Citi Trends, Inc. (CTRN) Q1 2022 Earnings Call Transcript

Citi Trends, Inc.  (NASDAQ: CTRN) Q1 2022 earnings call dated May. 24, 2022

Corporate Participants:

Nitza McKee — Senior Associate

David N. Makuen — Chief Executive Officer

Jason B. Moschner — Vice President of Finance and Principal Financial/Accounting Officer

Analysts:

Dana Telsey — Telsey Advisory Group — Analyst

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Chuck Grom — Gordon Haskett Research Advisors — Analyst

John Lawrence — Benchmark — Analyst

Presentation:

Operator

Greetings and welcome to the Citi Trends 1Q 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, Tuesday, May 24, 2022. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee — Senior Associate

Thanks Melika and good morning everyone. Thank you for joining us on Citi Trends first quarter 2022 earnings call. On our call today is our Chief Executive Officer, David Makuen and Vice President of Finance. Jason Moschner. Our earnings release was sent out this morning at 06:45 AM 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 and 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, David Makuen. David.

David N. Makuen — Chief Executive Officer

Thank you, Nitza. Good morning everyone and thanks for joining us today on our first quarter fiscal 2022 earnings call. This morning, I will begin by reviewing the ongoing transformation of our business and highlight our financial and operational results for the first quarter fiscal 2022 before updating you on our focus, on our highest priority, providing for our customers and associates during tough times. We are doubling down on helping them show up whatever comes there way. Well, then Jason Moschner, our VP of Finance and Principal Financial and Accounting Officer will elaborate on our financial results and a few other items related to our outlook.

Before turning to our results, I want to recognize that the macro environment is difficult for our customers given a number of factors including ultra-high inflation that is driving high food prices, rents, and gas prices. These factors coupled with geopolitical instability and lapping the stimulus from last year disproportionately impact our core customers, and also our associates who work tirelessly to operate our 600 plus store fleets.

While, it hasn’t been easy for them, they are resilient, strong and able to weather the storm just like they have for so many other storms during the last 20 years. Importantly, Citi Trends will always be dedicated to our neighborhoods. We’ll always be there for our loyal and new customers. Our unique ability to listen to the African-American and Latinx families we serve and respond with the right trends, fashion and essentials at the right time in the right store has never been stronger. No matter the headwinds, it’s our responsibility to keep it fresh and fun for the family each and every day. I want to thank our associates throughout all functions and stores that keep Citi Trends purpose-driven in running the best way possible for our customers each and every day.

Now turning to our results. Our first quarter topline results were in line with expectations. And our bottom line performance was better than our previously provided guidance. The difficult economic backdrop coupled with third-party data suggesting shifts in discretionary shopping behavior is negatively impacting traffic to our stores. However, our core customer metrics are holding up well as we continue to see strong and consistent conversion and basket spend with basket well above 2019 and very close to 2021 levels.

I’ve shared the stability of our conversion and basket trends now in three consecutive calls with you and I want to underline the following point. Our content is resonating and our agile buy and move team is really reactive in executing at a high level. Our team is more nimble than ever, and in particular, we are chasing ample available trends that will scoop up and offer prices that don’t break the bank. Looking back in the quarter, we successfully managed inventory levels and had newness and freshness arriving in stores weekly. The classic extreme value chase is definitely on. With a soft store traffic setup, our store management teams have been intensely focusing on conversion while styling customers from head to toe in our specialty store experience to drive UPTs and healthy baskets. We commenced the early phases of further optimizing our product mix, with the gradual rollout of multiple incremental product initiatives across our six cities or categories. We remodeled 20 Legacy Citi Trends stores in our new CTX format and they are off to a great start as customers engage with the revitalized neighborhood trend spot. We continue to navigate and manage the challenging supply chain backdrop and labor challenges while diligently managing expenses. We completed the previously announced sale leaseback transaction of our distribution center located in Darlington, South Carolina. We are making substantial progress on our infrastructure initiatives to improve our buy and move teams’ ability to procure and move goods.

And lastly, we are making great progress on our search for a new CFO. As we look to the remainder of 2022, we expect the macro factors to continue to impact our customer and the broader discretionary shopping landscape. It’s therefore prudent that we plan conservatively and thus we are revising our growth targets for the rest of the year, while still comparing primarily to pre-pandemic 2019 as a baseline.

Additionally, we believe the right step is to take a conservative approach to opening new stores and therefore we now intend to open approximately 20 stores during fiscal 2022. With that, I’ll turn the call over to Jason to discuss our first quarter results in detail, as well as our updated guidance for the balance of the year. Jason.

Jason B. Moschner — Vice President of Finance and Principal Financial/Accounting Officer

Thanks David and good morning everyone. For the first quarter of fiscal 2022, the operating environment remained difficult with headwinds of extreme inflation, freight pressures and lapping government stimulus to name a few. Despite this, we delivered total sales in line with our expectation, achieved gross margin well above the levels in 2019 and prior and applied rigorous discipline to controlling our expenses resulting in earnings per share that exceeded the top end of our prior guidance. We ended the quarter with a strong cash balance and a clean inventory position, leaving us poised, as David said, to chase trends within our six cities or categories keeping our powder dry so we can appropriately respond to our customers’ needs based on the time of the year and the occasion.

Now let’s turn to the specifics of our Q1 financial results. As mentioned in our earnings release, we are comparing select operating results for Q1of 2022 relative to Q1 of 2019 in order to provide a more normalized comparison of performance. In addition, certain results are adjusted with ’22 figures adjusted to exclude the gain from selling our distribution center and 2019 adjusted to exclude expenses related to our proxy contest. Please see our earnings release for reconciliation of these adjustments.

Total sales for the first quarter were $208 million, an increase of 1.6% compared to Q1 of 2019. Comparable store sales declined 29% versus 2021 on top of a 35% increase last year versus 2019 representing a stack of 5.8%. Our conversion and basket remains strong, which tells us our content is resonating. Earnings per share was $3.59 compared to $0.65 or as adjusted $0.42 compared to $0.72.

Gross margin was 39%, 150 basis points higher than the first quarter of 2019. Our continued improvement in quarterly gross margin rates versus 2019 and prior is primarily the result of disciplined inventory management, starting with higher markups, stronger full price sell through, fewer markdowns, and lower shrink rates, partially offset by 125 points of deleverage in freight costs due to the current supply chain headwinds. Navigating the supply chain environment remains fluid. We have worked to increase the efficiency of our internal operations while also negotiating rates with our shipping partners to mitigate the elevated transportation costs. Adjusted SG&A for the quarter was 34.1% of sales, up from 30.9% in the first quarter of 2019. On the dollars basis, adjusted SG&A was 13.8% higher. Adjusted operating income was $4.7 million versus $9.8 million or on an adjusted basis, the margin was 2.3% compared to 4.8%. GAAP net income was $30.2 million compared to $7.8 million in the first quarter of 2019 or as adjusted $3.6 million compared to $8.7 million.

Now turning to our balance sheet. Total inventory at the end of the quarter was lower by 1.2% compared to the end of Q1 2019. Excluding our packaway inventory, inventory was down 13.9% and our average in-store inventory was 32.5% lower than 2019, which reflects our continued focus on freshness and improved store turns. During the quarter, we completed the sale leaseback of our distribution center in Darlington, South Carolina, resulting in gross proceeds of $46 million and a pre-tax gain of $35 million.

The impact of rent expense in fiscal 2022 is expected to be approximately 40 basis points. As it relates to our buyback program, we repurchased approximately 170,000 shares at an aggregate cost of $5.3 million leaving $54.7 million remaining. We ended the quarter in strong capital position with $61.7 million of cash and no debt. As we stated in the past, capital allocation is the primary focus of our Board, and we will prudently balance our use of cash between buybacks, investments, and our growth strategy, and ensuring adequate liquidity in this challenging environment.

Now turning to our guidance for the balance of the year. With the expectation of macro factors continue to pressure our customer, we believe it is prudent to plan conservatively. We have revised our outlook as follows. Full year sales of $860 million to $880 million and a comparable sales decrease of 14% to 16% on top of a 22% increase last year versus fiscal 2019. At the midpoint of this range, this implies a comp stack of positive 7%. Full-year operating income of $58.8 million to $65.3 million for as adjusted $23.8 million to $30.6 million. At the midpoint of this adjusted range, this implies a 32% increase compared to fiscal 2019.

Full-year diluted EPS ranging from $5.59 to $6.09 on a GAAP basis or as adjusted $2.25 to $2.75. At the midpoint of this adjusted range, this represents an increase of 60% over adjusted EPS in fiscal 2019. I’ll note that our full-year guidance includes $2.3 million of incremental non-cash SG&A expense related to the conversion of certain cash-settled awards to restricted stock, which negatively impacts diluted EPS by approximately $0.22 in our guidance. These converted awards will be fully vested during Q1 2023 and therefore, they will no longer result in the incremental expense after the first quarter of 2023.

Finally, given our revised plans for opening 20 new stores during the year, we project capital expenditures of approximately $32 million. To wrap up, our teams are executing disciplined cost controls, optimizing our operations and diligently managing the balance sheet. We recognize the challenging environment and therefore, we are laser focused on controlling the control holes while we work to maximize our top line sales and amaze our customers each and every day. With that, I’ll turn the call back to David for closing comments. David.

David N. Makuen — Chief Executive Officer

Thanks, Jason. Before we take your questions, I want to provide some additional beliefs in our customers and business model that gives us the confidence to navigate current unpredictable times and make the ongoing improvements to our model to maximize profitability in the years ahead. First about our customers; our associates make it personal and often know the customers on a first name basis and even what’s happening on in their lives. Across our fleet, we play an essential role in the neighborhoods where we quite literally helping opportunities to life, by suggesting value outfits for her and him and the kids for both work and play, suggesting value toys and accessories to the little ones; suggesting new value beauty items tailored towards black and Latinx women and so much more. At the crux of this relationship is a high level of loyalty and dedication our customers and associates have with our brand. It’s a special bond. It is not easily eroded by tough times. Our customers know tough times, and they are equipped to muscle through. This characteristic is also an indelible strand of our DNA that we will leverage to help solve for the current times while laying the groundwork for future growth. Regarding our business model, when I take a step back and look at how we managed the business through an incredibly challenging period, we are definitely behaving like as a 75-year-old startup. The monetization at the Citi Trends brand is unfolding as planned and can be felt in our people, our culture and our operations. Our 75-year history is critical in understanding how durable our model is and where we uniquely sit in the neighborhood to the curated assortment we offer through the unique associate team that takes respect all to a new level.

If you walk away with one thing today, it’s the power and underlying foundational strength of the legacy value brand built by and for the neighborhoods we serve for many decades in the past and for many decades in the future. I’m humbled to be a member of the team that shares my passion for growing and building something really special for the customers and associates that care deeply about the success of Citi Trends.

For this year and beyond, as you’ve heard before, we remain focused on four strategic priorities. Number one, growing our fleet and expanding our customer base. Number two, optimizing our product mix. Number three, reinvesting in our infrastructure. And number four, making a difference within the communities we serve.

In closing, I want to again thank the entire Citi Trends team for their dedication and all their efforts towards making a difference in the communities we serve. Their passion to live our purpose, life is best when you live bold, live proud and respect all, is definitely shining bright. With that, we are now ready to take your questions. Melika.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first one question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead, your line is open.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone. Hello, David and Jason. As you think about the current environment and state of the consumer with inflationary headwinds with your customer, what — how are you managing on price? How much pricing you are passing on to them? What have you seen be accepted not be accepted by category and how are you managing the inflationary headwinds internally in terms of labor costs? And then lastly, any update on how the CTX stores are performing versus the base and the 20 new stores versus the prior guide for 35? Do those push off into 2023 and some of that because it’s just hard to get the goods for the stores, whether it’s HVAC equipment or other things? Thank you.

David N. Makuen — Chief Executive Officer

Hi, Dana, and good morning. Nice to hear from you and thanks for the questions. I’ll try to tick through some of those from the start. On price, I will tell you that we really not changed our stance versus what we’ve shared prior, even dating back into 2021. We have maintained that we can nudge price up in the case of improving value features and benefits and that’s been working consistently up until today and we expect it to work throughout the rest of this year into the future. We have maintained value on sort of the essential band within our cities — call that underwear, socks, the things that you kind of need –less trend-driven, more basic-driven, we’ve maintained those prices and will not pass on any increases to customer. And then thirdly, a lot of our newness — so not like super SKUs, but newness in the area of trends — we really managed not only the price in relationship and kind of resiliency of our customer, but also managed the ability for us to price the trend right and bring it in at lower than maybe ’19 and prior inventory levels people talked about and celebrate the trend selling out moving onto the next one. So, I think we’ve managed kind of pricing assortment really successfully and we’re going to stay the course on all those points.

On the labor headwind, I think at the end of the day, we similar to and sort of price, we’re going to stay the course. As you’ve heard me speak in the past, we haven’t had to do drastic wage increases, but rather we’ve done very surgical and strategic and tactical wage increases where needed and we treated our people well from a cultural standpoint and from a benefit standpoint. So, that kind of the total package is working well for us and we expect that to continue for the future without any big disruptions and we’ve had great loyalty from our teams in our distribution centers, as well as in our stores and of course in our headquarters that indicate a passionate team ready to serve the customer no matter what function they’re part of.

From a CTX perspective, we are really pleased with the results so far. We’re seeing lifts higher than we did in ’19 and prior remodels, and we’ve shared that we expect to see high single digit lifts and we’re right on plan for the initial class. Really exciting, we will have basically 20 opened by tomorrow. And that’s something that we’re pretty pumped about and we’ll do another tranche here in the Q2 period to up that number to close to 30 by the end of Q2. So, we’re excited about where that’s going.

And then — request what is your last question, if you don’t mind.

Dana Telsey — Telsey Advisory Group — Analyst

On the number of store openings going to 20 from 35, is that because of pushes into ’23 or is it the headwinds of getting supplies to get a store open?

David N. Makuen — Chief Executive Officer

It’s actually — it’s not necessarily either one right now. Let me answer the first piece of your question. We expect to grow stores and hit our thousand store target. We have no question in that number that we shared with everybody prior; the pace of which we do that, we’re just going to slow down a little bit this year. We expect to return to a faster pace in ’23 and ’24 and beyond. And we’ll move. So, we’ll move that 15 for sure. In fact, most of the deals are already in flight or done. We’ll move those into ’23. In respect to lowering it, it’s really just a more prudent measure on our part. We want to make sure that we’re able to spread our resources throughout the company around, not only managing the current business, but getting new stores off to a great start, managing the remodels in a effective way and running our core business in these times of challenges. So, that’s kind of really how we thought about it, but we’ve got tons of deals in the pipeline. We’re excited about upping the number in ’23 and upping it from there in ’24 and so on.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. One last thing, cadence of the quarter, what did you see in terms of cadence of the quarter? Whether it’s lapping stimulus or tax refunds and how is the exit rate and what’s happening so far Q2 todate?

David N. Makuen — Chief Executive Officer

Sure. Good question. The cadence of the quarter, the short answer is, it got better by month. So from Feb through April, we saw sequential improvement in our transaction counts. We saw a consistent and strong conversion level and a consistently strong basket. So, that was encouraging throughout the quarter. And then as we’ve entered the early parts of Q2, we’ve seen a continued improvement off of the improvements we saw a month to month in Q1. And I’ll stick a quick plug in for some of our incremental initiatives that we’ve talked about the last couple of calls are taking hold. There is sort of test learn, summer and roll out gradual over Q2 and Q3, but we’re liking the traction we’re seeing and that’s contributing to the improved momentum.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

David N. Makuen — Chief Executive Officer

You’re welcome. Have a great day.

Operator

Thank you. Our next question is from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead, your line is open.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Thanks. I want to start by just following up on that last question and great to hear that there is some improved sequential results. I wanted to clarify so historically, there has been this typical seasonality where Q1 on an absolute dollar basis is significantly stronger than Q2 and Q3. I wanted to understand if you just maybe a little bit more color on expectations around Q2 because of how tax refund didn’t play out as typical? Are you expecting Q2 sales to be up from Q1?

David N. Makuen — Chief Executive Officer

Jeremy, hello. Thanks for calling in and asking some questions. While today we’re not disclosing any guidance related to the individual quarters of the year, what I can tell you is that the Q2 to Q4 trend run rate is very similar in our projection and guidance to what we’ve stated earlier, meaning it gets better over the Qs and ends with the numbers that we guided as of today. So, while we’re not sharing the relationship of every single quarter, what I can tell you is the sequential improvement offers us a confidence that we will accomplish that bill from quarter to quarter. The order and the way I think about it is we expect to have a strong remaining summer inclusive of July 4, which is an important time period for the brand. Then, we roll into a more normalize in the past three years — that is back-to-school season. We’re well-positioned from a current and packaway standpoint to see back to school and then as you can imagine, we’re putting the right emphasis and priorities around winning the gifting season in Q4. So that’s kind of some color around how the rest of the year shapes up in our minds.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Well, let me ask just in slightly different context, and I apologize, but you cut the full-year guidance by roughly $60 million, but Q1 played out kind of right down the pipe of where you’re expecting it. So, I’m just trying to understand in versus your prior expectations in March, is that $60 million change kind of coming equitably over the course of the remaining three quarters? Are you just having a little bit lower expectation in Q4 or is it more in the near term where we thought we might get a little more balance in Q2, Q3 previously and now we’re thinking it’s seasonally going to play out a little bit more like it might typically? I know you’re going after that summer season now.

David N. Makuen — Chief Executive Officer

Yeah, yeah. No, good question. Yeah, I think we can give you some directional insights that the inflationary pressures are certainly lingering and as we know from all the news expected to linger a little longer than we all hope. And so you can take it away that your Q2 has got a little more of that $60 million decline than Q3 and Q4, that’s a fair takeaway. But they all, as you can imagine, we sliced away a bit from each quarter to appropriately respond to the pressures from inflation and such.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Great, that’s helpful. And then, just wanted to get into the inventory. So, you have some packaway — inventory levels on a year-over-year basis are up about 27% — came in maybe a little bit higher than expected, but consistent with what we’re hearing from a lot of retailers in recent weeks that inventory levels for a variety of reasons are higher than expected. In terms of thinking about your gross margins, which I think probably came in pretty close to where you might have been expecting in Q1 — on a go-forward basis, do you have some concerns at all about the risk of maybe markdown rates being a little bit higher, not just because like — one I want to understand if your inventory levels are where you expected them to be two to three months ago. And then two, given that there is a lot of competitors also with higher inventory levels certainly than they expected, are you starting to see any incremental pressure from slightly higher promotions? Are you thinking that maybe clearance rates are going to be up a tick certainly from where they were a year ago?

David N. Makuen — Chief Executive Officer

Good questions. Jeremy, first off, we are very pleased about where we sit inventory-wise. And If I can, I will give you a little bit of color versus [Indecipherable] in our script and release we talked about versus ’19. But obviously, ’21 data is out there. So, an important thing to remember about our business model is that we spend considerable effort and devotion towards capturing forward season buys from roughly November of ’21 through even as late as March of ’22 and we pack away those goods for eventual selling in really back to school and later. And so when you look at our end of quarter inventory levels against last year up like you said kind of mid 20s, we really believe you need to pull forward through buys out there. So, we’re really up when you do that, up 5% because that forward season buy amount is sitting in the rafters in our distribution centers. And we pull it out starting in back-to-school and then continue through holiday and we really basically drain it and deplete it in a good way. And that’s a good margin and unbelievable deals in that bucket to speak. So that’s important color to understand.

The other thing is our average store inventory against last year is only up a couple of points. And that’s important to know, because we were extremely depleted last year during the stimulus yield Q1 period. And so to be only up 6% on an average store, that’s literally what’s in our four walls. It’s just a testament to the team’s focus on not getting over SKUs, keeping the powder dry, and managing inventory levels across all of our cities in a really effective manner. So long story short, we’re not terribly concerned, yet we are simply maniacal about keeping it this way. And then on your point around risk around markdowns and margins, that’s you can assume that’s all built in to what we share today. We spent a lot of time modeling that and we feel comfortable with what we shared today.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Great. Last one for me. Yeah, absolutely. Thanks, that’s great color. Last one from me is just around the SG&A understanding. Also, the $2.3 million non-cash stock charge. So, presumably that’s going to be spread over the next few quarters. I wasn’t sure if it’s all hitting in Q2 or not. But then, in terms of your absolute spend in Q1, just $71 million down from where you were in Q2 and Q3 of last year — so, managing that really well. My guess is it sounds like that’s kind of like a sustainable level, but wanted to just kind of get a little more detail around that SG&A spend and then also specific to that $2.3 million award, if that was hitting all in one quarter or if that was spread over multiple quarters here throughout 2022, thanks.

David N. Makuen — Chief Executive Officer

Sure. Yeah, you bet. I’ll take the part one, and then Jason can chime in on part two. But on part one relative to the $2.3 million kind of one-time event that will impact in doing our EPS about $0.22 for this year. It is spread across the year. It’s probably more like 30% in Q1 and then the rest of it spread by quarter and as Jason pointed out, it runs out as of the end of Q1 of ’23 and no longer becomes ‘non-cash charge’ to the EPS number. So that’s a good thing. I’ll give you a high level on SG&A. I think we do feel confident about it in terms of how we forecasted it and how we’re managing it. But I’ll turn it over to Jason for a minute or two on that one.

Jason B. Moschner — Vice President of Finance and Principal Financial/Accounting Officer

Yeah. And quickly to clarify on those awards, that was a conversion we disclosed that in the footnotes to our 10-K as well that it was in the fourth quarter of 2021 and we converted certain cash-settled awards that were for our mid-level managers and to restricted stock and the nature of the accounting rules around that they take on the fair market value at the conversion price, which was an elevated value relative to their initial grant date price. So, that price gets locked in and then the expenses straight line until they bust. So they’ll be fully busted in March of 2023 and then going forward, we may have no cash-settled awards. So no mark to market fluctuations in our equity awards and all future equity awards will just be straight line expense based on grant date fair value. At SG&A expense for the balance of the year, we do feel confident in our ability to control expenses and then generally speaking, we think we can keep it around the levels that we kept in Q1 of ’22 with the caveat that we generally do have some fluctuations through the quarters. We generally a slightly higher SG&A spend through Q2 through Q4, just as it relates to the variable expenses with our sales, particularly in Q4. So, I think it will, we expect will follow directionally along the same path that ’21 followed and even as ’19 followed and stand around the levels starting point being where we were in Q1 of 2022.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Great, thanks for that context and color. Best wishes.

David N. Makuen — Chief Executive Officer

Thanks, Jeremy. Have a great day.

Operator

Thank you. Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead. Your line is open.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Hey, thanks a lot. Good morning. Just wonder if you guys could speak to how you arrived at the comp guidance down 14% to 16%. You guys were fortunate enough to come in line with the 1Q view that you provided and if I run the three-year stacks out over the next few quarters, it does imply a pretty big uptick sequentially throughout the year. So, just was wondering if you could just unpack how you got to that number for us and if you’d be willing to give us a little bit of help on the second quarter.

David N. Makuen — Chief Executive Officer

Hey, Chuck, nice to hear from you. Yeah, let me give a little bit of color on kind of how the year unfolds. And it is pretty consistent methodologically with prior talk on this in the March release, meaning we expect sequential improvement from Q2 to Q3 to Q4, largely driven by, as I mentioned a few minutes ago, the seasonal patterns in the business, winning back to school, winning holiday but importantly also tied to the gradual rollout and incremental volume initiatives so to speak within many of our cities. As I’ve spoken about in the March call the addition of missy size range for example, the expansion and rollout of a more intense queue line. Last UPT stop before your checkout a portion of our store. The further traction of our CTX remodels, which go into comp. So, all of those inputs and assumptions remain in our model, really, as I’m sure you’ve thought about it. We just kind of tamped down the lifts that we thought we would potentially achieve based on persistent level of the inflationary impact impacting our lower income customer. So it definitely improved sequentially and is bolstered by these incremental initiatives and then I’d share a little bit of color on current product trends, which is relevant in that we’re seeing some really good trend shifts within some of our cities regarding the change in habits of our end-customer, mainly driven by greater wear-to-work trending activities that is benefiting us. So we’re kind of, if you will, way more in business than last year and the prior year on wear-to-work clothing from black and white simple pieces that you could put together with the Trends Flare and so forth. And then we’re also seeing a continued strong trend in I guess the flip side, the at home portion. The still remote worker/remote caretaker and matriarch of the household who is still wearing lounge meets, streetwear in a casual sense and we’re seeing that boom. In fact, we’re seeing both those businesses really surprise us every single day and we’re feeding them as best we can. So all of that kind of like base things are happening well, some incremental things are happening well are bolstering our confidence in the build so to speak, quarter-to-quarter over the year.

In terms of Q2, I’m not at liberty to share much more that I shared in the previous answer, but maybe the thing I’d add and just emphasize is our confidence in that basket and conversion metrics. We’re in well over 100 stores now with conversion and traffic meters and therefore able to compute conversion, and we’re just seeing this really wonderful consistent high conversion level that is just simply not wavering even with inflationary pressures. So, it points to the fact that the consumer who has the funds — many still do — to come into our stores are converting at the same rate and then their basket is really interesting. I mean our basket is similar to ’21 levels, never mind well above ’19. And so all of those as it pertains to Q2 specifically and the rest of the year, but just component in your point about Q2, we feel really good. We’re seeing incredible take rates on Memorial Day goods as we speak. So look forward it’s going to be a banger and then we have a very early back to school season because of where our stores are located. And so, we’re already seeing some good traction on things like uniforms and back-to-school goods. So, all that gives us certainly good feelings about how Q2 unfolds.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Okay, that’s very helpful and then just to build on that. I was hoping you could talk about the evolution of your basket since 2019 in terms of the overall dollar size UPT. And I guess like what’s actually changed within the basket? How much more discretionary that basket has become or has it stayed mainly in the apparel area?

David N. Makuen — Chief Executive Officer

Yeah. Great, great questions. Let me give you some high level thoughts on that. First off, what is being driven by — it’s being driven by both the basket — that is both by UPT gains and I’m talking now versus ’19 — and AUR improvement. So similar to how we’ve reported, frankly the resiliency and the acceptance of better quality value, slightly better for an higher price points for the brand, the customer is not really [Indecipherable] at those and that combined with higher UPT is call it 50-50, Chuck, to the basket is contributing to that trend being up significantly against ’19 in the neighborhood of almost an 8 to 10 bucks higher than ’19. And relative to ’21, it’s almost flat to ’21, which is encouraging as you know, given what was in the market in terms of stimuli and such during ’21. So as we look at the complexion of that basket, you know what — it really hasn’t changed much, because of the fact we’re a trend-driven brand, the balance between sort of what I call needs and wants has stayed relatively consistent. The only sort of aberration in a good way to that is the queue line impact. We’re seeing a contribution in UPTs to the basket incremental for sure from the queue, but everything else apparel to non-apparel is kind of holding its own kind of in the same way it did in 2019, which I think bodes well. I think it shows us that the merchants are keeping up with the times on both the needs and wants and kind of [Indecipherable] are right, the incremental addition of the incremental queue line activities.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Okay. It’s actually really — yeah that’s great color. Thank you. My last question is — I’m just trying to understand — you talked about business getting better each month of the quarter to Dana’s question earlier and a continued improvement in the May, yet you’re more guarded on the consumer. I was just curious if you could just maybe just speak to what you guys have done internally to understand the concerns that your consumer has in terms of the food, rent, and gas inflation? — Just like what’s changed? Has it gotten incrementally –has it become incrementally more concerned? And I guess if that’s the case, then why do you think your business has gotten a little bit better. I just want to understand, I guess as much details you have on your consumer right now.

David N. Makuen — Chief Executive Officer

Yeah, good, great question. I think what we’ve done primarily to date, Chuck, is hold a series of internal focus groups primarily led by the field and getting direct input from our associate base who often mirrors our customer base. We trade back and forth in fact on a regular basis in the neighborhood. And I’ll give you some direct color a little more than in the call, so to speak. We were hearing a disproportionate amount of pressure on gas and hearing things like, hey, I fill at my tank with a portion of my paycheck, and then I bide my driving side so that I don’t have to fill it up again a week later. And that’s a real from the heart and it makes it hurt because that’s curtailing some of their certainly distance driving and probably pleasure driving choices and it’s keeping them local now. That in many respects is most likely benefiting our traffic a bit because they are staying closer to home and we are near home for them. So, there is probably put and take there. Again, this is qualitative data and not quant. The second thing we’re hearing is rent. Our customer often rents in a way over indexes versus the average population and even a slight higher cohort of income, these guys are renters and they’re feeling the pressure of landlord, rents going up, utilities — from the rental going up and those utility costs obviously being passed onto the to the renter. And some are facing things like addictions and this is certainly more on the lower income [Indecipherable] and below. They are facing some really, really tough times. And so those are the two that are showing up the most. Food is coming in number three, but not certainly not as high as gas or rent. So we’re watching that carefully and we’re talking frequently to our associate base and they’re talking to customers just to kind of keep tabs on that. At the end of the day, I’ll go back to some of that shop local commentary that I was talking about. We do think that there is a kind of a benefit so to speak for being dedicated to our neighborhoods and being there because over 50% of our volume is literally within a three mile or less away and around the store. And as you know in roughly three quarters of our chain, there really aren’t a lot of options shop for the family. There might be a female option in the neighborhood once in a while, but there’s not a lot of options to shop for a guy, a woman and a kid and even a baby in the neighborhoods. So, I think there to some respect like I talked about the ability of our model and sheer fact that where we’re located and how we curate for our audience, that’s really I think fortified likely our basket and conversion levels. And then lastly, the loyalty, which — I’ve talked about the loyalty of our customer is frankly boundless and those who can’t come in as frequent if you’ve talked to, feel terrible, but they’re managing their reduced I guess available disposable income as it were and they’re coming in a little less frequently, but when they do, they shop in a healthy way and they love it. They wish they can come in more. So, and I think all of that is going to unfold over the rest of the year and I think short-term, we like most of retail is going to do some more digging and research and that’s we’re going to do actually in the next couple of weeks. We will do more research quantitatively to figure out what are we missing if anything, but that’s what we know today. And then lastly, like I mentioned earlier in the call, we’re just doubling down, Chuck, on what we do best and I find that that’s the best way to lead in these situations and so we are staying true to our purpose and to our mission of providing Trends basics and fashion to this audience and as long as we keep doing that, I think it will help us get through this.

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Got it. Thanks a lot.

David N. Makuen — Chief Executive Officer

Thanks, Chuck. Have a good day.

Operator

Thank you. Our last question is from the line of John Lawrence with Benchmark. Please go ahead. Your line is open.

John Lawrence — Benchmark — Analyst

Yeah, good morning guys.

David N. Makuen — Chief Executive Officer

Good morning, John.

John Lawrence — Benchmark — Analyst

Hi, David, would you sort of take Chuck’s last question just one step further. When you look at those pressures on your customer base historically when you’re in these inflation periods and I guess you somewhat answered that, but just one step further about what is that trade effect for the trade-down effect for some of your customers as they see this pressure around them and then maybe some customers find you than that in that neighborhood for back-to-school or July 4 that were may be, may be shopping a little upstream or whatever, what have you seen in years past there?

David N. Makuen — Chief Executive Officer

Yeah, that’s a great question, John, I think if you go back to historical trends, we have definitely shown resilience and strength in coming out of the kind of the post period of a recessionary time. You could see that in 2008 and 2009 for the brand. As an example, I think these times as we’ve all read are little different and have some different characteristics associated with what we’re going through today. But, for us, I’ll key off of what I suggested to, Chuck, which is this idea of shopping local and what we know about our customer is back in ’21, they were reaching a bit outside of the immediate local trading area — they kept a drive in there going on a trip and spending some of their wallet out, I’ll call it in the regional shopping pad or zone trading area. And there would shop enough so, they we’re doing both. I think in these times that we’re seeing little less [Indecipherable] sort of regional/30-minute away hub and they’re staying in the local hub and a local grocer at a probably a $1 player and maybe a beauty store. They’re staying in that area and they’re patronizing us. And that’s what’s I think continuing to support the brand and our current reported trends and what we believe will be our year for the rest of the year. So that’s a belief we have in the business and it’s something that for a local shopping days is affordable and so back to your word of trade down maybe it’s some of that or maybe it’s still shopping value, but instead of going out to the regional ring, they’re going to shop value in their local ring and save on gas and stay closer to home. So, again a lot of that’s qualitative, but I think it holds together in terms of how our metrics are posting up and we are going to continue to key in on this notion and offer incredible values and what I call drop-ins of great stuff at prices that don’t break the bank. For example, this week, we are dropping in three different programs that are just blow out great value that we happen to have in our [Indecipherable] and buy bucket. We’re pretty sure the customer is going to go thank you, we appreciate you like we always do because you’re thinking about us [Indecipherable] create new values. So, I think we’ve always done that. We’ll continue to do it. It’s a hallmark of who we are and the customer response from us doing that. Does it makes sense.

John Lawrence — Benchmark — Analyst

Great. Great, thanks for that. And you mentioned the new stores. I might have missed it, but did you comment on how many more remodels you’re going to do.

David N. Makuen — Chief Executive Officer

I did not specifically because there was no change. We still have on the books a total of 50 remodels. And I did mention that we’re going to zero in on completing approximately 30 by the end of Q2. So, we’re on pace to what we’ve disclosed in prior meeting well over half within the first half of the year.

John Lawrence — Benchmark — Analyst

And no real difference between the performance or remodel on a new store as far as the lift.

David N. Makuen — Chief Executive Officer

Well, we measure that a little differently. The new store is coming out of the gate new obviously. The remodel, we’re measuring it against a control group of comp stores, but we’re pleased with what we’re seeing and we’re feeding each of those store groups new and remodels, the appropriate fresh gains to see back in the sales and it’s going as planned.

John Lawrence — Benchmark — Analyst

Great. Last question for me is we’ve heard some other companies talk about the availability of merchandise is pretty robust out there. Can you comment on that and what you see as far as maybe deals in the pipeline?

David N. Makuen — Chief Executive Officer

Sure. Do that. As I mentioned in the call, the Chase for our business model is definitely on. There is needless to say, unfortunately for the industry, but for us it’s a good thing and that we’re seeing goods come across our desk on a daily that represent terrific values across branded goods and private label goods that represent cancellations from other brands and unfortunately don’t needed anymore, but becomes something that we can pick up on an attractive basis. So, it is a very flush environment, which Citi Trends intends to take advantage of in the right strategic manner. And like I mentioned in the call, We look to do that for bolstering our BTS somewhat although we’re pretty good on BTS and now it’s more about bolstering fall and holiday with looking at those opportunistic buying opportunities. So, we’re out there. We’ve never not going out there. We love it and we do it in a very strategic smart way and most importantly, that’s right for our customers. We don’t go out and just do any willy nilly great deal. We make sure that that product that we are picking up is right for our African American and Latinx families.

John Lawrence — Benchmark — Analyst

Great, thanks for the color. Good luck.

David N. Makuen — Chief Executive Officer

Thanks, John. Have a great day.

Operator

Thank you. There are no further question at this moment, on the phone line.

David N. Makuen — Chief Executive Officer

Thank you, Melika. Thanks everybody for joining the Citi Trends first quarter 2022 earnings call. Have a great week and upcoming Memorial Day. Bye-bye.

Operator

Thank you, ladies and gentlemen. [Operator Closing Remarks]