NEW YORK, April 1, 2019 /PRNewswire/ -- Macellum SPV
III, LP, Macellum Advisors GP, LLC, and certain of their affiliates
(collectively, "Macellum"), which own approximately 3.8% of the
Common Stock of Citi Trends, Inc. (NASDAQ: CTRN) (the "Company" or
"Citi Trends"), issued a letter to its fellow stockholders
highlighting the urgent need for immediate and significant change
to the composition of the board of directors of the Company (the
"Board") and addressing recent statements made by certain members
of Citi Trends' management and Board in the Company's March 28th letter.
The full text of the letter can be found below:
Dear Fellow Stockholders,
Macellum Advisors GP, LLC, together with its affiliates
(collectively, "Macellum" or "we"), is a large, long-term
stockholder of Citi Trends, Inc. ("Citi Trends" or the "Company"),
having initially acquired shares in 2016, and currently
beneficially owning approximately 3.8% of the outstanding common
stock of the Company. We were disappointed but not surprised
to read the Company's March 28, 2019
letter to stockholders, which we believe materially misrepresented
our ongoing efforts to work constructively with the Company to
reconstitute the Company's Board of Directors (the "Board").
We believe the letter provides a window into the dysfunction and
lack of urgency of the existing Board and provides clues as to why
an existing director would be forced to formally nominate highly
qualified individuals to the Board in the first place. To be
clear, our motivation in putting forth four highly qualified
nominees has been to try to improve a Board that is not functioning
well in order to address the Company's prolonged underperformance
and poor corporate governance and preserve and maximize value for
all stockholders.
As you may know, we previously undertook a successful proxy
contest at the 2017 annual meeting of stockholders, resulting in
the appointment of Jonathan Duskin
to the Board. Since joining the Board, Mr. Duskin has made
considerable efforts to mobilize his fellow directors to implement
the changes necessary to deliver stockholder value and create a
culture of accountability on the Board. Unfortunately,
despite these persistent efforts, as a single voice on a seven (7)
person Board, and a single voice on the six (6) person Nominating
and Corporate Governance Committee, the Board has not adopted the
meaningful changes we believe are desperately needed at Citi
Trends. Even though the Board agreed it needed to refresh
itself not a single director was willing to step down from the
Board this year and there is no evaluation process in place to
ensure the Board is properly refreshed.
Our many attempts to avoid a public battle were
rejected
Over the past several weeks, Mr. Duskin has reached out to the
Board and expressed his belief that the Company needs to undertake
a Board refreshment. While the Board agreed a refresh was
necessary, the Board has only been willing to increase the size
of the Board to add new directors rather than hold itself
accountable and replace incumbent long-tenured directors with new
highly-qualified, independent directors who would bring much needed
fresh perspectives and more relevant experience and skill sets to
the Board.
Most recently, we proposed what we believed was an incredibly
reasonable compromise to avoid the expense and distraction of a
proxy fight. We proposed that the Board add two new
independent directors to the Board for election at the 2019 annual
meeting of stockholders (the "2019 Annual Meeting") - one of
Macellum's nominees and one director candidate that would be
mutually agreed upon, which could include one of Macellum's other
nominees. In addition, in the spirit of moving forward
constructively, our proposal suggested that just one incumbent
director resign at the 2019 Annual Meeting and an additional
incumbent director step down at the 2020 annual meeting of
stockholders (the "2020 Annual Meeting"). This was in
response to the Company's proposal that one of Macellum's nominees
be added to the Company's slate for the 2019 Annual Meeting and the
Board undertake a search for a second independent director to be
added by December 31, 2019 without
stockholder approval. The Company's proposal did not
contemplate any incumbent director stepping down from the Board
until the 2020 Annual Meeting.
Our most recent proposal was merely an acceleration of the
process the Board allegedly wished to undertake, with a further
effort to right-size the Board by the 2020 Annual Meeting.
However, much to our disappointment, the offer was summarily
rejected, despite the Company's own acknowledgement that they found
Macellum's nominee, Peter Sachse,
qualified to join the Board despite never asking to interview
him. Given the urgent need to address the Company's
underperformance, we cannot find any rational explanation for why
the Board would want to delay effecting meaningful changes to
unlock stockholder value, which the Board has itself agreed are in
the best interest of stockholders. Instead, the Board seems
ready to spend another $2.5 million
of stockholder money, to protect incumbent seats on the Board,
after it spent approximately $2.5
million during the 2017 proxy fight. Is spending
upwards of $5 million worth it to
stockholders to keep the status quo? We do not think
so.
Macellum formally nominated four highly qualified director
candidates for the Board's consideration because the Board demonstrated no sense of urgency
in refreshment
Macellum's motivation for nominating four director candidates
has been to refresh the Board with the most highly qualified
directors. Because Mr. Duskin is only one of six directors on
the Nominating and Corporate Governance Committee, his voice was
continually marginalized forcing us to nominate to preserve our
rights as stockholders. Mr. Duskin's extensive consumer and
retail experience enabled Macellum to present a selection of four
exceptional candidates for the Board's consideration to which the
Company may not have otherwise had access and which we hoped would
save the Company both the time and expense of hiring a search
firm. Nevertheless, in the interest of working with the
Board, Mr. Duskin was still initially willing to go through a
search firm to identify other candidates, to the extent that it was
done in a timely and cost-effective manner. Unfortunately,
the discussions quickly devolved into the Macellum proposed
candidate versus the candidates the legacy directors hoped to
identify in the future.
Not about expense reimbursement
The Board would like stockholders to believe that Macellum is
holding out to have our expenses reimbursed. We assure you
that this is not the case. We believe the Board actually
offered us reimbursement as part of their last settlement proposal,
however, Macellum rejected this offer because it did not offer the
material change that Macellum believes the Company must have if
stockholder value is to be created.
Macellum has a substantial amount of capital invested in Citi
Trends. The only way for Macellum to make money is for the
value of the stock to rise significantly. In our view, the
only way for the value of the stock to rise significantly is for
there to be material change to the status quo on the
Board.
Mr. Duskin is an agent of change to create long term value
for the stockholders
The legacy directors would also have you believe Mr. Duskin is
only focused on short term value. Mr. Duskin will certainly
take credit for aggressively pushing for additional share
repurchases and still believes the $80
million cash balance the Company needs is overstated and
erroneously derived. If he was not on the Board, we doubt
that any further repurchases would have occurred beyond what the
Company was forced to do in 2017 during the last proxy
fight.
Mr. Duskin's role as a director makes it impossible for us to
detail the inner workings of the boardroom, however, we ask you to
consider the following questions when you assess Mr. Duskin's
contributions as a director:
Prior to Mr. Duskin joining the Board, did the Company
- issue any guidance, either annual or quarterly?
- have a long-term, annual growth algorithm?
- have a long-term earnings per share (EPS) target of
$4?
- initiate a Hispanic focused test store, despite having 200
stores with bilingual signage?
- have a store growth rate commensurate with the long-term goal
to have 800 stores?
- initiate a cost cutting program?
- more meaningfully engage with its stockholders and provide any
vision about the future of the Company?
Despite Mr. Duskin's considerable efforts and the progress
made during his tenure, it is still not nearly enough change.
Additional operational changes urgently need to occur, but the
Board's willingness to maintain the status quo has been an obstacle
to continued progress and meaningful change.
Manipulating facts and misleading statements
The legacy directors would like stockholders to believe that
business has been great and their strategic plan is working.
In reality, last year, earnings before interest and taxes (EBIT)
has decreased by 1% despite increasing the number of stores by 3.5%
(19 additional stores) and relocating or expanding eight stores.
Furthermore, the greater part of EPS growth has been the result of
a lower share count and lower tax rate rather than an improvement
in the Company's performance. Therefore, we think the
Company's claim that EPS has grown by 59% is particularly
misleading especially given that it includes $2.5 million of one-time expenses incurred in
connection with the prior proxy contest in 2017. Even though
the EPS metric is largely irrelevant because the EBIT is still
disappointing, we believe it is still a material
misrepresentation. Perhaps running another contest this year
is a way to inflate earnings growth next year.
Disappointing and deteriorating results
Since Mr. Lupo was appointed Chairman of the Board in June of
2018 the total stockholder value has fallen 31%. Mr. Lupo has
been on the Board since the IPO in 2003, is the longest serving
director, and has overseen this disastrous underperformance every
step of the way.
Most concerning of all are the recent deterioration of
results. Since Bruce Smith was appointed CEO in March of
2018, sales and operating profit have begun a startling slide which
appears to be accelerating. Same store sales have fallen from
+3.3% in Q2 2018 to 0.6% in Q3 2018, to 0.2% in Q4 2018, and
quarter to date Q1 2019 are down a shocking 8% with management
guidance of negative 3% for the quarter. If management
achieves this same store sales guidance it would be the worst
quarter since Q4 2015. Operating profit declines are equally
disturbing with Q4 2018 down 9% and Q1 2019 down 10% based on EPS
guidance. There is a clear trend that since former Chairman
Ed Anderson left and Mr. Smith
assumed the CEO position, the Company's results are steadily
declining. Clearly, it appears the Board is failing to
provide the proper oversight, support and guidance for Mr. Smith to
be effective.
Significantly, one year into the Company's long term growth goal
of achieving $4 per share, they are
materially behind the annual trajectory. The Company will
fall short of its annual same store sales and earnings growth goal
of 3% and 12-15%, respectively, with guidance calling for same
store sales to increase 1-2% and earnings to increase 4.5% (as
inferred from the Company's 2019 EPS guidance). As these
results show, the Company struggles to achieve success under the
current Board and management configuration.
Perhaps that's why the Company's valuation at 3.7x trailing
twelve month EBITDA is one of the lowest in the sector.
Largely due to what we believe is lack of confidence that any
stockholder or potential investor could have in the Company's
ability to deliver long-term, sustainable growth.
Let's not lose sight of the long term
underperformance
While most of this letter is focused on performance since the
Board lost a contested election in 2017, let's not forget what
caused us to engage with the Company in the first place.
Since FY 2009, EBIT has declined from $29.3mm to $25.1mm
in FY 2018, or 14%. Also, the Company has spent $222 million on capital expenditures through Q3
of 2018 which resulted in EBIT dollars per store falling 41% to
$45K in FY 2018 from $77K in FY 2009. Similarly disappointing,
same store sales have been flat since FY 2009 and EBITDA margins
have declined by 290 bp in FY 2018. All of this against a
back drop of the largest employment gains the core customer has
ever experienced.
Macellum owns 18x more stock than Chairman Lupo and 6x
more than all the non-executive directors
In the letter, the Company noted that we sold 38,000 shares, or
7% of our entire position, since May 2018. While this is
true, we think it is important to also note that Macellum has
purchased every share it owns, and as a manager of outside investor
money, Macellum cannot control when investors redeem their
investment. By contrast, no one on the Board has made an
open market purchase for years. Worse, Mr. Lupo has sold over
$300K or 30% of his holdings of Citi
Trends stock and based on public filings, only owns 27,480 shares
despite having served on the Board since 2003.
Additionally, unlike Macellum, Mr. Lupo has total control over his
decisions to transact in the securities. Given Mr. Lupo's
insignificant ownership in the Company, we have concerns that his
interests do not fully align with those of the stockholders.
The path forward
Mr. Duskin has gone to great lengths to work constructively with
Citi Trends directors since he joined the Board, as evidenced by
our decision to avoid a proxy contest last year and to delay our
public announcement of our nomination so we could continue to work
with the Company toward an agreement without any distractions or
unnecessary attention. Despite our good faith efforts to come
to an agreement and achieve meaningful change on the Board, our
settlement offers have been repeatedly rejected, seemingly in an
effort to project the jobs of the directors rather than the
interests of all stockholders. In our view, the failure of
the settlement conversations boil down to one point: no legacy
director is willing to step down from the Board at the 2019 Annual
Meeting. Instead, the Board is only willing to increase the
number of directors serving on the Board. We believe this is
simply not sufficient and will not result in the urgently needed
change in the boardroom or in the Company's performance.
Stockholders need change immediately so we can address the
Company's stagnant performance and put the Company on the track to
achieve long-term, sustainable, consistent growth. Mr.
Duskin, as a single voice of transformation, cannot create value on
his own with the status quo and inertia being so strong on the
Board. The Board must be reconstituted now.
Our preference has always been to work privately and
constructively with the Board and we are still hopeful that we can
reach a settlement that will create meaningful change.
However, as a significant stockholder with interests that are truly
aligned with those of the other stockholders, we are committed to
doing what is in the best interest of the stockholders of the
Company and will take all actions that we deem necessary to deliver
value to all stockholders.
Sincerely,
Jonathan Duskin
Macellum Advisors GP, LLC
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
Macellum SPV III, LP, a Delaware limited partnership, together with
the other participants named herein (collectively, "Macellum"),
intends to file a preliminary proxy statement and accompanying
White proxy card with the Securities and Exchange Commission
("SEC") to be used to solicit votes for the election of its slate
of highly qualified director nominees at the 2019 annual meeting of
stockholders of Citi Trends, Inc., a Delaware corporation (the "Company").
MACELLUM STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO
READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH
PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB
SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS
PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT
WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES
SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR.
The "Participants" in the proxy solicitation are Macellum SPV
III, LP, a Delaware limited
partnership ("Macellum SPV"), Macellum Management, LP, a
Delaware limited partnership
("Macellum Management"), Macellum Advisors GP, LLC, a Delaware limited liability company ("Macellum
GP"), Jonathan Duskin, Theresa R. Backes, Paul
Metcalf, Peter R. Sachse, and
Kenneth D. Seipel. As of the date
hereof, Macellum GP and its affiliates beneficially own, in the
aggregate, 494,019 shares of common stock, $0.01 par value per share, of the Company (the
"Common Stock"), including 2,397 shares of restricted stock awarded
to Mr. Duskin in his capacity as a director of the Company, which
will vest on June 6, 2019, provided
Mr. Duskin is a director of the Company at such time, representing
approximately 3.8% of the outstanding shares of Common Stock. As of
the date hereof, Macellum SPV directly owns 489,010 shares of
Common Stock. As of the date hereof, Macellum GP, as the general
partner of Macellum SPV, may be deemed to beneficially own the
489,010 shares of Common Stock beneficially owned directly by
Macellum SPV. As of the date hereof, Macellum Management, as the
investment manager of Macellum SPV, may be deemed to beneficially
own the 489,010 shares of Common Stock beneficially owned directly
by Macellum SPV. As of the date hereof, Mr. Duskin beneficially
owns directly 5,009 shares of Common Stock, including 2,397 shares
of restricted stock awarded to him in his capacity as a director of
the Company, which will vest on June 6,
2019, provided Mr. Duskin is a director of the Company at
such time, and, as the sole member of Macellum GP, may be deemed to
beneficially own the 489,010 shares of Common Stock beneficially
owned directly by Macellum SPV. As of the date hereof, neither Ms.
Backes nor Messrs. Metcalf, Sachse or Seipel beneficially own any
shares of the Common Stock.
Investor Contact:
Jonathan Duskin
Macellum Management, LP
(212)-956-3008
Jduskin@macellumcap.com
John Ferguson
Saratoga Proxy Consulting LLC
(212) 257-1311 or (888) 368-0379
Info@saratogaproxy.com
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SOURCE Macellum Advisors GP, LLC