Citi Trends (CTRN) Q1 2026 Earnings Transcript

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DATE

Tuesday, June 2, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Kenneth Duane Seipel
• Chief Financial Officer — Heather Plutino

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TAKEAWAYS

• Revenue -- $231 million, marking a 14.4% increase driven by both transactions and higher average basket size.
• Comparable Store Sales -- Increased 13.9%, with a 2-year stack of 23.8% and extending a streak to 21 consecutive months of growth.
• Adjusted EBITDA -- $13.9 million, more than doubling from $6.4 million year ago, with margin expanding 280 basis points to 6% of sales.
• Gross Margin -- Rose 40 basis points to 40%, supported by improved merchandise margin and tailwinds from allocation and shrink initiatives, partly offset by higher freight (fuel surcharges).
• SG&A Expenses -- Adjusted SG&A at $78.3 million, up from $73.4 million, leveraging 250 basis points to 33.9% of sales due to expense controls and sales growth.
• Store Network -- 2 stores opened and 1 closed, ending with 591 stores; 25 remodels completed in the quarter, with an additional 26 finished early in Q2.
• Cash and Liquidity -- $81.1 million in cash, no debt, and no usage of the $75 million revolver at quarter end.
• Inventory -- Grew 4.8% versus prior year-end, below the comparable sales growth rate, reflecting increased efficiency.
• 2026 Guidance – Comparable Store Sales -- Raised to 8%-10% growth for the full year, with high single digit comps implied for the remaining quarters.
• 2026 Guidance – Total Sales -- Projected to rise 9%-11% year over year.
• 2026 Guidance – Gross Margin -- Expected to expand by 50-70 basis points over fiscal 2025’s 39.6%, revised downward from prior guidance due exclusively to higher fuel surcharges in freight.
• 2026 Guidance – Adjusted SG&A Leverage -- Anticipated improvement of 140-160 basis points versus fiscal 2025, above the previous outlook.
• 2026 Guidance – Adjusted EBITDA -- Full-year forecast of $35 million-$40 million, with margin expanding 200 basis points over the previous year.
• 2026 Guidance – Store Growth and Capital Expenditure -- Plan to open approximately 25 new stores, close 4, remodel 50, and spend $35 million-$40 million in capital expenditures, unchanged from prior outlook.
• Strategic Initiatives -- Launching the “Insiders Club” customer relationship management program in July, aiming to drive customer frequency and loyalty.
• Operational Execution -- Cited benefits from AI-driven allocation systems, improved open-to-buy process, and enhanced shrink management contributing to both margin and store optimization.
• Customer Mix & Product Tiering -- Highlighted greater engagement from middle- and high-income consumers and expanded branded and trend-forward offerings across “good, better, best” product tiers.
• Incentive Compensation -- Adjusted accrual up to 128% for Q1 due to better performance, with management explicitly referencing this increase.

SUMMARY

Management signaled confidence in the growth runway for Citi Trends (NASDAQ:CTRN), citing accelerated top-line momentum and 21 consecutive months of comparable sales increases. The company emphasized durable improvements in merchandising, inventory control, and expense leverage, each contributing to expanded profitability. Strategic priorities included expansion into more branded, trend-driven assortments, implementation of new customer loyalty systems, and disciplined store growth supported by AI-driven analytics.

• CEO Seipel stated, “Our product team has sharpened focus on trend identification, brand curation, and style development. From opening price points to premium branded fashion, our merchant team translates these trends into compelling styles that deliver exceptional value to our customers and meaningful margin to the business. Each season, we are improving our product trend and style execution while leveraging AI to optimize product allocation to the correct store.”
• The company’s new-store AI analytics model reportedly achieved “approximately a 90% accuracy in sales prediction” for site selection and expansion risk mitigation.
• The CFO referred to positive progress in reducing shrink and markdowns, driven by AI-based systems and camera technologies, while acknowledging that “fuel surcharges are real” as an ongoing margin headwind.
• Management described a deliberate cadence for new store openings to maximize peak period exposure, with a plan to “accelerating to approximately 40 new stores in 2027.” based on current pilot outcomes.

INDUSTRY GLOSSARY

• SG&A: Selling, General, and Administrative expenses; non-production operating costs such as payroll, rent, and marketing.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization; a measure of operating profitability.
• Shrink: The reduction in inventory from theft, loss, or errors, impacting gross margin.
• Comps (Comparable Store Sales): Sales from stores open for at least one year, used to measure underlying sales growth.
• Open-to-buy: Budgeting and planning tool for managing inventory purchasing within a set financial limit.

Full Conference Call Transcript

Kenneth Duane Seipel: Thank you, Nitza. Well, good morning, everyone, and thank you for joining us today for our first quarter 26 Earnings Call. Simply stated, we had an excellent quarter. Building on the powerful momentum from 2025, nearly every metric accelerated during Q1 26. And we are seeing strong momentum early in Q2 as well with quarter to date comps in the high single digits. Which is validating that our strategy is working and our execution is becoming increasingly consistent.

As noted in our prerelease last week, in Q1, we generated $13.9 million of EBITDA, which is more than doubling last year's $6.4 million Our profit improvement was driven by exceptional comparable store sales growth of 13.9% representing a 2 year stack of 23.8 and also marking a 21st consecutive month of sales growth for the company. Our performance was broad based. Sales increases across all product divisions and all store climate zones. While a portion of the quarter benefited from tax refund timing, I would like to highlight that our sales trends before and after the tax refund period on a 2 year basis is in the upper teens.

Consistent with the momentum we delivered in Q3 and Q4 of 25. And the 2 year upper teens growth trend has continued now in Q2. Our sales growth is being driven by refinements of trend, style and value of our core merchandising assortment. Plus, we also utilize extreme value deals periodically to add excitement to the treasure hunt for our customers. The strong performance of our core merchandising strategy gives us confidence in the durability and sustainability of our top line performance. Our gross margin rate expanded by 40 basis points driven by improved merchandise margin rate. Partially offset by increased fuel surcharge expense in the freight line.

SG and A was well controlled and leveraged by 250 basis points versus last year. I was particularly encouraged by our transaction growth. Consistent with 2025 performance, nearly half of our sales increase was driven by increased customer traffic. The key indicator that our product and brand are resonating. At the same time, we saw some meaningful improvement in our basket size, which demonstrates that our customers are responding to the strength of our assortment and the compelling value that we are delivering. From a merchandise perspective, we saw discipline execution across the business. Family Footwear continued its momentum from Q4, with customers responding enthusiastically to expanded branded offerings at exceptional value across all genders.

In footwear, off price and extreme value strategy continues to gain momentum driving both traffic and basket growth. Men's also delivered a very strong quarter. Driven by increased relevance in streetwear trends for young men. Our updated strategy successfully balances trend forward product for the younger customer, while continuing to serve the style and preferences of our core male customer with updated styling compelling values, and improved in stocks. Children's had another strong quarter. Benefiting from improved in stock levels and attention to detail in product selection. Which creates stronger value positioning. As I mentioned on the Q4 call, our children's business has become both a cornerstone of our company and a model of consistent disciplined execution.

The team continues to deliver highly desired styles consistent value, and improved inventory in stock positioning. Women's accessories also posted meaningful gains, which reflects early success in our assortment adjustments to a more branded trend right product. And we were encouraged by customer response to improvements of our women's apparel business especially in Missy. Women's apparel represents a significant opportunity as we continue to reposition our women's business to fully capture the style trend and sizing opportunities that we do see in the market.

This product momentum is a result of continued refinement of our 3 tiered good, better and best strategy across all merchandising divisions. what is important to note here is that we are serving customers across a wide range of income levels. Including a meaningful portion of middle and higher income consumers. This creates a significant opportunity for us to expand our offering of recognizable brands at compelling prices that align with our style and trend expectations. At the opening price point, we continue to deliver strong value through Citiescore offering for budget conscious customers.

The foundation of our business remains the better tier, which is typically priced between 7 and $12, where we provide a broad assortment of trend right product that drives consistency and loyalty. And at the top end, we are continuing to expand our best tier through both fashion forward product and branded extreme value opportunities. Often with extreme discounts up to 75% off MSRP. These product strategies combined with improved discipline in our open to buy process, and continued benefits from our AI driven allocation systems are driving stronger inventory productivity, and improved margin performance. In marketing, our objective is to really deepen the connection with our customers, and reinforce the role in communities that we serve.

In Q1, we extended the momentum from our highly successful holiday Joy Looks Good On You campaign, by inviting customers to help modernize the Citi Trends jingle. Engagement exceeded expectations. Generating strong social reach and viral moments. While also driving incremental store traffic. By quarter end, we had received a meaningful volume of customer submissions And in Q2, we will select the finalists from the submissions. With the winning jingle expected to be deployed in the second half of the year. Now turning to operations. The SG and A leverage we delivered in the quarter reflects more consistent execution across the organization.

As we improve execution, we are able to better leverage the fixed portion of our cost structure without adding commensurate expense as the business grows. I am pleased with the progress across our stores, headquarters, and our distribution centers in controlling costs and improving overall operating disciplines. From a store growth point of view, we opened 2 new stores during the quarter. 1 in St. Louis and 1 in Baltimore. These 2 locations, along with the 3 new stores from last fall, are serving as test stores for us as we refine our processes and prepare for accelerating store growth. And I am very pleased to report that our new stores are all performing above expectations.

As a reminder here in stores, 1 of our primary points of differentiation our neighborhood store locations. Which are embedded in communities where we build trust over many years. The combination of these convenient proximity and strong word-of-mouth recommendations create sustainable powerful traffic drivers. Now I will turn the call over to Heather to walk through Q1 financial results in more detail as well as our updated 2026 outlook, and then I will return after her remarks to discuss our priorities for the remainder of 2026. Heather?

Heather Plutino: Thanks, Kenneth, and good morning, everyone. I am pleased to walk you through our first quarter results and our updated and improved outlook for 2026. We delivered a strong first quarter driven by top line growth, gross margin expansion and disciplined expense management. Resulting in adjusted EBITDA of $13.9 million a $7.5 million increase over last year's Q1 adjusted EBITDA of 6.4 million These results reflect the continued progress of our strategic transformation and the strength of our operating model. Total sales for the first quarter were $231 million a 14.4% increase to Q1 25. Comparable store sales increased 13.9% ahead of our expectations driven by both increased transactions and higher average basket.

On a 2 year stack basis, comps increased 23.8%. And Q1 26 marks our seventh consecutive quarter and 20 first straight month of comp sales growth. As Ken mentioned, our comp sales growth trend on a 2 year basis before and after the tax refund season has been consistently in the upper teens, including Q2 performance to date. In the quarter, gross margin increased 40 basis points versus last year to 40%, driven by improved merchandise margin, fueled by our strategic investments in allocation and loss prevention systems and updated processes. These tailwinds were partially offset by higher freight expense. Freight in the quarter was higher than planned due to rising fuel surcharges.

We expect that headwind to continue throughout the year, and we have incorporated its impact into the updated outlook I will walk you through shortly. First quarter adjusted SG&A expenses totaled $78.3 million compared to $73.4 million a year ago. The increase to last year was mainly driven by expenses to support higher sales. In addition, we had higher store and corporate bonus accruals from improved performance. As a rate of sales, adjusted SG and A for the quarter was 33.9% leveraging 250 basis points versus last year. Demonstrating our ability to leverage our cost structure with higher sales. As I mentioned earlier, Q1 adjusted EBITDA grew $7.5 million over last year to $13.9 million.

With adjusted EBITDA margin, EBITDA as a rate of sales, expanding 280 basis points to 6%. During the quarter, we opened 2 stores and closed 1 location, ending the quarter with 591 stores. And we remodeled 25 stores, completing a significant portion of our full year program in time for the important Q1 tax refund season. Or TACMS as we call it. In early Q2, we remodeled an additional 26 locations completing our remodel program. Now turning to the balance sheet. I am pleased to say that we drove our 13.9% Q1 comp with quarter end total inventory up only 4.8% to last year, reflecting our ongoing inventory efficiency initiatives.

Our balance sheet remains healthy with $81.1 million in cash at the end of the quarter. No debt, and no drawings on our $75 million revolver. As we have said in several prior investor presentations, we expect our year end cash balance to be approximately flat to last year's $66 million reflecting investments in inventory and capital projects particularly new stores and remodels over the balance of the year. Throughout the year, we expect to remain in a strong financial position affording us the flexibility to pursue strategic alternatives. Turning to our guidance.

With the results of our first quarter, we are updating our outlook for fiscal 26 as follows: We expect comparable store sales growth of 8% to 10% for the year. With our Q1 comp results, this implies high single digit comps for the balance of the year. Total sales are expected to grow in a range of 9% to 11%, Gross margin is expected to expand 50 to 70 basis points compared to 39.6% in fiscal 25. As we continue to leverage new systems and processes to drive improvements in markdowns and shrink partially offset by higher freight expense due to the fuel surcharges I mentioned earlier.

Our revised expectation for freight expense drove the decrease from our prior outlook of 100 basis points of margin rate expansion. We now expect adjusted SG&A leverage in the range of 140 to 160 basis points versus fiscal 25. Higher than previous outlook of 70 to 100 basis points of leverage due to the impact of higher sales as well as ongoing disciplined expense control. Adjusted EBITDA is expected to be in the range of $35 million to $40 million with adjusted EBITDA margin expected to expand 200 basis points over fiscal 25. Our real estate plans are unchanged from previous outlook, with plans to open approximately 25 new stores.

To close 4 locations, and to remodel approximately 50 locations, Finally, full year capital expenditures are expected to be in the range of $35 million to $40 million consistent with previous outlook. In closing, Q1 represents a strong start to 2026, reflecting the operational foundation we built last year. And the continued execution of our strategic priorities. We remain focused on driving sustainable profitable growth through disciplined inventory management, operational efficiency, and targeted investments in our business. We are confident in our long term trajectory and our ability to deliver meaningful value for our shareholders. I want to thank our teams across the organization for their continued dedication and hard work which is enabling this transformation.

We look forward to updating you, our investors, on our progress next quarter. With that, I will hand the call back over to Kenneth. Kenneth?

Kenneth Duane Seipel: All right. Well, thank you, Heather. So as we look ahead to the balance of 2026, we are firmly in the execute phase of our growth plan. Focused on delivering against our customer brand promise. Our customers are discerning. They understand that value is more than just price. And they are willing to spend more when the style is right the trend is relevant, and quality meets their expectations. In short, value is not just price. Our brand promise is very clear. Styles that see you, prices that amaze you, and trends that tell your story. Our teams are focused every day on bringing that promise to life for our customers.

To support this, we have established 3 clear priorities in 2026. Consistent execution, strong sales flow, to growth to profit, and accelerated growth. So first, consistent execution. As I mentioned earlier, our sales growth is being driven by refinements in trend, style and value of our everyday core merchandising assortment. Consistent execution of our merchandise strategy gives us confidence in achieving upper single digit comparable store sales growth this year and in the foreseeable future. A key focus will be repositioning our women's business to fully capture the style, trend and sizing opportunities in the market. Across juniors, plus, and missing. Updating our product offerings to ensure trend right merchandise is front and center for all female customers.

This represents a meaningful opportunity to drive both traffic and sales. Throughout 2026, we will maintain our disciplined focus on improved style, trend, and value across all product categories, and we will continue to apply the learnings from our strongest performing categories like men's and children's to elevate execution company wide. Our product team has sharpened focus on trend identification, brand curation, and style development. From opening price points to premium branded fashion, our merchant team translates these trends into compelling styles that deliver exceptional value to our customers and meaningful margin to the business. Each season, we are improving our product trend and style execution while leveraging AI to optimize product allocation to the correct store.

This creates a long runway of growth as we continue to develop and refine product execution. We have continued opportunity to expand off price and extreme value buying capabilities. Ensuring a steady flow of compelling brands and products at exceptional value. Extreme value products is driving both traffic and basket growth, while supporting margin performance. The off price market remains robust, allowing us to be highly selective which is a key advantage for our model and core to our competitive advantage. We have already secured several strong deals that will support continued momentum into the back half of the year.

On the marketing front, we are focused on consistent execution throughout the year, This includes expanding our social and influencer presence, deepening community engagement, and ensuring that our brand is authentically represented in everything we do. As I said earlier, this is not just about visibility. it is about deepening relationships and reinforcing city treatment to the communities we proudly serve. Our second priority is ensuring strong sales growth through flow through to profit. Incremental sales are going to translate into accelerated profit growth. Our plan in 2026 calls for about a 10% sales growth, while more than doubling EBITDA. Making this a pivotal year in the evolution of our profit profile.

Foundational to profit flow through is leveraging our highly fixed expense base as we grow. Best practices implemented during the repair phase and operational areas of the business are beginning to have a positive impact on our cost structure enabling us to grow sales more efficiently. In addition, we have several tangible initiatives supporting this objective, including our AI-based allocation systems, enhanced store technologies to reduce shrink, and our ongoing supply chain improvements to increase capacity and efficiency. And as I have highlighted on prior calls, we continue to leverage KPI dashboards across all functions to ensure we have disciplined execution. A benefit of our improved execution is our ability to absorb macro macroeconomic challenges.

Like increased fuel charges into our business while still achieving our profit flow through objectives. Our third priority is accelerated growth. Which will be disciplined, return focused, and strategic. First, beginning in July, we are going to launch our customer relationship management that we are calling the Insiders Club. The Insiders Club turns traffic into loyalty, loyalty into frequency and frequency into EBITDA. We are making a deliberate investment in owning our customer relationship and building a sustainable data driven growth engine that compounds over time. The objective is to invest early to build customer relationships, And then as the CRM system learns and scales, it becomes a meaningful contributor to long term shareholder value.

The Insiders Club transformed Citi Trends from a transaction based retailer into a relationship driven brand. It allows us to know our customer, reward our customer and grow with our customer while reinforcing the treasure hunting excitement that makes shopping with us an experience. We will begin activation of the Insiders Club this July, and expect the program to build momentum rapidly. We also remain on track with our store growth plans. As Heather mentioned, we have completed 51 remodels so far this year, and we expect to open a total of 25 new stores the remainder of the year. While preparing to accelerate our expansion in 2027.

Our approach is grounded on data driven site selection local market expertise, and disciplined financial criteria. Using AI tools, we have analyzed 3 years of actual transaction data from every store location combined with comprehensive geolocation studies to understand the specific customer and market characteristics that drive success. This AI data-driven approach has demonstrated approximately a 90% accuracy in sales prediction, helping us to identify and replicate our most successful store profiles while minimizing risk as we expand our footprint. Beyond the analytics, we are applying strict financial criteria to every new store. Decisioning, targeting mature store averages of approximately 1.5 million in sales and mid teens 4 wall contribution margins.

Our early results from our newest stores are exceeding expectations giving us the confidence and accelerating to approximately 40 new stores in 2027. Equally important to our growth initiatives is the growth of our people. We are a company that facilitates the continuous learning and development of all employees to transform adapt to changes, and improve performance positioning us to maximize growth opportunities as they arise. And as a part of that initiative, we are focusing on succession planning for our key leadership roles to ensure continuity of the transformation plan while strengthening our bench talent. Our strong debt free balance sheet enables us to explore multiple avenues of growth beyond our current 3 year plan.

Our strategy is to build a strong organic growth foundation, accelerate expansion where the economics are compelling, and selectively pursue transformational opportunities. We are beginning to evaluate synergistic acquisition opportunities that align with and complement our strategic priorities. We are committed to applying the same discipline approach to our customer focus, product, execution, and financial returns that has driven our turnaround so far and has generated significant shareholder value creation. So in closing, progress at Citi Trends is well underway. Our track record of consistent comparable store sales increases shows our strategy is working. Our execution is more consistent and our customer connection is stronger than ever. We are debt free, disciplined, and positioned for growth.

We have a clear path to profitable expansion, stronger earnings and lasting shareholder value. We are clearly focused on our customer. The foundation is stronger and the opportunity ahead is significant. We still have a lot of processes to refine. Product categories to optimize, systems to build, and growth opportunities to maximize. We are more than a retailer, We are a neighborhood destination for black families, delivering style, trend, value, and trust that no 1 else can deliver. I am confident in our strategy and our team's ability to execute. The foundation we built positions us well for growth throughout 2026 and beyond. Thank you all for your continued support.

I will turn it to the operator now for any questions.

Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the-- before pressing the star keys. We ask that you wait 1 moment while we poll for questions. Our first question is from Michael Baker with D. A. Davidson. Please proceed.

Analyst (Michael Baker): Okay. Thanks, guys. So you kind of alluded to the impact of tax refunds. It sounds like, you know, probably helped, but certainly more to it than that. But you talked on the period before and after. What do you consider the tax refund period? Or maybe some other way to ask this can you just tell us your monthly trends?

Kenneth Duane Seipel: Yeah. Mike, probably the most sort of thing about the tax refund trend for us is really from about mid February. Up to in this year, kind of right up to Easter period. For the most part, 6 to 7 weeks there. Is what we would account for the majority of the tax refunds that flowed into the market. And so when we talk about sales trends prior, that includes a little bit of the January performance as well. But going into February 15, And then coming out after Easter, and even into really even through last week, our trends have remained very consistent with what we experienced as I mentioned in Q3, Q4.

So we have been very encouraged about the overall underlying health of the business. And as we noted in Q1, obviously, sales went spiked up to 23.8% on a 2 year, which is better than we had been performing. So we believe that gap between our baseline and that upside is probably attributed dominantly to the tax refunds in that period, but very encouraged about the health on either side.

Analyst (Michael Baker): Yeah. Okay. That makes sense. Then I guess I will keep it to 1 question and 1 follow-up, and this does follow-up on that. I think Kenneth, I think I heard you say high single digits for the quote, foreseeable future. Did I hear that right? And what to you is foreseeable future?

Kenneth Duane Seipel: Yeah. Yeah. Thank you. You actually did. that is a pretty good nuance in the in the script Mike. that is a good catch. Yes. We did say that. We are talking about in the foreseeable future right now is our merchandising plans that we have in place all the way through the balance of this year. Through 2026. We are taking a hard look at 2027 right now, and that may moderate a little bit and get into more of the mid singles as we go forward. But the point here is that we see a long runway of continued increases I am often asked, by investors, can we continue to comp the comp? Right?

And we have a great deal of confidence in that. there is so many merchandising opportunities that we have on the table. We can kind of go store by store, category by category. Take a look at various ways that we can continue to get better executing our 3 tiered assortment. And delivering better value to the consumer. So we see a big ramp up this year, and that will continue. And then we do see continued success beyond. But yeah, to be more clear, I was speaking very specifically about the foreseeable future being through the end of this year.

Analyst (Michael Baker): Perfect. Appreciate the color. I will turn it over to someone else.

Operator: Our next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please proceed.

Analyst (Jeremy Hamblin): Thanks, and congrats on the strength of the business. So as a follow-up question in terms of you noted men's category very strong. Children's, very strong, women's accessories, footwear. In terms of thinking about where you see the biggest opportunities not just the remainder of 2026, but as we get into 2027, what are the categories where you feel that you can really attack and improve? And what are the drivers of that? Is it more consistency of the merchandise? Is it more national brands or, kind of close out off price deals? Any color you might be able to share in terms of the merchandising strategy?

Kenneth Duane Seipel: Yeah for sure. We have done a good deal of analytics to really kind of think about what is a long term opportunity for store productivity. And which categories inside of our box really have an opportunity to provide outsized growth along that continuum. And you can kinda go through literally department by department. And find significant opportunity across the board. For example, I called out our shoe department who has done a nice job the last 2 quarters, very, very pleased with their results. And they are at the very beginning. I think if you are the to get the team around the table, said they are-- we are just getting started.

We actually see a path there to probably more than double that department over time. And we have got quite a bit of work to do to get that done, but there is certainly significant growth there. And I can kind of go around the store and do that same sort of thing. I would also step back and say, that the other area of growth is probably the most significant. it is just more broadly appealing to our higher income consumers. So they have been responding extremely well. And as we continue to reposition fashion and trend, we were getting good response.

You might remember in Q4 last year, we launched Young Men's Trend, highly successful, and it is continued into today, and we are just beginning to kind of understand how large that business can be. there is a significant opportunity there just to continue to mature what is a fairly new business for us. The same is true in our Women's division, as I mentioned briefly on the call. We are just launching some trend. I am very excited about the team's work for Q3. We have looked at it. The styles are right on. The trends are right on. We are making some different investments there.

And there will be a little bit of a breaking out moment, I think, for our women's fashion team. And then complementary to that, right behind that, we are just exploring the implementation and now ultimately the expansion of Missy category of product. And I do not mean to take a theme to our call going through here, but the point here is that there is a lot of significant opportunity just getting better doing what we are doing in our 3, tiered strategy, good, better, best around the store. And, you know, I speak from time to time about extreme value, and I like to talk about it because it is fun to talk about.

But reality is it is essentially the icing on the cake for us. Yeah. that is the stuff that drives the excitement, the treasure hunt, and will really kind of drive traffic for us, but we are not reliant on that as our growth engine. that is complementary to our overall core merchandising strategy.

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

Kenneth Duane Seipel: Yeah. Perfect. I will talk a little bit about the last part of your question. I will ask Heather to kind of fill in on the balance of 2026 for you. But how we are thinking about unit growth going forward, we are gonna put our new store cycle on 3 cycles a year. Our goal here is to kind of open new stores up into peak periods so that we have our best foot forward in merchandising. We can invite new customers in and really kinda get the new stores off to a good start.

And so in our model, that would mean we are going to go open up a block of stores in February in advance of the taxless period. We are going to open up a block of stores in the summer, mostly mid July, in advance of back to school. Then we are going to open up again another block of stores in October in advance of going into holiday. And those 3 opening cycles will allow us to, a, number 1, improve our execution and discipline of opening new stores.

Secondarily, it will allow us to make sure that when we open up a store that we have our very best foot forward on new product going into a peak season. And that we believe that we can use that as a springboard then mature those stores at a much more rapid rate. In 2026, we are just getting started, obviously. So our opening cadence a little bit irregular in 2026. Would not use that as a proxy. 2027 will be and beyond is what I just described. So Heather, would you be able to fill in the blanks there for Jeremy relative to the remainder of the year opening cadence?

Heather Plutino: For sure. So we did the 2 in February in time for taxness. We are thinking 3 to 5 in July period and then the balance this year. So, again, that speaks to Kenneth's 2026. It is what we consider not, quote, unquote, normal for a go forward period, but that is us getting our legs under us.

Analyst (Jeremy Hamblin): Great. that is helpful. And if I could just sneak 1 more in just on some of the margin color. So you noted the fuel surcharges that we are seeing across the industry. Can you speak a little bit to your inventory shrink performance? And then given the really strong comps you are doing and comping the comp, can you give us some color on incentive compensation and whether or not like, you know, accrual for that also went up, for the year given the strong performance?

Heather Plutino: Yeah. Kenneth, I will grab the mic if you do not mind. So I will start with the gross margin question. No doubt fuel surcharges were not in our initial guide, certainly an industry issue. We are not alone. That caused our change in our outlook for gross margin from an expansion of 100 basis points to our updated guide. And that is entirely due to those fuel surcharges. Okay? So we are seeing positive movement as expected from both markdowns and shrink Those are the tailwinds I spoke about in my script. And then the offset is these fuel surcharges. So shrink is getting better. Markdown's getting better because of the investments that we have made.

And you have heard us speak about quite a bit in these calls about AI based systems, AI based camera systems, both of those are driving goodness in the gross margin line. But you know, fuel surcharges are real. And as I said, we expect that to continue for the balance of the year, and it is all incorporated in the guide. And then your second question, Jeremy, I am sorry.

Analyst (Jeremy Hamblin): On incentive comp, you know, given the strong, comp performance and profitability?

Heather Plutino: Yeah. We did something a little bit different this year, and we adjusted the incentive comp accrual in quarter 1. You will recall last year, we were chasing quite a bit throughout the year, and it caused, catch up, accrual adjustments. So we decided we were gonna take a hard look at in the first quarter, which is much earlier than usual. So, yes, we did adjust up the incentive comp accrual. We were at a 100% when we started the year. Right now, we are at about a 128%. Not mad about that, and I am sure the whole team is pretty happy about that too.

Analyst (Jeremy Hamblin): No doubt. Well earned as well. So much for taking the questions, and best wishes.

Heather Plutino: Thanks, Jeremy. Thank you.

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

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

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

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