Slide 1: Citi Trends: The Case for Change
Citi Trends: The Case for Change April 2017
Slide 2: Important Disclosures
Important Disclosures • Any views expressed in this presentation represent the opinion of Macellum, whose analysis is based solely on publicly available information. No representation or warranty, express or implied, is made as to the accuracy or completeness of any information contained therein. Ma
Slide 3: Table of Contents
Table of Contents I. Executive Summary II. Value Destruction Clear with Appropriate Peer Group III. Board Oversees Material Deterioration in Operating Results IV. Board Makes Poor Capital Allocation Decisions Which Result in Declining Returns V. Poor Corporate Governance & Misleading Statements VI.
Slide 4: I. Executive Summary
I. Executive Summary Retail and Consumer Sector Hedge Fund 4
Slide 5: Why We Are Here
Why We Are Here • Why We Are Here: — Executive Chairman, R. Edward Anderson, and the Board’s poor governance have led to significant value destruction and deteriorating operating results for an extended period of time and must be held accountable. • Who We Are: — Macellum is a family of funds that e
Slide 6: Executive Summary – Value Destruction
Executive Summary – Value Destruction • Total stockholder returns DOWN significantly. — Since Mr. Anderson became Chairman of Citi Trends in May 2006 and held roles of Executive Chairman and CEO for over 10 years, the stock is DOWN 66% with S&P Retail Index UP 201%1. — If you invested $1.00 in Citi
Slide 7: Executive Summary – Material Drop in Operating Results
Executive Summary – Material Drop in Operating Results • Since 2006, under Mr. Anderson as Chairman, CEO and Executive Chairman, operating performance has deteriorated significantly. Mr. Hyatt joined the Board in November 2006. — Sales per square foot - has fallen 23% from $156 in 2006 to $121 in 20
Slide 8: Executive Summary – Poor and Self-Serving Governance
Executive Summary – Poor and Self-Serving Governance • Board failed at its most important duties many times – to attract and retain qualified CEOs and plan for CEO succession. • Excessive compensation not linked to performance. — Mr. Anderson, as CEO in 2014, was compensated $3mm to achieve lowest t
Slide 9: Macellum Nominee are Highly Qualified
Macellum Nominee are Highly Qualified • Mr. Jonathan Duskin – CEO and PM of Macellum Capital Management, a family of funds, that exclusively focuses on the retail sector. — Monetized activist investments cumulatively returned 55.9% vs. SPX of 3.3%. Passive market neutral fund annualized 5.8% during
Slide 10: Executive Summary – Create Material Value for Stockholders
Executive Summary – Create Material Value for Stockholders • With the right Board oversight and improved governance, there can be material upside for stockholders. — With modest operational improvements, Citi Trends can deliver EBITDA growth of up to 50%. — With small changes to working capital mana
Slide 11: II. Value Destruction Clear with Appropriate Peer Group
II. Value Destruction Clear with Appropriate Peer Group Retail and Consumer Sector Hedge Fund 11
Slide 12: Value Destruction – Significant Decline in Stock Price
Value Destruction – Significant Decline in Stock Price $60 $1,600 TSR DOWN 66% SINCE MR. ANDERSON STARTED AS CHAIRMAN COMPARED TO RUSSELL 2000 UP 108% $1,400 $50 $1,200 $40 $1,000 $30 $800 $600 $20 $400 $10 $200 $0 $0 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1
Slide 13: Uses Low Point of Stock Price to Defend Performance
Uses Low Point of Stock Price to Defend Performance “From January 1, 2012 - March 8, 2017, Citi Trends has delivered a total stockholder return of 99.1%” – Stockholder letter from Citi Trends dated 4/11/17. • The Board selected one of the lowest points of the stock of the last 10 years to make their
Slide 14: Majority of Peers Not Relevant
Majority of Peers Not Relevant • Citi Trends’ proxy peer group is not designed to be an appropriate competitive basket for comparative purposes. A large number of Citi Trends’ “peers” are not even specialty apparel retailers. Ci ti Trends Proxy Peer Group BKE The Buckl e, Inc. Reta i l er of medi um
Slide 15: Board Ignores Closest Competitors for Peer Group
Board Ignores Closest Competitors for Peer Group • In Citi Trends’ own words, the best companies to compare Citi Trends’ operating performance are off-price retailers. — CTRN – “We are an off-price retailer of urban fashion apparel and accessories for the entire family.” – Citi Trends’ Form 10-K dat
Slide 16: Company’s Misstatements Regarding Competition
Company’s Misstatements Regarding Competition • From the Company’s own marketing presentation, TJX and ROST are primary competitors. Source: Citi Trends’ March 2017 marketing presentation. Retail and Consumer Sector Hedge Fund 16
Slide 17: Performance vs. Most Appropriate Competitors
Performance vs. Most Appropriate Competitors • Citi Trends trades at 4.4x EBITDA compared to 11.2x, 10.7x and 10.2x BURL, ROST, and TJX , respectfully. 120 100 80 60 40 20 0 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015 1/3/2016 1/3/2017 CTRN TJX ROST BURL
Slide 18: Peer Selection Ignores Comparable Companies
Peer Selection Ignores Comparable Companies • Ignoring comparable companies. — Board appears to select poor performing companies while ignoring successful companies that actually operate in the same off-price, discount apparel retail space, to mask their underperformance. — The Board eliminated ROST
Slide 19: More Appropriate Specialty Apparel Peers Outperform Citi Trends
More Appropriate Specialty Apparel Peers Outperform Citi Trends • Focusing on worst-in-class peers. — The Board has selected a worst-in-class peer group. Citi Trends proxy peer group has no off-price retailers and few other specialty apparel companies an investor would consider peers. — We compiled
Slide 20: III. Board Oversees Material Deterioration in Operating Results
III. Board Oversees Material Deterioration in Operating Results Retail and Consumer Sector Hedge Fund 20
Slide 21: Sales Productivity and Operating Margins Decline
Sales Productivity and Operating Margins Decline • Self-inflicted mistakes overseen by Mr. Anderson and the Board cause operating performance to deteriorate significantly. — Sales per square foot has fallen 23% from $156 in 2006 to $121 in 2016. — EBIT margins have fallen from 7.6% in 2006 to 2.7% i
Slide 22: Material Drop in Results - Declining Sales
Material Drop in Results - Declining Sales • Merchandising mistakes under Mr. Anderson and the Board’s direction caused sales per square foot to fall sharply. Sales Per Sq. Ft $160 $156 $151 $150 $143 $140 $140 $137 $130 $124 $122 $122 $121 $119 $120 $113 $110 $100 2006 (1) 2007 2008 2009 2010 2011
Slide 23: Material Drop in Results – Losing Sales to Competitors
Material Drop in Results – Losing Sales to Competitors • At the same time, comparable off-price retailers have experience material growth in same-store sales. Cumulative Same-Store Sales Results 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 CTRN TJX
Slide 24: Material Drop in Results - Operating Margins Decline
Material Drop in Results - Operating Margins Decline • Board’s mistakes have led to a material drop in operating margins while the competition experienced a material expansion. Operating Margins 16.00% Operating Margins Comparable in 2006. CTRN Operating Margins > ROST in 2006 14.00% 12.00% 10.00% 8
Slide 25: Merchandising Mistakes Cause Deterioration In Sales
Merchandising Mistakes Cause Deterioration In Sales • Mistakes in merchandising drove the Company’s key customer away. — The Ladies category had a 36.8% comparable sales decline. — The drop in this category is largely responsible for the top line weakness experienced by the Company. 2009 2010 2011 2
Slide 26: Board Oversees Deterioration in Inventory Turn
Board Oversees Deterioration in Inventory Turn • Slow and declining inventory turns negatively impact results. — Board allocates too much cash to slow and declining inventory turn. — Turns equal to competitors could result in an additional $60 million in cash. — Slow turn made the Company struggle t
Slide 27: Inventory Turns
Inventory Turns • Citi Trends buys too much inventory and turns decline. Competitors make improvements and take market share with consistently fresher inventory. 7.00x 6.50x 6.00x 5.50x 5.00x Comparable Companies Improve Turns 4.50x 4.00x 3.50x 3.00x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Slide 28: False Narrative to Explain Deterioration
False Narrative to Explain Deterioration • The Company has latched onto a false narrative to explain the deterioration in its operating results. — Customers are buying brands - We believe the Company’s female customers is willing to buy branded clothes and fashion at a value price point provided the
Slide 29: False Narrative to Explain Deterioration
False Narrative to Explain Deterioration — The Company contends that the target customer is struggling economically. — Statistics indicate that the core customer should be improving economically. — The primary customer demographics of the Company has seen their unemployment rate significantly improv
Slide 30: Other Self-Inflicted Mistakes Negatively Impacting Results
Other Self-Inflicted Mistakes Negatively Impacting Results • New merchandise categories have not been accretive. — The new categories have only shifted sales from one category to another with no aggregate benefit. — These changes have distracted the Company from delivering on its core promise of off
Slide 31: Board Misleading Statement Regarding Positive Returns from Strategy
Board Misleading Statement Regarding Positive Returns from Strategy “The Board's Strategy is Showing Results and Creating Positive Stockholder Returns” – Citi Trends Stockholder Letter dated 4/11/17. • Reality: 2015 and 2016 shows the continued deterioration of value and operational performance. 201
Slide 32: Q4 2016 Results Are a Continuation of Poor Trends
Q4 2016 Results Are a Continuation of Poor Trends NOT Evidence of Successful Strategy • Despite the Board’s claim that their strategy is working, Q4 2016 showed no evidence. — 1st quarter to date same-store sales declined 7%. — Gross margins deterioration - fell from 38.4% to 38.1% year-over-year. T
Slide 33: Compounding Merchandising Mistakes
Compounding Merchandising Mistakes • Board’s letter to stockholders dated 4/11/17 indicates further de-emphasizing of branded merchandise. “The Company continues to provide its customers with on-trend, off-price, private label, urban, fashion apparel.” – The Citi Trends Board 4/11/17. — This is the
Slide 34: IV. Board Makes Poor Capital Allocation Decisions
IV. Board Makes Poor Capital Allocation Decisions Which Result in Declining Returns Retail and Consumer Sector Hedge Fund 34
Slide 35: Declining Return on Equity and Invested Capital
Declining Return on Equity and Invested Capital • Return on equity and invested capital. — The Board has made poor capital allocation decisions that have led to declines in Return on Equity (‘ROE’) and Return on Invested Capital (‘ROIC’). — At the same time, the Board did not invest in projects and
Slide 36: Return On Invested Capital Declines and Diverges
Return On Invested Capital Declines and Diverges • Poor investment decisions lead to lower returns. Off-price competitors take advantage of opportunities and drive higher returns. 50.00% 40.00% 30.00% ROIC Diverage Between CTRN, TJX, ROST and BURL 20.00% 10.00% 0.00% 2006 2007 2008 2009 2010 2011 20
Slide 37: Low and Declining Inventory Turns
Low and Declining Inventory Turns • Company failed to improve inventory turns, demonstrating weak capital discipline. “We are now much better managers of inventory and we are committed to reducing inventory levels and improving inventory productivity.” - R Edward Anderson conference call dated 8/29/
Slide 38: Inadequate Share Repurchase
Inadequate Share Repurchase • Putting aside the issue of whether the timing and motivation for a return of capital plan makes sense, we do not believe the amount of the Company’s plan is adequate. — The Company currently has $114 million in cash on its books currently and targets to maintain an $80
Slide 39: Underspending in Vital Systems
Underspending in Vital Systems “Improved systems can improve inventory managements and have improved our systems and we’ll continue – we will continue that over time.” - R. Edward Anderson conference call dated 8/29/07 — Despite acknowledging the importance of vital systems, the Board has not suppor
Slide 40: Underspending on Store Growth Cedes Market Share to Competitors
Underspending on Store Growth Cedes Market Share to Competitors • Company’s store opening program has been erratic. In last 5 years, they have ceded significant market share. “… have concluded that our chain saturation level is close to 1,000 stores”. - David Alexander, CEO conference call dated 5/1
Slide 41: V. Poor Corporate Governance & Misleading Statements
V. Poor Corporate Governance & Misleading Statements Retail and Consumer Sector Hedge Fund 41
Slide 42: Failure to Recruit and Retain CEO
Failure to Recruit and Retain CEO • History of failing to recruit and retain qualified CEO and plan for succession. “Mr. Mazzola’s departure is a big negative in our view, particularly given the timing.” – Patrick McKeever, Managing Director MKM Partners 3/23/17 — Mr. Mazzola left the Company to be
Slide 43: Board Must Be Reconstituted to Search for New CEO
Board Must Be Reconstituted to Search for New CEO • Failure to plan for CEO succession. — The Board has also clearly failed at succession planning. In the case of both Mr. Alexander and Mr. Mazzola, the Board was unprepared for their departures. • Difficulty in recruiting new candidates. — We fear t
Slide 44: Reactive vs. Proactive Board
Reactive vs. Proactive Board • Board’s reactive behavior, announced in the middle of this contested election, is a transparent attempt to preserve their jobs. — Board boasts about new program to return capital to stockholders yet fails to mention that they were previously resistant to returning capi
Slide 45: Excessive Compensation Not Linked to Performance
Excessive Compensation Not Linked to Performance • Excessive compensation stems from a Board that lacks independence. — Executive Chairman compensation excessive for a company of this size. — In 2015, Mr. R. Edward Anderson, was compensated $877,000 as Executive Chairman. — Former CEO, Mr. Mazzola w
Slide 46: Declining EBITDA Targets Approved by Board
Declining EBITDA Targets Approved by Board • Ineffective targets do not lead to growth – goals do not challenge executives to grow earnings and promote long-term stockholder value. — EBITDA target declined 20% over the last 5 years. — The Company missed 5 of the last 8 EBITDA targets. — The Board’s
Slide 47: Problematic Director Compensation
Problematic Director Compensation • Citi Trends non-employee directors receive a cash retainer of $84,000 annually, which is line with the median cash compensation paid to non-employee directors of large capitalization companies*. In fact, Citi Trends non employee Directors receive more in cash reta
Slide 48: Board Misleads Investors Regarding Facts of Settlement Discussions
Board Misleads Investors Regarding Facts of Settlement Discussions • Truth about settlement discussions. — The Board refused to commit to the appointment of any new directors to the Board, including Macellum’s nominees. — The Company would only “consider” the addition of up to two new independent ca
Slide 49: Citi Trends Has Problematic Corporate Governance
Citi Trends Has Problematic Corporate Governance • Classified Board with directors serving staggered three year terms. • Stockholders cannot act by written consent. • Special meetings of stockholders can only be called by stockholders holding 50% or more of the voting power. • Supermajority voting r
Slide 50: Tenure Clouds Independence and Directors Lack Stockholder Alignment
Tenure Clouds Independence and Directors Lack Stockholder Alignment • Long tenure compromises the Directors’ Independence. — Mr. Anderson 16 year tenure. — Mr. Hyatt 10 plus year tenure. — The independent Directors have an average tenure of over seven years with three of the five averaging eleven ye
Slide 51: Board’s Inappropriate Skill-Set has Led to Failure
Board’s Inappropriate Skill-Set has Led to Failure • Multiple times the Board failed to recruit and retain qualified CEOs. Board has not planned for CEO succession. The Board lacks the skills to make an informed decision. — March ’09 – Board fails to recruit a qualified CEO. Board fails to have succ
Slide 52: Nominees Need to be Replaced
Nominees Need to be Replaced • Nominee R. Edward Anderson’s 16 year tenure provides a lack of fresh perspective. — Mr. Anderson has served as Citi Trends’ leader for 16 years and must be held accountable for poor results. — 66% decline in total stockholder return since becoming Chairman of the Board
Slide 53: VI. Our Nominees Will Seek to Drive Value Creation
VI. Our Nominees Will Seek to Drive Value Creation Retail and Consumer Sector Hedge Fund 53
Slide 54: Executive Summary - Our Nominees vs. Company Nominees
Executive Summary - Our Nominees vs. Company Nominees Our Nominees Company Nominees Truly Independent Directors Long Tenured Directors Direct stockholder representatives • R. Edward Anderson As beneficial owner of ~3.9% of the outstanding stock, – NOT independent Jonathan Duskin’s interests are
Slide 55: Jonathan Duskin
Jonathan Duskin • Stockholder Mindset – — Macellum is one of the Company’s largest stockholders, beneficially owning approximately 3.9% of the outstanding common stock of the Company. — As a direct, stockholder representative, Mr. Duskin’s interests are directly aligned with all other stockholders –
Slide 56: Jonathan Duskin
Jonathan Duskin — Christopher and Banks - Macellum ran a successful activist campaign at Christopher & Banks Corporation. Through a negotiated settlement, Mr. Duskin, along with three new directors, joined the seven member board in June 2016. After deteriorating results in Q4 2016, Mr. Duskin and th
Slide 57: What Others Say About Jonathan Duskin
What Others Say About Jonathan Duskin — “Jon is a great Board member. He understands the critical facets of what makes a retailer function and helps bring that perspective to the Board room. He constantly challenges the executives to focus on what’s right for the shareholder.” — Kent Kleeberger, Cha
Slide 58: Paul Metcalf
Paul Metcalf • Significant Executive and Merchandising Experience. — Mr. Metcalf served as the Chief Merchandising Officer and Executive Vice President of Burlington Stores, Inc., where EBITDA expanded from $311 million to $445 million during his tenure. — The stock priced increased 275% from its IP
Slide 59: VII. Our Vision – Time for Change
VII. Our Vision – Time for Change Retail and Consumer Sector Hedge Fund 59
Slide 60: Improve Sales Growth
Improve Sales Growth • Improve the Company’s merchandising strategy. — We believe the Company must bring back appropriate brands, bought in-season, at close-out prices back to the Company’s fashion sensitive customers. CTRN 2010 2011 2012 2013 2014 2015 2016 % Chg. Transactions (est.) 0.2% (6.9%) 1.
Slide 61: Increase Inventory Turn
Increase Inventory Turn • Reallocate capital expenditure to improve the Company’s systems – systems, particularly planning and allocation, are a critical to improve inventory turn. • Increasing inventory turn can: — Drive higher sales – getting the right product, in the right place, at the right tim
Slide 62: Appropriate Store Growth
Appropriate Store Growth • Store growth. — The Company believes that they can have over 800 stores nationally. — ~80% of customers don’t have credit cards. — Limits their ability to shop on line. — Necessitates stores visits. — Off-price retailers, with natural protection from internet competition a
Slide 63: Appropriate Share Repurchases
Appropriate Share Repurchases • Increase size of share repurchases. — Recent repurchase announcement inadequate and our nominees would seek to increase its size. However, given Citi Trend’s — We agree that apparel retailers need to have a strong balance sheet. depressed valuation, we believe the Com
Slide 64: Explore Sale Transaction to Ensure Value Maximizes
Explore Sale Transaction to Ensure Value Maximizes • Explore sale transaction. — We are confident that there is an opportunity to increase operating results materially at Citi Trends. — However, unlike the present Board, our nominees would not be opposed to exploring a sale to create value. — We fee
Slide 65: Significant Opportunity to Create Value
Significant Opportunity to Create Value • Significant opportunity to create value. — We believe the Company’s stock price can more than double to over $35-37 per share if the Company can achieve $54.4 million in EBITDA by achieving the following milestones: — Aggregate sales of $800 million – equate
Slide 66: VIII. Conclusion
VIII. Conclusion Retail and Consumer Sector Hedge Fund 66
Slide 67: Time for Change
Time for Change • Board has put up barriers to prevent stockholders from having the facts before making a decision. — Rather than engage in a substantive dialogue, the Company has gone through the motions. — The Board summarily rejected adding a stockholder representative to the Board. — The Company
Slide 68: Appendix
Appendix Retail and Consumer Sector Hedge Fund 68
Slide 69: Jonathan Duskin Bio
Jonathan Duskin Bio • Jonathan Duskin, age 49, has served as Chief Executive Officer of Macellum Capital Management, LLC, which operates a New York-based pooled investment fund, since July 2009, and as the sole member of Macellum Advisors GP, LLC, which is the general partner of Macellum SPV III, LP
Slide 70: Paul Metcalf Bio
Paul Metcalf Bio • Paul Metcalf, age 56, is currently the owner and principal of BEL Retail Advisors, a business consulting firm that specializes in retail development and strategy, which he founded in May 2015. From April 2012 to March 2015, Mr. Metcalf served as the Chief Merchandising Officer and