Categories Consumer, Earnings Call Transcripts

Citi Trends, Inc. (CTRN) Q4 2020 Earnings Call Transcript

CTRN Earnings Call - Final Transcript

Citi Trends, Inc. (NASDAQ: CTRN) Q4 2020 earnings call dated Mar. 16, 2021

Corporate Participants:

Nitza McKee — Senior Associate

David N. Makuen — Chief Executive Officer

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Analysts:

Dana Telsey — Telsey Advisory Group — Analyst

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

John Lawrence — Baraboo Growth — Analyst

Presentation:

Operator

Greetings, and welcome to the CTRN 4Q ’20 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on, Tuesday, March 16, 2021.

I would now like to turn the conference over to Nitza McKee, Senior Associate at ICR. Please go ahead.

Nitza McKee — Senior Associate

Thanks, Frank, and good morning, everyone. Thank you for joining us on Citi Trends fourth quarter 2020 earnings call. On our call today is our Chief Executive Officer, David Makuen; Chief Financial Officer, Pam Edwards; and Vice President of Finance, Jason Moschner.

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 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 fourth quarter and fiscal 2020 earnings call. I will review Citi Trends’ operating results for the fourth quarter and fiscal 2020, and then discuss our progress and go forward plans on our strategic initiatives. Pam Edwards, our CFO, will then elaborate on our financial results and provide some thoughts on how we are approaching fiscal 2021.

Before reviewing our results, I would like to take this opportunity to personally thank our entire Citi Trends team for all that they accomplished this past year. None of 2020 was easy for America. Our unwavering support of our associates and customers to live their lives as normally as possible was our primary mission. We continue to double down on the safety and health measures that our communities expect from us, and we will continue to follow the CDC guidelines each and every day. To the more than 5,000 people, a tremendously diverse crew, who power Citi Trends, I am so grateful for your hard work and dedication to our customers and our brands. Amidst the pandemic impacted backdrop, our unique and powerful winning culture is only getting stronger and paying off in so many ways. We collectively have transformed the Citi Trends’ operating model, positioning the Company what we believe to be many years of profitable growth. Our strong full year results are reflective of the uniqueness of our brands, our highly engaged customer base, and our motivated leadership team.

To quickly recap, during the COVID-19 pandemic, we took the following actions. We temporarily closed all of our retail stores as of March 20, 2020 and we began safely reopening our fleet in ways starting in late April. We also temporarily closed our distribution centers. We implemented strict protocols, aligned with CDC recommended guidelines to ensure a safe and healthy shopping in working environment. We took quick and aggressive actions on expenses and working capital to preserve our financial health and liquidity.

Now let me discuss the key highlights of our fourth quarter and annual performance. As previewed in February, we had an exceptional fourth quarter, driven by our on-trend assortments that resonated with our loyal and growing customer base. Total fourth quarter sales increased 19.4% inclusive of a comparable store sales increase of 16.7%. The sixth consecutive quarter of positive growth, including open-only stores for the first quarter of 2020. Similar to previous quarters, our holiday growth was driven by higher average basket size than prior year, and we saw strong broad-based sales increases in the majority of our cities or categories.

For the year, we experienced a total sales increase of 0.2% to $783 million, despite operating with 16% fewer store days, limited store hours, and social distancing capacity constraints. Utilizing fact-based rigor and improved disciplines in buying, planning and allocation, we drove significant inventory optimization, improving inventory turns for the second half of 2020, during which all of our stores were open by more than 60%. We added a significant number of new brands and developed new partnerships, adding to our world-class assortment, further differentiating our apparel, accessories and home trends for way less spend, always curated for African American and Latinx families. We successfully opened 18 new stores during 2020. Last, but not least, we formed the CitiCARES Council, made up of a diverse group of individuals to create and oversee initiatives of change. The CARES in CitiCARES stands for Citi Trends against racism employee solutions, and their mission is to contribute to elevating humanity to place a peace and inclusion so that families of color experience equality wherever they may walk, work, shop and carry out their lives.

What’s important to note is that in 2020, we amassed so many valuable learnings about our customers wants and needs, and how improvements in our model can serve them even better in the future. Potent combination of consumer research, selling analytics and social media tracking allowed us to test and react in ways this business has never seen before. In fact, our new way of looking at our assortment by Citi, deliberately forming seven cities, which are women’s, men’s, kids, home, beauty and accessories, lifestyle and footwear. By forming those seven cities, we created haha moments that channel the unstoppable energy of our buying, planning and allocation teams to deliver the trends in Citi Trends.

Transformative thinking across so many functions position us as the premier specialty value brand in underserved communities. On our one inviting and differentiated experience, we enable be it on comfy, fashionable, confident or sexy; lighting, streaming and TikToking your way to stardom; spicing up your apartment, home or kitchen; showing it up with the best lashes, nails and earrings on the block; rooting for your fave team, and rocking the coolest lit around; and of course, showing off the latest drop of new kicks or dressy heels, our stores are all that and more, with prices that won’t break the bank.

Now, I’d like to turn the call over to Pam, our CFO, to discuss the fourth quarter and full year results, and our thoughts around fiscal 2021 in greater detail. Pam?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thank you, David. Good morning. First, I’d like to say that I’m very excited to have joined the Citi Trends team. It’s been a busy and productive few months getting to know the business, and I’m delighted to be joining you on my first earnings call.

Now, turning to a review of our results. Total sales in the fourth quarter increased 19.4% to $252 million, including a comparable store sales increase of 16.7%. The increase in comp sales was driven by a low-20s increase in basket size, offset by a slight reduction in customer transactions. The majority of our comp was driven by apparel, while home and lifestyle had absolute high comps.

We achieved gross margin in the quarter of 42.7%, an increase of 300 basis points, compared to 39.7% in the fourth quarter of 2019. This follows our third quarter gross profit expansion of 440 basis points from the prior year third quarter. The increase in our quarterly gross profit rate continues to be primarily the result of strong full-price selling and fewer markdowns.

As a percent of sales, SG&A expenses leveraged by 60 basis points to 31.5% from 32.1% in the fourth quarter last year. SG&A expenses increased by $11.6 million, compared to the fourth quarter of last year. The increase in SG&A expense dollars was primarily attributed to higher incentive compensation due to better year-over-year performance.

Operating income was $23.7 million, an increase of 111% compared to operating income of $11.3 million in the fourth quarter of 2019, for an operating margin result of 9.4% compared to 5.3% last year.

Now turning to the bottom line. Our net income was $18 million for the quarter, compared to net income of $9.4 million in the fourth quarter of ’19. Earnings per diluted share was $1.81, compared to $0.84 per share in the fourth quarter of last year.

Now turning to our full year results. For fiscal 2020, total sales increased 0.2% to $783.3 million, and comparable store sales decreased 2.1% with the decline driven by the impacts of COVID-19. As a reminder, in the first quarter 2020 through March 7, our comparable store sales increased 3.1%; then, in the second quarter, we recorded a 32.2% increase in comparable store sales open — comparable store sales for open-only stores. In the third quarter, our comparable store sales increased 6.3%. And finally, in the fourth quarter, our comparable store sales increased 16.7%.

Gross margin for the full year, expanded 180 basis points to 39.8% from 38% in 2019. The increase was primarily due to strong full-price selling and fewer markdowns in the second, third and fourth quarters of 2020, partially offset by the 1,011 basis points reduction in our gross margin for the first quarter due to the markdowns we took as we temporarily closed our fleet of stores in March.

As a percent of sales, SG&A expenses for the full year were flat with last year, coming in at 32.2%. SG&A expenses increased by $0.6 million, compared to the prior year, primarily due to incremental store and distribution center cleaning and PPE supplies required for our teams to work safely, partially offset by a decrease in payroll expense, a result of associate furloughs, and reduced operating hours, primarily in the second quarter of 2020.

Operating income increased 72.2% to $31.9 million, compared to operating income of $18.5 million in fiscal 2019, for an operating margin of 4.1% compared to 2.4%. Our net income was $24 million, compared to $16.5 million in 2019. Earnings per diluted share was $2.32 compared to $1.41 last year.

As David mentioned, our 2020 financial results are a reflection of our strong operational execution, despite the headwinds we face from the pandemic, including significant store closures ranging from 35 days to 100-plus days during the first half of the year. We ended the quarter with $120 million — $123 million in cash, compared to cash and investments of $63 million at the end of last year. We generated operating cash flow of $111 million, compared to $43 million generated last year. During the year, we repurchased approximately 1,031,000 shares for $32.9 million under our share repurchase program. As of the end of the fiscal year, there was $33.4 million remaining on our share buyback authorization.

As for inventory, we ended the year in a very clean position with inventory down 24.9%, compared to the end of last year. Notably, we ended the quarter with 40% less inventory in our comparable stores. At the end of Q4, our next season buy inventory represented 19% of total inventory, compared to 17% last year.

Now turning to our first quarter and fiscal ’21 outlook. We are encouraged by a quarter-to-date sales performance, which is above our internal expectations. For the full year 2021, we expect to grow sales between 11% and 15%, with earnings per share of $2.85 to $3.05. We expect to spend $39 million in capital expenditures for the year, including opening at least 30 new stores, remodeling 30 stores, and making progress towards improving our infrastructure. We also will continue to repurchase shares on our existing authorization, which as of yesterday, there was $22.2 million remaining.

Thank you. And now, I’ll turn the call back to David for closing comments. David?

David N. Makuen — Chief Executive Officer

Thanks, Pam. So glad to have you on the team. After a year of CEO of Citi Trends, I’m really energized about the strength of our brand and the passion of our people as they conquer new challenges. I have had the time to study all facets of our business, and have helped the entire leadership team on our growth strategies. As we look to 2021, we are focused on four each strategic areas that provide the foundation to over time accelerate sales and earnings growth. Our four key strategic areas of focus include; number one, growing our fleet; number two, optimizing our product mix; number three, investing in our infrastructure; and number four, making a difference in our communities.

First a little detail about growing our fleet. After opening 18 stores in 2020, we ended the year with 585 stores. As we outlined in January of 2021, we see opportunity to grow our fleet to a 1,000 stores eventually, over 70% growth from where we are today. We will grow the fleet in three distinct types of neighborhoods. Number one, African American centric, number two, melting pot, having blend of African American and Latinx, and number three, Latinx centric. We are bullish on store growth, given that our customers love spending time in our stores. Over half of our customers live within 10 minutes or less of the store. Our dwell time in stores is very high with many spending over an hour, as they enjoy searching for the latest, fresh trends at extreme values. We are truly for the locals, and for the culture. Growing our fleet will provide more access to our value, employ more from the community and further extend the Citi Trends family.

Second, we’re optimizing our product mix. Our customers are at the heart of everything we do. And because our customers are so highly engaged, give the opportunity to really study our customer and use data to inform our offerings across our seven cities or areas of business. We see opportunities for improvements related to curating assortments and fine-tuning how we hone in on the dynamic changes in the preferences of our customers, with our ultimate goal of creating an even more compelling store experience in the months and years ahead. Lastly, as we continue to optimize our product mix, we are focused on prioritizing choice and breadth over depth, improving speed to market, driving faster turns, expanding non-apparel categories, and investing in systems and automation, which brings me to our third strategic focus, which is investing in our infrastructure.

We will do so by making investments across our merchandising, supply chain and stores, or as we call it, buy, move and sell. In buy, as part of our product mix optimization, we are investing in cloud-based system tools and analytics that will bring a data-driven approach to our inventory planning, buying and allocation process. In move, or supply chain, we are developing solutions to improve speed and productivity, including distribution center upgrades and system enhancements. And lastly in sell, in addition to new store growth, we are investing in remodels, as well as implementing store associate tools, such as workflow apps and a new POS system.

And lastly, our fourth strategic focus, making a difference. As I mentioned, our customer is at the heart of everything we do. We are committed to make — we are committed to making a difference in the communities we serve and the lives that we can impact. During the quarter, our Board of Directors formed a Corporate Social Responsibility Committee chaired by Margaret Jenkins. Committee will oversee our initiatives around ESG and social responsibility, as we start the journey towards becoming a more sustainable company, grounded in diversity and inclusion. In fact, we kick-started 2021 with our first ever Black History Makers program during Black History Month. We were flooded with black entrepreneurs that applied online for one of the 10 $5,000 grants to further their businesses. We look forward to announcing the winners in the near future.

As we said at the ICR Conference in January, we believe our focus on these four initiatives will lead to accelerated sales and our earnings growth over time. To that end, we are reiterating our previously stated 2023 growth targets, which are, increasing top line sales to more than $1 billion in 2023, delivering comparable store sales growth in an average of about 3% per year, growing the fleet with at least 100 new stores by the end of 2023, remodeling at least 150 stores by the end of 2023, and investing in infrastructure improvements for merchandising, supply chain and stores. This will lead to growing operating income at a compound annual growth rate of 20%-plus more per year, increasing earnings per diluted share at a compound annual growth rate of 25% per year.

So overall, I’m excited about our outstanding finish to a strong year. We had many operational and financial accomplishments in 2020 that strengthened our positioning. Thank you to the entire diverse Citi Trends team that sparked our transformation and, that I know, is excited to see the future unfold in 2021 and beyond.

With that, we’re ready to take questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you. Congratulations, David, to you and the entire team on what an amazing year in the depths of a pandemic. As you think about 2021 and beyond, I know that data has been an important new game changer of what the business model is going to include to inform you. What are you looking forward to glean that will help you with data to drive the business in 2021? And then on inventory levels, what are you seeing, how you planning given the supply chain disruptions that we’re all hearing about? Thank you.

David N. Makuen — Chief Executive Officer

Hi, Dana. Thanks a lot for joining us and great questions. On the data front, what I can tell you as our focus in 2021 is getting all over our internal data. It’s organizing it, mining it and using it to inform how we can impact really all levels of our P&L. We see data as a great place to start in terms of understanding how we can study all our expenses, and all of our infrastructure opportunity improvements across this year. So this year, we really focused on function by function, leveraging the data that we like to — thankfully already have pretty sophisticated systems to be able to enable our users to glean insights and then take actions from those insights.

On the inventory question, great one. We all know the headwinds out there in the retail landscape. We’re doing with them as they come. We’re able to be pretty nimble and agile as we deal with some of the slowdowns and difficulties moving goods. But overall, we believe strong. We have the right plans in place to keep our flow, fresh new trends coming at the rate required to meet the consumer’s appetite. So we don’t see any huge headwinds there, and we’re really excited about what’s to come in terms of nailing the trends for our consumers.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you. And just one quick one for Pam. Pam, if you look at the expense structure of the business in 2021 and the opening of new stores, is there opportunity — what are you seeing in terms of occupancy costs as compared to previously as you’ve opened stores? Is there opportunity on the occupancy costs, given what we hear out there? Thank you.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thanks, Dana. Thanks to our strong relationship with our landlords, last year we were able to secure abatements and deferrals and along the way we renegotiated renewals and extended options at terms that made good sense for us in the current economic landscape. So from a headwind perspective, I think we’re in pretty good shape as we had towards the year.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

David N. Makuen — Chief Executive Officer

Thanks, Dana.

Operator

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Yeah, thanks. Good morning, and congratulations on the pretty remarkable performance in 2020. I wanted to start by just giving a little bit more color here on quarter-to-date given the noise around store closures and so forth. You noted that through March 7 last year, I think, comps were up 3.1%, I believe you said. Wanted to see if we use that as a benchmark? It said that you’re performing above expectations. Wanted to see if you could give us a sense or quantify that in a little bit more detail, given that you’re about to enter a period in which stores were closed a year ago?

David N. Makuen — Chief Executive Officer

Thanks, Jeremy, for joining and good question. While I can’t share any specifics, what I can share is there are lots of puts and takes in Q1. Now, I’ll go through a couple. The biggest one is tax refund shifts, which prior years or earlier, as we all know, they’re kind of dribbling out this year and that’s changed the curvature of our sales results in Q1. And we planned it that way, which is why we talked about we’re above our internal expectations as best we can when we model when those tax dollars are expected to flow into consumers’ pocketbooks. So we’re keeping a close eye on that. I mean, I think so far we’re seeing a trend that pleases us, but there is a lot more to come on the tax refund side of life. And then the — I mean, the other factor is the Easter timing shift that impacts our curve in Q1 as compared to prior years, so we baked that in as well. And that’s pretty big for us. It’s not — certainly not as big as Christmas, but it’s a nice peak sort of 10-day period. So that shift as well. So we’re kind of putting that all into our models, and what’s coming out is a nice trend so far. And then as you know, we run up against the closures, starting on the 20. So compared to 2020, that’s all plus business. And what we’re doing lastly is, we’re kind of comparing our run rates of ’21 to ’20 to ’19 in fact. And so we’re starting to kind of blend almost a two-year stack as we look at the business. When you put all that together, we see us tracking ahead of what our models says, and it’s, I think, a sign of the strong fundamentals in our business.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Okay. Just to hone in on that a little bit more in terms of thinking about 2019 as a benchmark kind of your — the AUVs that you were running in Q1 of that year, it seems based on our checks like, trends have been very strong. And you’ve got, as you noted, Easter, you’ve got stimulus money that’s going to be come in as well. Is it fair to assume that your current trends are tracking above the 2019 levels at least quarter-to-date?

David N. Makuen — Chief Executive Officer

Quarter-to-date, well, not exactly, because again the different shifts — ’19 is not a perfect sister year for Eastern tax timing. So can’t say that they were exact or above. But again, in our modeling when we kind of try to account for all those moving parts, we are trending in a direction that gives us confidence that we’ll be above ’19.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Understood. I wanted to shift into your product optimization. You had some really successful new partnerships with the Jordan Brand, Tommy Hilfiger last year. Can we expect more of that new brand additions? Anything that you can share with us now, but how you’re looking at that initiative here in 2021?

David N. Makuen — Chief Executive Officer

Sure. Happy to shed a little light on that. What I’d start with is our assortment is grounded in a really nice combination of private label brands, most of which are developed for our specific customer of mine. And then we do our best to enhance the assortment with the right level of brand penetration in all our categories, particularly the cities of men’s, women’s and kids, and then we also dip into beauty and accessories with brands. So as we look at the landscape, you’re right. We’ve added some good healthy brands that have definitely enhanced our assortments through all of 2020. And what we’ll do in 2021 and, frankly, beyond is continue to develop and nurture those relationships. Some will come, some will go. That’s part of retail. But at the end of the day, our partners that we are securing in new relationships are boding well for us. We’re nurturing those relationships and hoping to expand them where it makes sense in the cities that it makes sense in e.g., men’s, women’s and kids. So you’re right to bring it up. It’s a focus of ours, and we watch it closely. And each of our Citi heads, if you will, have a — have discrete plans to continue to woo and bring on new brands. And then frankly, bringing on new private-label resources, I don’t want to skip that, that’s very important as well. The more we can find vendors, particularly black-owned vendors that make goods tailored to our demographic is amazing. We’ve got a number of those stories that we’ll share more of in the upcoming releases. But we’re beginning to make some good headway, and really give black-owned brands a platform to sell through. So we’re excited about really the total mix.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Got it. And if we could just hone in on the private label as kind of a percent of your mix in 2020. Can you kind of give us a range of where that is, and where you expect it to trend here over the next year or two?

David N. Makuen — Chief Executive Officer

Sure. Yeah. What I would tell you is, it’s the bulk of our volume. I’ll kind of leave it at that. Greater than 50% read into that. And it remains really the lifeblood of what we do. And so whilst we’ll always have brands as part of the mix, it’s these unique vendor relationships that we maintain with hundreds of vendors around the country that often make goods that we can tailor to our demographic and — meaning we can curate goods for our customers. So yeah, they’re a very important piece of the pie. We love those guys and we are continuing to work with them, as we’ve seen openings in our stores, so to speak, to carry goods beyond apparel, for example. So we’ve opened up a lot of new private brand development companies that would do stuff for us in the home business, that would do stuff for us in the tech business, that would do stuff for us in the team business. So it covers really a lot of the store. And again, excited about the opportunity to find more, and more of them being black-owned is a great thing, and be kind of continue down that road.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Great. And then I had a two-part marketing question. First is, what was your marketing spend as a percent of sales in ’20? And what do you expect it to be kind of moving forward here in 2021? And then as a follow on to that, in terms of potentially looking at any type of loyalty program, or are there other ideas to potentially gather additional customer data to serve your customers more effectively? I know you’re a big data guy. Any color on that?

David N. Makuen — Chief Executive Officer

Sure. Thanks, Jeremy. Yeah, absolutely. On the marketing front, I’ll leave it at, it’s pretty immaterial in 2020. In ’21, it’s really what I call maintenance level of marketing spending, most of it driven by store signage, and then a small smattering driven by a paid digital social media marketing. So we’re — I’d call it, it’s immaterial. We’re testing and learning a bunch of things. We’ll have more to say about marketing, likely in ’22 and ’23 because our opportunity this year is really to focus on the four areas of strategic imperatives that I mentioned. We’ll get to marketing in our future, but it’s again not in the top of the list this year.

On the loyalty front, it’s something definitely near and dear to my heart. Similar answer, we first got to put in, as I mentioned, our new POS system, which will begin to give us the technological foundation to begin collecting customer data. But again, we’ll probably reserve that collection, test and learn and the scaling of it and so forth, for a few years down the road, maybe a couple of years down the road. So it’s out there, but we think we’ve got bigger fish to fry in the next 12 months to 18 months that will propel this business forward. But you’re fishing in the right pond. We want to get there at some point in our future.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Okay. Last one from me. And again, I appreciate you taking all my questions here. But your gross margin performance has really been exceptional. It’s now kind of third straight quarter that you’ve seen at least 300 basis points of margin gains year-over-year. It looks like you’ve just seen a little bit of a step-up in that, and I know that’s because of the changes you’ve made on turning your inventory faster. But in terms of quantifying, can you give us a sense for the percent of markdowns that you had in, let’s say, in these last three quarters versus what you had been seen in previous years, so we can get a relative sense of just how much of that margin upside is coming from just fewer markdowns?

David N. Makuen — Chief Executive Officer

Yeah, good question. We don’t give all the specifics there, but what I can share with you directionally is markdowns were in double-digit range in ’19 and prior. And we certainly are now looking at single-digit range in ’20, and we’re — we do everything in our power to keep them in single digits sort of the future. We get better and better in this area, Jeremy. And so I’ll never say, there’ll be nothing. There are always something. They’re strategically used to tick down price in order to make something go away. What really we’re doing is focusing on the upfront buy, way more than we used to, so that we buy with the right mindset of we want to sell through, celebrated selling out and then move on to the next trend and so forth. So the fact that they’ve moved in the single digits is an amazing accomplishment. And it’s — to your point, it’s aiding and abetting our margin expansion.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Got it. And then is it fair to assume that based on your EPS guidance for the year, it looks like you’re — it’s embedding operating margin over 4%. And my view on that is, I’m assuming that maybe your gross margins are going to be close to what you did in 2020, or possibly even a touch better? Is that a fair assumption?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Yeah, that’s a fair assumption. We expect to continue our trend of high-30s, low-40s.

Jeremy Hamblin — Craig-Hallum Capital Group — Analyst

Great. Thanks so much. Best of luck, this year.

David N. Makuen — Chief Executive Officer

Thanks, Jeremy. Have a great one.

Operator

Our next question comes from John Lawrence with Baraboo Growth. Please proceed.

John Lawrence — Baraboo Growth — Analyst

Good morning.

David N. Makuen — Chief Executive Officer

Good morning.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Good morning.

John Lawrence — Baraboo Growth — Analyst

David, just first of all, congratulations on what you’ve been able to accomplish. Since we talked on — upon your arrival, obviously, pandemic and a lot of other things, unusual year, but congrats on what you’ve been able to do.

David N. Makuen — Chief Executive Officer

Thanks, John.

John Lawrence — Baraboo Growth — Analyst

Just dialing in a little bit following on Dana’s question on basically the unit economics and looking at store growth and that type of thing. This productivity curve that you have that’s work in the model basically better merchandise, less markdown, better sell through. As you look at that, and when you’re in the real estate meetings, does all of that sort of new model, better margins in all of that new model, if you will, open up the door for a lot more real estate opportunities than you had, say, two years, three years ago. I assume it would.

David N. Makuen — Chief Executive Officer

Yeah, great question. Absolutely. I think that the line of sight we have, thanks to some amazing learnings. And the transformation in 2020 has actually changed to your point [Technical Issues] real estate meetings, and how we’re going about site selection. In a couple of calls ago, we talked about enhancing the data portion of our real estate, and that’s really off and running. I’ve got a great set of party [Technical Issues] all of the demographic, [Technical Issues] opening up not only [Technical Issues] country with new stores that’s [Technical Issues] figure out that the remodel came well. And so having that part of the mix, John, along with our results as a tailwind, has definitely, I think, made us smarter in terms of how we are considering and improving real estate. And it’s also given us the confidence to enter those neighborhoods that I spoke to [Phonetic], because as we’ve sliced [Phonetic] in that in our fleet, we’ve learned a lot more about it. And the big aha has been this opportunity to work with [Phonetic] Latinx shoppers. And so we’re looking at Latinx communities to open new stores. And that’s one of those aha moments that wasn’t really on the agenda two years, or three years ago, and now it’s firmly on there, and we’re chasing the right sites that would make us a part of those neighborhoods.

John Lawrence — Baraboo Growth — Analyst

Yeah. And just to take it one step further, what — have you given any information on what it cost David to do one of these remodels. And I assume when you do one of those, and you get the comp increase that probably a pretty high use of cash to do those remodels with a big high ROI on that?

David N. Makuen — Chief Executive Officer

Yeah. You’re right on. We’re looking at it from a payback curve potential and we do really the following. We figure out how we can do the right level of remodel depending on the age and condition before. We then try to negotiate with the landlords to get either renewal [Phonetic] or revised term, and do the remodel similar to TA allowance. And then we proceed and get it done. And then we anticipate a nice lift in the high single digits from a comp standpoint, and that produces a nice ROI over time in these remodels. So yeah, we — you’re absolutely, right. We’re following insights and data into that process too, negotiating better with landlords than we used to do. And I would tell you, we’re not just going into the oldies. We’re going into even more recent class stores where we see an opportunity for the biggest lift potential based on the population density, and that’s a new approach as well. So we’re kind of approaching these remodels from a bunch of new angles. We just did our first class in fact. So, of the 30 that we have publicly stated we’ll do in 2021, we finished eight, and they’re off to a good start. So our formulas, seemingly working. We’ll monitor and do all 30 this year, and then more to tell next year.

John Lawrence — Baraboo Growth — Analyst

Great. Thanks so much for your time. Congrats, and welcome Pam.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thank you.

David N. Makuen — Chief Executive Officer

Thanks, John.

Operator

Mr. Makuen, there are no further questions at this time. Please continue with your presentation or closing remarks.

David N. Makuen — Chief Executive Officer

Frank, thanks so much. Thanks for everybody. I’ll keep it brief. Have a great day and week, and we’ll see you at the next time. Take care now, bye-bye.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Bye.

Operator

[Operator Closing Remarks]

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