by transaction increases, broad-based product strength and disciplined execution across our business. Our transformation strategy is gaining momentum. Our operational capabilities are advancing and our customer connection is strengthening, but we're not done. We still have processes to refine, categories to optimize and systems to build.

So today, I'm going to share the progress we've made, and we'll outline our path forward, which is a clear, disciplined growth plan designed to deliver sustainable value creation and strengthen Citi Trends' position as a leading neighborhood retailer for African-American families.

So over the past 40 years, my career has been dedicated to value retailing with C-level leadership roles across merchandising, operations and strategy. I began in the early days at JCPenney as a buyer and operator in the '80s and then help drive Target's big brand development in the '90s and the rapid growth that they went through and was instrumental in Old Navy's explosive expansion in 2000s. Since 2010, I've been focused on private equity-backed retail, where I served as both CEO and co-investor. That ownership structure created strong alignment with shareholders and has enabled me to successfully lead 3 retail turnarounds, each delivering returns of 3 to 6x the initial investment.

I bring that same level of experience to Citi Trends, where I'm the second largest investor in the company. And so far, since taking the chair, we've more than doubled our market cap for Citi Trends, and I see a path to more than double again in the future.

So this morning, we released our holiday comp store sales increase of 9.3%, which is on top of last year's 7.1%, giving us a 2-year stack of 16.4%. Year-to-date through December, our comp store sales increase is running at 9.8%, which is a 2-year stack year-to-date of 13.3%. And as illustrated in the graph here, you can see consistent quarter-over-quarter sales performance for the past 5 and soon to be 6 quarters.

Okay. Now I'd like to describe for you our differentiated business model and the strategies that guide our path forward. So Citi Trends is headquartered in Savannah, Georgia, with buying offices in New York. We're an off-price retailer specializing in family apparel, accessories and home categories, with annual sales of about $820 million in fiscal 2025.

We operate 591 stores across 33 states that are approximately 12,000 square feet in size with strong penetration in the Southeast, and we're strategically positioned in our customers' neighborhoods. So Citi Trends is really in the early stages of a compelling transformation. We have a clear line of sight to achieve about $45 million of EBITDA in 2027, which represents a $60 million increase from 2024. This growth will be driven by consistent comp sales, gross margin expansion, operating expense leverage and strategic new store expansion. I'll describe each of these metrics in detail later in the presentation.

Citi Trends has really built a differentiated competitive position within this high-performing off-price retail sector. We're the only off-price retailer specifically focused on African-American customers, delivering styles, brands and trends at compelling prices that resonate with this underserved demographic.

This focus has created a uniquely loyal, high-frequency customer base and enabled us to build nearly 600 store locations in neighborhood shopping centers where our customers live and shop.

Our stores are embedded in communities that we've served for years with proximity and word of mouth serving as powerful traffic drivers. We operate a debt-free balance sheet. At the end of this year, we expect to have approximately $65 million in cash, no borrowings on our $75 million revolver and approximately $140 million in total liquidity. This financial strength gives us flexibility to invest in growth initiatives while maintaining operational stability. And we have developed a very clear tangible and internally controlled path to accelerate shareholder growth.

A little bit about the off-price model. It's really demonstrated consistent strong fundamentals over time. The off-price model works by capitalizing on supply chain inefficiencies and vendor overstocks. Our merchant team source quality products at significant discounts when manufacturers faced surplus inventory or delivery timing issues. We turn this inventory quickly with frequent product newness and scarcity, which creates an urgency to purchase and drives higher visit frequency.

Our research shows that this treasure hunt element resonates particularly well with our core customer, who views shopping as both a practical necessity, and also an enjoyable activity. Off-price retailers have historically grown significantly faster than traditional retail, generating highest operating margins and commanded the highest multiples. Citi Trends has a very clear path to improved operating margins, and we believe there's an opportunity for the market to assign a multiple to our business commensurate with the off-price sector, which gives us an additional path for shareholder value creation.

Our approach is pretty straightforward. Every day, low pricing on exceptional product values, no promotions or complex markdown cadences and short buying windows give us flexibility to react to emerging trends and changing market conditions. So the Citi Trends' product strategy centers really on a 3-tiered approach designed to serve customers across all income levels.

So at the opening price point, we offer value-focused basics, which are clearly signed in our store as Citi Store for the most budget-conscious customers. The core of our business is our better tier of quality products with breadth of selection and fresh styles, typically priced between $7 and $12. This assortment drives customer loyalty and consistent performance across categories of women's, men's, children's footwear and home. And at the top end, we're expanding our best tier with 2 distinct approaches. So first, we're adding more trend-relevant product, fashionable styles at prices well below specialty retail. And second, we're building our extreme value capabilities, which are well-known brands purchased at steep discounts, often up to 75% of MSRP.

These deals capitalize on supply chain disruptions and the surplus inventory that's in the market. Our goal is to grow this extreme value segment to represent an incremental 10% of our total sales. These branded treasures drive both traffic and basket growth while delivering strong margin performance.

Our strategy is really built around a clear and unwavering focus on style, price and trend sensibilities of the African-American customer, who is at the very center of everything we do. The average age is approximately 40, often families with multigen children or multigenerational households. Our neighborhood locations create proximity and convenience that drive engagement.

More than 1/3 of our customers shop with us weekly or biweekly, and these are our most frequent shoppers with household incomes ranging $75,000 to $150,000. Our next tier visits monthly, typically with incomes in the $50,000 to $75,000 range, and we serve a segment, a third segment, of less frequent, more budget-conscious customers with lower household incomes.

I think what's really important here to understand is that we're serving customers across all income levels with our 3-tiered product strategy. We have a significant portion of average and higher income customers, which creates tremendous opportunity as we expand our assortment of recognizable brands at exceptional prices that are aligned with their style and trend, of course.

Our customers have really responded positively to this shift with many of our new trendy products quickly becoming some of our very best sellers. Citi Trends' cultural relevance is a competitive advantage. The African-American consumer have historically been trendsetters and early adopters in fashion, music and culture. Understanding this dynamic allows us to curate assortments with both immediate appeal to our core customer and broader market relevance to our secondary customers.

Our customers are discerning. They understand that value is more than just price, and they're willing to spend more when the style is right for them, the fashion is on trend and the quality is right. In short, value is not just price.

Our value promise, our brand promise, I should say, is very clear, styles that see you, prices that amaze you and trends that tell your story. So this past holiday, we launched our Joy Looks Good On You, marketing campaign with refreshed branding on social media. Our objective is to ensure that Citi Trends is an important part of the African-American community by connecting with our customers on their terms and their lives. I'm excited to share with you the Joy Looks Good on You video right now.

[Presentation]

Really a lot of fun to watch that video over and over again.

Since we launched this video, we've had over 12 million viral views and actually, I got an update just last night that's even more than that, but it's continuing to go, but you can understand why. It's really kind of hit the heart of our African-American consumer.

This is actually the first of a series of videos that we're releasing, each highlighting moments of joy. And we're leveraging still images further to advance our marketing efforts.

So the Citi Trends' stores are at the heart of their neighborhoods. They're more than just retail locations. They're community anchors where our customers know they'll find both value and belonging. Our store managers and our associates often friends, family and neighbors create genuine trust and connection that extends well beyond the transaction.

This community connection is a competitive advantage that drives measurable results. Transaction growth has consistently accounted for the majority of our comparable sales increases over the past 5 quarters. Word of mouth remains a powerful traffic driver in these neighborhoods, fueled by relationships our teams have built over the years in serving these communities.

Our neighborhood positioning also creates a defensible market position. Our stores have been embedded in these neighborhoods for years. And in many of these communities, we are the primary and often only value retailer, making Citi Trends both essential and irreplaceable for the families we serve.

So this year, we refreshed 62 of our high-volume stores that average around $2 million in annual sales with an average remodel cost of about $100,000. This remodel transforms both the look and feel of our stores with updated fixtures, improved wayfinding, signage of better lighting, enhanced presentation standards, all of this to make the shopping experience easier and more enjoyable.

The impact, though, goes well beyond our sales lift. These refreshed stores also inspire our teams, they elevate the brand perception of the community, and they send a strong signal to the customers that we are investing in their neighborhoods.

So looking ahead, we continue -- we will continue remodeling about 50 stores per year as part of our ongoing fleet maintenance and market investment strategy. This disciplined approach allows us to progressively upgrade our store base while still achieving our planned returns on invested capital.

So looking forward, we're positioning Citi Trends for strategic new store growth. In 2026, we plan to open 25 stores. From 2027 onward, we will continue opening at least 40 stores per year, which will take our store count to approximately 650 stores by the end of 2027.

Our expansion strategy focuses on two approaches: backfilling existing markets where we have brand awareness and proven performance, and also selectively entering new markets where strong demographic alignment to our customer base. We piloted a market backfill approach this past fall in Jacksonville, Florida and Columbia, South Carolina by opening new stores in conjunction with remodeling the existing stores in the market.

Our objective is to increase our market share by strengthening the store presence and reinvigorating the brand awareness. Both markets are off to a really strong start and are beginning to serve as testing and learning models for our future expansion work.

Our new store expansion is guided by a disciplined approach that combines analytics, market expertise and financial metrics. Using AI tools, we have analyzed 3 years of actual transaction data from every single store location, combine this with comprehensive geolocation studies to understand the specific customer and the market characteristics that drive success. This AI data-driven approach has demonstrated approximately a 90% accuracy in sales prediction. So this will help us identify and replicate our most successful store profiles, while keeping our risk minimized as we expand our footprint.

Beyond the analytics, we're applying strict financial criteria for every new store decision. By targeting the mature store averages of about $1.5 million in sales, mid-teens 4-wall contribution margins, this 3-part approach, advanced AI-driven analytics, local market expertise from our real estate team and disciplined financial hurdles positions us to expand intelligently while maximizing our return on investment.

Our balance sheet does provide significant strategic flexibility. As I mentioned, we operate debt-free and are projecting $65 million of cash balance in each of the next 3 years, no borrowings and about $140 million in total liquidity. This financial position allows us to invest in growth initiatives while maintaining our operational stability.

So over the next 3 years, we're going to invest in capital projects with demonstrated return on investments, primarily store remodels, new store openings and technology infrastructure, including our AI-based systems. Total capital spend is expected to be around $45 million in 2026 and 2027.

Our disciplined approach to capital allocation emphasizes return -- reinvestment of operating cash flow to fuel growth while preserving our financial strength. Over time, this strength will enable our company to selectively pursue strategic roll-ups and synergistic acquisitions to further drive sustainable shareholder value. Customers have quickly responded to our improvements, and we are delivering consistent comp store performance as a result.

Through December of this year, comp store sales have increased 9.8%. And as I said in the last earnings call, we expect sales increases to continue on top of prior year strong performance. Our transformation is guided by a 3-phase framework designed to deliver sustainable, profitable growth. So in the repair phase, we focused on restoring fundamental and foundational practices to ensure we have a strong foundation for growth. This included a sharper, more refined clarity of the African-American consumer, a 3-tiered product assortment to appeal to all income levels, style and trend sensibilities, implementation of AI-based software for product's allocation to improve our in-stocks, reduce markdowns and speed up our inventory turns and many more practices that have enabled us to be much more consistent in our execution.

In the execute phase, we are focused on implementing best practices in all areas of the business to improve our productivity, thus enabling SG&A leverage. And we're focused on increasing the speed of our supply chain to reduce cost while working and reduce working capital in the product pipeline.

We've introduced this past year, a pay-for-performance bonus program, which now links bonus eligibility to EBITDA and to KPIs specific for each area of the business. As a result, our teams are incented more than ever to drive measurable results and drive continuous improvement. And in addition, our long-term incentive program is linked to the achievement of EBITDA objectives, further ensuring that management and shareholders are aligned.

Although -- and I would say this, although we're pretty proud of our progress, we have to say that we're in really early stages, and we're humbly aware that we have significant work ahead. So Citi Trends does have a clear and tangible path to creating shareholder value, one that's grounded in discipline, detail and execution. Our strategy is really not aspirational. It is actionable, backed by a specific set of initiatives designed to deliver measurable results.

So compared to fiscal 2024, we're targeting total sales growth of $150 million, which achieving about $900 million in fiscal 2027. Our gross profit rate expansion of about 400 basis points to 42%, leveraging SG&A by 200 basis points, which results in a planned EBITDA of approximately $45 million, and a profit margin of around 5% in fiscal 2027, which is an increase of $60 million over 2024. These are not distant goals, but very achievable outcomes driven by the actions that we are currently executing.

So looking ahead, we're expecting consistent total store sales growth of 6% to 8% annually, resulting in sales of over $900 million in 2027. At the core of this strategy is continued refinement and execution of our 3-tiered product assortments I spoke of earlier. And to accelerate the growth in better trend product, we have added a highly regarded trend director in 2025 to assist our merchants in developing and procuring emerging trends for our customer where we see opportunity to expand sales in our better product.

Plus, we'll improve store productivity by intensifying efforts in key categories with double-digit growth potential in areas such as footwear, plus sizes, big men's, young men's and missy apparel, while continuing consistent growth in children's, family basics and our core categories. And incremental to our plan, we have built the internal capacity to fully capitalize on the fast-moving world of dealmaking. And as described earlier, extreme value deals are more than just transactions. They create excitement, they deepen our price perception, and they set us apart as a retailer who brings style, brands and amazing prices that others just simply cannot deliver.

Our gross profit rate is on track to expand to 42% in 2027. To achieve this growth, we're leveraging technology and innovation. Our newly implemented AI-based planning and allocation system I spoke of earlier will transform how we manage inventory, improving efficiency, reducing markdowns and aligning product assortments with customer demand at the individual store level.

This means fueling growth where opportunity is strongest, while minimizing excess inventory at our lower volume locations. Plus in the near future, we're implementing markdown optimization to further optimize our profitability. Additionally, we see opportunity to improve margin through reduced shrink and lower freight costs. Shrink rates are expected to improve as we adopt enhanced practices, which includes stronger internal data accuracy measures and new investments we've made in facial recognition surveillance systems.

On the supply chain side, our ongoing efficiency work is expected to generate improvements in freight rates. Our plan will deliver strong profit flow-through as sales grow, fueled by margin rate expansion and disciplined cost controls. We anticipate over 200 basis points of improvement in SG&A, which will create meaningful operating leverage. All of this adds up to a significant step change in EBITDA to $45 million by the end of 2027. And importantly, this is an aspiration. It's tangible, detailed roadmap of initiatives prioritized by their ability to generate real shareholder value.

So progress at Citi Trends is underway. As I noted today, we're in the early stages with significant opportunity ahead. We still have processes to refine, categories to optimize and systems to build. Our track record of consistent comparable store sales increases proves that our strategy is working. Our execution is more consistent and our customer connection is stronger than ever. We are debt-free. We are disciplined and positioned for growth. We have a clear path to profitable expansion, stronger earnings and lasting shareholder value.

We're more than just a retailer. We're a neighborhood destination for African-American families, delivering style, trend and value and trust that nobody else can deliver. Citi Trends is executing with discipline, growing with purpose and unlocking sustainable growth momentum. Future is ours at Citi Trends, and we are just getting started. Thank you all very much for your time today.

Greetings, and welcome to the Citi Trends Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Nitza McKee, Senior Associate at ICR. Please go ahead, Nitza.

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' Third Quarter 2025 Earnings Call. On our call today is 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's available on the company's website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks today made during this call may contain 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 within 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 statements.

I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken?

Thank you, Nitza. Well, good morning, everyone, and thank you for joining us today for our third quarter earnings call. I am pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation strategy is gaining significant momentum, our operational capabilities are advancing and our customer connection is strengthening.

As I shared at a recent investor conference, we're in the early stages of what I believe will be a compelling transformation for Citi Trends. We've established a clear line of sight to achieve approximately $45 million of EBITDA in 2027, which represents a $60 million increase from the 2024 levels. The substantial growth trajectory will be driven by our continued focus on consistent comparable store sales performance, gross margin expansion, operating expense leverage and strategic new store expansion.

Today, I'll walk you through the drivers of our third quarter results and provide additional details on how we're executing against this exciting long-range road map.

Turning now to our results. In the third quarter, we delivered comparable store sales growth of 10.8%, which represents a 16.5% growth on a 2-year basis. This marks our fifth consecutive quarter and 15th straight month of strong comp growth with total sales up 10.1% as compared to last year in the quarter. Consistent with our year-to-date performance, the majority of our Q3 sales results were due to increased customer traffic. We began the quarter with a strong back-to-school season, and we finished the quarter with an equally strong late fall fashion and pre-holiday product performance with particular strength in Children's, Men's and basic apparel categories throughout the entire quarter.

Our Q3 performance brings our year-to-date comp to a 10% or plus 12.3% on a 2-year basis. We're seeing positive sales increases across all store volume groups and geographies as well as across all product categories, underscoring the breadth of the top line improvement across the business. Plus, I am pleased to report that our holiday is off to a good start, and our strong 2-year stack sales momentum has accelerated into the fourth quarter where we are poised to generate our sixth consecutive quarter of year-over-year growth.

Gross margin rate in Q3 was consistent with the operating plan expectations and year-to-date 2025 performance. Our merchants have done a nice job of managing product cost while delivering amazing prices in the ever-changing landscape of tariffs. Due to the macro disruptions, the off-price deal flow continues to be robust, which allows us to have confidence in continued margin performance in the foreseeable future.

I should also note that we made a tactical decision to pull forward some of the product originally expected in early Q4 into late Q3, which created a purposeful shift of freight expense from Q4 to Q3 this year. And as noted in our press release, the prior year gross margin rate results in Q3 2024 were artificially high last year due to Q2 strategic inventory reset activity, actions that ultimately jump-started the company's top line turnaround last year.

SG&A leveraged 130 basis points compared to last year, which includes the incremental funding of performance bonus program for our employees this year. We're making good strides in improving execution consistency in all areas of the business, which, in turn, is having a positive impact on expense control. Looking ahead, we're focused on efficient execution to enable us to continue to leverage expenses as we grow the top line. As a result, we achieved better than planned EBITDA in the quarter, giving us confidence in raising our EBITDA guidance for the year.

Now turning to customer dynamics. Our turnaround is rooted in a clear, unwavering focus on the needs of our African-American customer, who is at the center of everything we do. As I mentioned on prior calls, I believe the primary reason for the quick turnaround in our business is our laser focus on the needs of our African-American customer and our highly differentiated competitive advantage of neighborhood-based locations.

Our stores are embedded in communities that we've served for years in proximity combined with word-of-mouth serve as powerful traffic drivers. Citi Trends has built a truly differentiated competitive position in this high-performing off-price retail sector. We're really the only off-price retailer specifically focused on the African-American consumer, delivering styles, brands and trends at compelling prices that resonate with this underserved demographic.

Our cultural relevance is a significant competitive advantage, African-American consumers are trendsetters and early adopters, and understanding this dynamic allows us to carry assortments with immediate appeal to our core customers. We also know that our customers are discerning. They understand that value is not just about price. They're willing to spend more when the style is for them, the fashion is on trend and the quality is right.

Our consistent strong traffic and basket performance in the third quarter provides clear evidence, demonstrating the strength of our uniquely loyal, high-frequency customer base. We continue to strengthen this connection by elevating cultural relevance of our assortments and refreshing the shopping experience to better align with our brand voice. Our brand promise says it all: Styles that see you, prices that amaze you, and trends that tell your story.

This holiday, we are launching and have launched the rebranded Citi Trends "Joy Looks Good on You" holiday campaign with updated social media presence under the @wearecititrends tagline. We've also implemented city bus wraps and shelter marketing in key markets to strengthen our local presence. All of this reflects a more refined, culturally relevant, modern brand voice.

Looking forward to further enhance our customer relationships and drive deeper engagement, we're making strategic investments in our technology infrastructure, including the design and implementation of a new CRM and loyalty platform. This work will deepen our interaction with our most frequent customers and enhance long-term customer value. While we're in the early stages of this initiative, we're excited about the opportunity to create a more meaningful brand interaction with our best and most loyal consumers.

Before diving into this quarter's product performance, let me briefly remind you of our 3-tiered product strategy. What's important to understand is that we're serving customers across all income levels and we have a significant portion of average and higher-income customers, which creates tremendous opportunity for our assortment of recognizable brands at exceptional prices that align with their style and trend preferences.

At the opening price point, we offer value-focused basics through our Citi $core program for budget-conscious customers. The core of our business is our better tier, typically priced between $7 and $12, which offers broad selection of on-trend styles that drive loyalty and consistent performance across Women's, Men's, Kids, footwear and home categories.

At the top end, we're expanding our best tier through 2 distinct approaches. First, trend-relevant fashionable styles priced well below specialty retail; and second, extreme value opportunities featuring well-known brands at steep discounts, often up to 75% off MSRP. We're targeting this extreme value segment to represent an incremental 10% of total sales as these branded treasures drive both traffic and basket growth while delivering strong margins.

With this strategic framework in mind, now let me walk you through our Q3 product performance, which is broad-based and balanced in all categories. Strong results were driven by both apparel and nonapparel categories and all divisions posted increases.

But first, I'd like to congratulate our Children's team on their strong double-digit growth in back-to-school and throughout the quarter. As our Children's team continues to improve style curation and product in-stocks, our customers continue to respond positively. Children's is a cornerstone of our business and a model of consistent execution this year.

Equally, basic product for Kids, Men's and Women's had a strong quarter, driven by better styles and improved inventory position in store. Our Men's division had another strong quarter of growth, reflecting the team's work to increase trend for our younger male customer while also attending to the fashion sensibilities of our mature male consumer. We're excited about this more comprehensive approach to our male customer. And based on the positive initial customer reaction, we have significant growth ahead in this particular category.

We also saw momentum in Women's footwear, which is an area we've been working to regain lost market share. There's still more work to be done in this category, but we're encouraged with Q3 results and customers' response to our branded product at extreme values.

Looking ahead in product, we're focusing on strengthening our product offering in all categories. Our Creative Director has significantly raised the bar and is focused on curating trends to ensure our product is always trend right. From the opening price product to our best branded fashions, our merchant team is finding ways to elevate trends and styles at amazing prices.

In Q4, we're repositioning the Men's store presentation to highlight increased emphasis on young Men's trend apparel while maintaining our core and classic portions of the assortment. We're in the early stages of repositioning our Women's area to better reflect the style, trend and sizing opportunity that we see for the business and plan to introduce an improved assortment to our customers in Q1 of next year. As I've mentioned before, we're continuing our focus on growing our anticipation classifications, which includes Big Men's, plus sizes and family footwear, all of which have significant upside potential in the future.

Turning now to operations. As I've discussed in the past, our transformation is guided by a 3-phase framework designed to deliver sustainable, profitable growth. In the repair phase, we focused on restoring fundamental business practices to ensure a strong foundation for growth, including sharper clarity around our African-American consumer, our 3-tiered product assortment and implementation of AI-based allocation software to improve in-stocks, reduce markdowns and accelerate inventory turns.

We are now firmly in the execute phase, focused on implementing best practices across all areas of the business to improve productivity and enable SG&A leverage. This includes increasing supply chain speed, reducing working capital costs and aligning our teams around KPIs and performance linked compensation to drive continuous improvement.

From an operational standpoint, we made continued progress on these phased initiatives in the third quarter. I want to congratulate the entire team, specifically our senior leaders for improved business execution in Q3. One of the keys to our success was consistent execution of a detailed plan to emphasize tactical excellence to win the quarter.

We continue to improve our inventory efficiency, supporting a 10.8% comp with overall 3% less inventory than the prior year. Due to speed improvements in our supply chain, we are also able to execute a 4.5% higher average in-store inventory. In the supply chain, improved work processes, productivity standards and day-to-day leadership enables us to efficiently reduce in-process inventory. This improved efficiency drives working capital optimization and provides flexibility and speed to react to sales trends while protecting gross margin.

In the quarter, we finalized the implementation of our AI-based allocation system across all merchandise categories, and we remain pleased with the results. We're now turning our attention to an AI-based planning system to help streamline sales and inventory planning processes for our merchant teams.

As I said before, retail is detail, and execution without measurement is just guesswork. Our use of KPIs and dashboards across all key functions provides the visibility that helps our teams stay on track and drive continual operational improvement, which is the core element of our execute phase strategy.

Looking ahead, while we've made good operational progress. As I said earlier, we recognize a significant opportunity remains to improve execution in many areas of our business. As we advance through our execute phase and improve consistency, we expect continued SG&A leverage to enhance flow through of sales to profit.

Now turning to our growth strategy. We remodeled 24 stores in the quarter, including 15 high-volume stores. Year-to-date, we've remodeled 62 locations and now have about 30% of our fleet in an updated format. These refreshed stores inspire our teams, elevate brand perception in the community and send a strong signal that we're investing in local neighborhoods.

In the third quarter, we opened 3 new stores in Jacksonville, Florida; Columbia, South Carolina; and Bainbridge, Georgia, bringing our store count to 593 locations across 33 states. In addition, we remodeled 5 stores in Columbia, South Carolina and 4 stores in Jacksonville, Florida. And in support of these new stores and remodels, we added local marketing, which included wrapping city buses with the Citi Trends brand message. These openings are part of our pilot market backfill approach, which we are opening new stores in conjunction with remodeling existing locations to increase market share by strengthening our store presence and reinvigorating our brand. In the first few weeks of business, the new stores and markets have responded above expectations.

I look forward to giving you a more thorough update on our next call after we have a full holiday season of results in these markets. These market investment tests will inform our approach as we accelerate growth in 2026, when we plan to open about 25 new stores, followed by at least 40 stores per year in 2027 and onward. This expansion strategy will take our store count to around 650 stores by the end of 2027, focusing on backfilling existing markets where our brand awareness and performance are proven while selectively entering new markets with strong demographic alignment to our customer base.

Our positioning of Citi Trends for strategic new store growth is guided by a disciplined data approach. Our new store expansion combines advanced AI-driven analytics, local market expertise and strict financial criteria. Using AI tools, we have analyzed 3 years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific market characteristics that drive our success. This data-driven approach has demonstrated about 90% accuracy in predicting sales, helping us identify and replicate our most successful store profiles while minimizing risk. We're applying disciplined financial hurdles to every new store decision, targeting mature store averages of about $1.5 million and mid-teens 4-wall contribution.

Looking ahead, we continue remodeling about 50 stores per year as a part of our ongoing fleet maintenance and market investment strategies. This disciplined approach allows us to progressively upgrade our store base while achieving planned returns on invested capital and positioning us to expand intelligently while -- excuse me, while maximizing return on investment.

Longer-term growth in early October, we had a chance to share our multiyear growth plan at an investor conference. The presentation we shared is available on our Investor Relations website. But I do want to take a minute just to review some of the key objectives of our long-range plan.

The first objective is to grow sales to $900 million or more in fiscal 2027 with consistent comp store sales growth plus the addition of about 25 new stores in fiscal 2026 and 40 stores in 2027. We plan to achieve a gross profit rate of 42%, a 400 basis point expansion compared to fiscal 2024, and we plan to leverage expenses by 200 basis points to a rate of approximately 37% or less. Resulting EBITDA is expected to be $45 million or more in fiscal 2027, a $60 million improvement to 2024 and an EBITDA margin rate of approximately 5%.

These are not distant goals. They're achievable outcomes driven by the actions we are actively executing to drive the turnaround of this important business and with our fiscal 2025 results to date. I think it's fair to say that we're off to a pretty good start.

With that, I'd like to turn the call over to Heather to discuss our financial performance for the quarter in more detail and our outlook for the fourth quarter. I'll return after Heather for some closing remarks. Heather?

Thank you, Ken, and good morning, everyone. I'm pleased to walk you through the details of our third quarter performance, which demonstrates once again the consistency and effectiveness of our transformation strategy. That clear strategy plus the foundational improvements made to date have created remarkable momentum across the business, and we are delivering measurable progress across key operational metrics.

Starting with the top line, Q3 total sales were $197.1 million, up 10.1% compared to Q3 2024. Comparable store sales increased 10.8%, 16.5% on a 2-year stack basis. Ken said this already, but it's so good it warrants repeating, our Q3 performance marks our fifth consecutive quarter and 15th straight month of strong comp growth, a remarkable feat, particularly in the current retail environment.

We delivered strong comps in each month of the quarter and saw consistent year-over-year growth in both traffic and basket as our revised merchandise assortment, including off-price deals and more branded extreme value product continues to resonate strongly with our customers, enabling us to gain market share. We also saw positive results across all climate zones across all store volume groups and across all product categories, demonstrating the broad-based nature of our improving results.

Third quarter gross margin was 38.9%. While 90 basis points lower than Q3 2024, these results were in line with our expectations. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open-to-buy for our revised product strategy to fuel our top line growth. As a result, markdowns and shrink in Q3 of last year were unnaturally low, creating an unfavorable comparison for the current year period.

As Ken mentioned, early in the third quarter, we decided to shift inventory and related freight expense from Q4 into Q3 to better manage freight flow for the distribution centers. Doing so drove additional freight expense in Q3, about a 40 basis point impact to margin rate while accomplishing the smoothing we wanted to achieve, protecting the holiday and delighting our customers with earlier access to holiday goods. Importantly, product margin was consistent with the results from the first half of the year due to the hard work of our merchant teams, as Ken remarked on earlier.

Third quarter adjusted SG&A expense totaled $79.5 million compared to $74.6 million in the prior year period. The increase to last year was driven by $3.2 million of higher incentive compensation accrual and store and DC expenses to process higher sales. As we've shared in previous calls, we reinstated an incentive compensation accrual at the beginning of this fiscal year after incurring very minimal related expense in fiscal 2024, causing the bonus to no bonus comparison again in the third quarter. In addition, due to improved expected financial results for the year, we set the bonus accrual to the max payout, driving a catch-up accrual in the third quarter.

On a rate basis, Q3 adjusted SG&A was 40.4%, 130 basis points lower than last year. Adjusted EBITDA for the quarter was a loss of $2.9 million, in line with management expectations and better than a loss of $3.3 million a year ago.

Before turning to the balance sheet, let me provide a few details on our performance through the first 9 months of fiscal 2025. Comparable store sales for the first 9 months increased 10% with a 2-year comp stack of 12.3%. Comps were driven by a 6% increase in transactions. This is a metric we're most proud of as it is evidence that our loyal customers are responding positively to the changes we've made in our assortment strategy and to the in-store experience.

Adjusted 9-month EBITDA was a loss of $0.1 million, an increase of more than $21 million to last year. EBITDA growth was driven by more than $47 million in incremental sales, 290 basis point margin rate expansion and 100 basis points of SG&A leverage, so improvement across the board.

Now turning to the balance sheet. Total inventory dollars at quarter end decreased 3.1% compared to last year with average in-store inventory up 4.5% as we strategically positioned ourselves for holiday sales, including the pull forward of inventory receipts from Q4 into Q3. As Ken mentioned, our success in driving double-digit sales increases with a modest increase in in-store inventory reflects our work to improve inventory efficiency through higher turns and improvements in supply chain speed.

As we enter the important Q4 holiday selling season, we remain pleased with our inventory level, composition and freshness. At the end of the third quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver and $51 million in cash. This financial strength continues to give us the flexibility to invest in our growth initiatives while ensuring operational stability throughout our transformation.

Now turning to our fiscal 2025 outlook. Based on our results through the third quarter and our confidence that the effectiveness of our turnaround plan will continue through the fourth quarter, we are pleased to update our outlook for 2025 as follows.

With sales momentum of the first 9 months of the year continuing into early Q4, we now expect full year comp store sales growth of high single digits at the high end of our previous outlook. We now expect full year gross margin expansion of approximately 230 basis points versus 2024, also at the high end of previous outlook due to continued progress on inventory efficiency and planned supply chain improvements.

2025 SG&A is expected to leverage approximately 90 basis points versus last year, reflecting continued expense control. Once again, this is at the high end of our previous outlook of 60 to 90 basis points leverage versus '24.

With these updates, we now expect full year EBITDA to be in the range of $10 million to $12 million, an increase to the $7 million to $11 million range in prior guidance. The revised guidance is $24 million to $26 million above fiscal 2024 results. There is no change to our expected effective tax rate of approximately 0% for the year.

For the year, we will open 3 new stores and will remodel 62 locations. Both of these targets have been achieved as of the end of the third quarter. In addition, we are planning to close 4 stores in the fiscal year, just above our previous guidance of 3 closures. And finally, full year capital expenditures are now expected to be approximately $23 million, at the lower end of our previous outlook of $22 million to $25 million.

While we don't provide quarterly guidance, given where we are in the fiscal year, we want to offer our thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up high single digits with a 2-year stack in the mid-teens. Q4 gross margin is expected to be in the range of 40% to 41%, up to prior year. SG&A is expected to be approximately $82 million, and Q4 EBITDA is expected to be in the range of $10 million to $12 million.

Before I turn the call back to Ken, I want to emphasize that our third quarter results reflect more than just 3 months of strong execution. They demonstrate the durability of our business model, the effectiveness of our strategic initiatives and most importantly, are a continuation of the improvement we've achieved across the last several quarters.

As we look towards the fourth quarter and into fiscal 2026, we remain committed to our disciplined approach while maintaining the flexibility that has served us well throughout this transformation. The foundation we've built gives us confidence in our ability to deliver sustainable, profitable growth while continuing to create shareholder value. I'm excited about the opportunities ahead as we continue to execute against our strategic plan.

With that, I'll turn the call back to Ken. Ken?

Thank you, Heather. Before I turn the call back to the operator to facilitate Q&A, I do want to emphasize that the transformation of Citi Trends is well underway. We remain guided by our 3-phase framework to deliver -- designed to deliver sustainable profit growth. The first phase, repair, is about restoring fundamentals and establishing a strong foundation for growth. The second phase, execute, focuses on hardening consistent best practices to drive reliable, predictable performance. And the final phase, optimize, leverages the work of the first 2 phases to accelerate our EBITDA growth.

As a result of our efforts, in the first 2 phases of this transformation, we've made meaningful improvements, including an improved product assortment strategy, a better in-store stopping in-store shopping experience for our customer and improvements in many processes and systems. Our 5 consecutive quarters of comp store growth is a proof point that our strategy is working, our execution is getting better, and our customer connection is stronger than ever as we firmly establish ourselves as a leading off-price retailer for our customers.

While we're proud of our results so far, we fully recognize there is significant opportunity ahead. I want to emphasize that we're in early stages of this transformation. There's still work to do, processes to refine, categories to optimize and systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value and expand our role as the leading neighborhood retailer for African American families.

I want to thank the entire Citi Trends team for executing with discipline, driving quickly towards our stated goals and most of all, for delivering results. The team is doing the hard day-to-day work to unlock sustainable growth and shareholder value, and we are just getting started.

Thank you, everyone. And now I'd like to turn it over to the operator for questions.

[Operator Instructions] then return to the queue. Our first question is coming from Michael Baker from D.A. Davidson.

Great. Great quarter. So 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?

Yes, for sure, Mike. Thanks. We, as I mentioned in the script, we are seeing broad-based growth throughout all the categories. And so at the top level for all categories, we've really sharpened our focus on better trend product. And we have seen good reaction to that this year and continued reaction. I mentioned briefly that we have just implemented a young Men's category, that's actually just setting in the stores right now. We're seeing good reaction to that. And as we begin to understand a little bit more about that dynamic, there's significant opportunity there.

Equally across the aisle in our Women's category, we've always had a pretty strong juniors business, but we recognize that there's a missing component of that as well as plus sizes that needs to be fully matured. And then on top of that, overlay trend product and those categories as well. And so that's a little bit of a new business for us relative to those 2 categories getting reset.

And then across the fleet. We're just getting -- going in shoes in our footwear category. The team, as I remarked, had a pretty good Q3 in Women's. We're off to a good start there. But we have significant opportunity, multiple millions of dollars of opportunity to grow our shoe business back to even, say, historical levels, let alone to catch up to where we are in the overall store. So there's significant opportunity there.

And then I would highlight, and I don't mean to make this so broad based, but it really truly is how we're looking at it. In Kids, for example, as we continue to build that business, it gets stronger and stronger and stronger. We've been executing quite well in Kids. But as we continue to invest in inventory, we see it grow. So there's areas throughout the store that we see that they just offer tremendous opportunities for growth. And then I guess I'll put the punchline for all this. The other piece of it. Don't forget that we have the extreme value opportunity. And we're doing a fairly small percentage of our business and extreme value right now. It's working quite well, and we see significant growth there. All of that actually totals up to, in my mind, a very obtainable $900 million.

Great. 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?

Yes. I'll make some high-level comments, and then Heather can fill in any of the specifics here. But the good news about our consumer right now, they've shown remarkable resiliency with all of the macro changes around government SNAP and different programs like that. And candidly, we've really seen no major impact as the shopping patterns have remained consistent throughout the quarter.

As I mentioned, we got off to a really good start in August. August was tremendous for us, led by our Kids division. All divisions did well, but Kids really had a tremendous back-to-school period.

And then I was really pleased with how we finished the quarter. October, particularly the last 3 weeks of October really accelerated quite well. I mentioned in the script that we advanced some of our freight from Q4 into Q3. When that hit our stores, we actually saw a really strong consumer reaction.

Yes. Mike, the only thing I would add to that is that it was a pretty tight band. It looks a little bit like a barbell, stronger in the beginning, first month, third month, middle month was a little softer, but the range is like 9.5% to 12%. So it's not like a severe dip in the middle, or severe spike. So yes, pretty consistent.

Next question today is coming from Jeremy Hamblin from Craig-Hallum.

Congrats on the impressive results. I wanted to just come back to the point, Ken, that you were making on some of these extreme value deals, which we saw some of those drop towards the end of the quarter, some notable deals with products like UGG, HOKA, Timberland brands, Jordan brand, et cetera. And that did seem to be a big driver of your strong traffic. But 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?

Yes. Good. Thanks, Jeremy. I appreciate it. A couple of things in our current status, extreme value deal flow, as I mentioned, continues to be very robust for the team. And we're being pretty discerning about what's being brought into the business right now. Many -- I guess we probably passed on a 3:1 ratio of adoption of deals that come across the desk, maybe even more. And as a result of that, the current sales performance of extreme value deals is probably in the 2% to 3% of business range, and that I'll just give you a broad range right now. It varies a little bit by category. And back to your point, we've seen a path to getting that closer to 10% as we continue to mature.

So there's a significant opportunity there. And we're learning a lot as we're bringing some of these deals in. Many of them have really responded much better than anticipated. If you have been a little bit slower than anticipated, a lot of it has to do with consumer acceptance and reaction of it. But as we're getting better and understanding how to do extreme value deals, particularly with our supply chain processing, we see that, and I believe that remains to be a competitive weapon for us going forward.

And then switching gears here to talking about the store fleet. And 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?

Yes. I'll give you a little bit of color on the process going forward into 2027. Our real estate team right now is working on a number of deals in the pipeline. And our goal will be, going forward, to open up our stores really at 3 distinct times of the year. We'll be opening up stores in early spring, going into the spring period, the [indiscernible] season. We'll be opening up stores in July, going into back-to-school. And we'll open up a group of stores in October going into holiday.

And so I would expect that, that fleet going forward, the 40 stores that I mentioned earlier, you can probably divide that equally by 3 into those time frames and probably have a really good view of how we're looking at the business from our side.

In 2026, we'll have lighter openings in the spring. We're just getting caught up there. Most of those openings will be more in July and August, probably equally split there -- or excuse me, July and October, equally split between those 2 months, to give you an idea as we get caught up and get this engine moving forward in new store growth.

Great. And then just one more for me. I know that you've got a lot of initiatives that are going on, a lot of technology initiatives. But I wanted to ask about your shrink mitigation efforts. I know this is something that you've been working on very diligently. And I think you had a pretty decent gap to close of where you wanted to get that, too. But any color you can share on the progress, on those efforts? What the impact is to your gross margin? And what do you expect to pick up from that kind of in 2026?

Jeremy, I'm going to grab that one. So we've rolled out new camera systems in about 1/3 of our stores in 2025. And these new camera systems not only provide what you would expect visibility into the store, but they're AI-capable and allow for our loss prevention team to use facial recognition, which you can imagine is helpful not only to protect our stores, but to engage with local law enforcement and to help the community, not just our Citi Trends stores. So we're excited about that.

Those cameras also have, outside of loss prevention and shrink prevention, they have heat mapping capability, which will help us understand customer shopping patterns and they have traffic counting capability, which obviously is an important component as well.

So we're excited about that. We're going to roll out to more than 2x that number of stores into 2026, so that we can leverage that very, very quickly. You and I talked about this before, but our break rate in 2025, it still remains what I understand to be in line with averages for retail. So we're not satisfied yet. And that means that it's less than 1.5% of sales, right? So still higher than we want it to be, less worried about the rate than I am about the dollars. I think we still have a few million to give back to the company on shrink mitigation over time.

Now as I look at 2026, our plan assumes a decrease in both dollars and rate in 2026 based on technology, based on talent. We are upgrading and updating our talent in our loss prevention teams. And based on processes, we are training regularly our store management teams and our district managers on shrink mitigation. So all of that comes together to say that we expected a decrease in 2026 and a further decrease in 2027.

Fantastic. Last one for me. So you also noted the implementation of technology, improving CRM. Can you elaborate at all in terms of how you plan to use that as the company continues to gravitate to using a bit more digital marketing efforts. Are there -- is there a thought around kind of loyalty program that you're leaning into? But any more color you might be able to share on kind of the timing of when the CRM update is happening and what you expect the outcome to be from that?

Yes, for sure, Jeremy. We are in the process, as I mentioned, of really getting it out and testing and developing the systems and the processes that go along with that. Our goal will be to launch a CRM in Q1 of this next year. And we don't have an exact date yet. We're still trying to pin down some stuff on the technology and its readiness and so forth. But think about a Phase 1 implementation in Q1. And then there will be a Phase 2 implementation in the fall of 2026.

The way I want you to think about CRM and loyalty for our business is we're actually going to be calling it "The Insider's Club." We'll have a much better title I'm sure by the time we get to it. And it's effectively going to be a way for our customers to tap into emerging trends and deals. You think about the value of being a part of our loyalty club and being one of the first ones to know about some of these amazing extreme value deals that are coming down the pipeline. We have the ability to notify our best customers. They can kind of come in and shop first, invest, and be kind of in the know, if you will, around emerging deals that are coming to the store. We believe that there will be a significant interest in that. And that actually has the ability then to drive incremental traffic with some of our best and most loyal consumers.

And beyond that, we're also trying to build in additional tools to make the shopping experience easier for our best customers. As an example, one of the things that they'll gain is actually the ability to have electronic receipts. And so quickly, they can have that stored and be on their phone and eventually we'll have an app on there that they can just simply access that had also a layaway programs and things of that nature will have digital access. So the goal here is to make it in Insider's Club, and then to find ways to make the shopping experience a little bit easier and more convenient for our consumer. And then as you mentioned, the intangible value for us is we're going to have a pretty significant database of consumers that are highly engaged that we can speak to with regularity via these marketing ideas.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for your further closing comments.

I'd like to thank everybody for attending today's call. We look forward to talking to you next quarter.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.