Greetings, and welcome to the Citi Trends second quarter 2022 earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, August 24, 2022. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.
Thanks, Rita, and good morning, everyone. Thank you for joining us on Citi Trends second quarter 2022 earnings call. On our call today is our Chief Executive Officer, David Makuen, and Chief Financial Officer, Heather Plutino. 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 performances, 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.
Thank you, Nitza. Good morning, everyone, and thanks for joining us today on our second quarter fiscal 2022 earnings call. Before I provide an overview of our second quarter performance and the strategic direction we are taking the business in the near term as a result of the current challenging macro environment, it's important that we provide you with a high level view of our customer base. After that, Heather Plutino, our Chief Financial Officer, will then elaborate on our financial results and a few other items related to our outlook. To begin, let me be fully transparent. Our customers are facing one of the most challenging economic environments in history. Inflationary pressures across their household necessities, including rent, utilities, food, and gas, are outpacing their wage growth.
Our lowest income household bracket, those with an annual household income of $25,000 and below, accounting for approximately 50% of our customer base, have been hardest hit from these extreme macro pressures. I have personally visited many neighborhoods and talked to many customers and associates to learn just how much pressure they are feeling. Even though tough times persist, what's most important to share is that our customers believe that our store experience is more engaging than ever, and our city crew delivers on our purpose each and every day by welcoming their existing and new customers like a friend, helping them show up for whatever comes their way. With this backdrop acknowledged, what we are clearly seeing is a decline in the number of discretionary shopping visits.
when they do visit Citi Trends stores, our conversion rates are extremely strong and have been consistent week to week since the beginning of the year. Plus, our average basket size is holding up nicely compared to last year's record stimulus aided spending levels. Given these trends, we are confident that our customers remain loyal to the Citi Trends brand and our assortments for the entire family continue to resonate. Having said this, we are committed to doing better and controlling what we can to meet the needs of the value customer, which our model does quite well. Our buy team in particular, is on their toes chasing extreme value trends across our six cities or categories. Hard at work, they have identified opportunities to capture more market share, particularly in our ladies and footwear cities, by adapting to changing consumer trends.
Additionally, we continue to play offense by introducing new or expanded assortments that I have mentioned previously, including the continued rollout of our Q line, adding more everyday essentials to the mix, building a ladies Missy sizing assortment, and capitalizing on the strength of our casual men's business. Overall, we remain hyper-focused on driving healthy sales, managing inventories, and maximizing margin to improve our operating profit. On the expense side, our number one priority is to lower our SG&A expenses to align with a lower sales expectation. As the second quarter unfolded, we couldn't adjust expenses overnight, but we aggressively created a plan and have already taken action to right size our expense structure and build efficiencies across our business functions, assuming a lower sales base brought on by primarily macro conditions.
Let me assure you, we are taking swift and aggressive actions on approximately $10 million in expense savings for the second half of 2022, or about 7% of total SG&A expense, including a 10% staff reduction. We wish the very best to the associates impacted by this difficult decision and truly appreciate their contributions. Overall, we are controlling what we can control, and we are on track to significantly reduce SG&A deleverage versus both 2021 and 2019 during the second half. Before I turn it over to Heather, I want to highlight a few metrics about our business during the second quarter and year to date. Comparable transactions versus the prior year sequentially improved 510 basis points from Q1 to Q2.
Our average basket contracted only slightly by 5% against last year's outsized growth of 35% compared to Q2 of 2019. We maintained a high gross margin at 38.1% for the quarter and 38.6% for the first half. Our inventory remained in excellent shape with an average in-store dollar decline of 13% compared to 2019 and a 26% decline on a unit basis. We ended the quarter with no debt, $28 million in cash, and $103 million in liquidity. With that, I'll turn the call over to Heather, our new CFO, who I am extremely pleased to have a member of our leadership team. She will discuss our second quarter results in detail, as well as our updated guidance for the balance of the year. Heather?
Thanks, David, and good morning, everyone. I'm very honored to be part of the Citi Trends leadership team, and as you can imagine, it's been a busy and productive two months since I joined in late June. I've been immersed in getting to know the business, meeting our corporate, stores, and distribution center teams, as well as our customers. I have quickly gained great admiration for the Citi Trends business model with its unique value proposition servicing the apparel, accessories, and home needs of African American and Latinx families, and its deep commitment to making a difference in the neighborhoods we serve. I'm excited to take on the CFO role and will leverage my background and experience in retail to identify opportunities to further transform the business model as I believe the potential for growth remains significant.
Now turning to our results in the second quarter and the first half of the year. As David mentioned, the macro environment remained difficult throughout the quarter with persisting headwinds from extreme inflationary pressures impacting all of our customers, but most notably our lowest household income cohort. The impact from inflation has been deeper and longer lasting than we expected. Importantly, our teams have remained nimble and focused, delivering strong margin in the quarter and working tirelessly to right size our expense base. Our balance sheet is healthy, and we ended the quarter with ample cash, well-managed inventory, and our $75 million revolving line of credit remains unused. In addition, as mentioned in our earnings release, we expect to close a sale leaseback transaction in our Roland, Oklahoma distribution center in September, adding $36 million of cash to our balance sheet.
All of which positions us well to continue to navigate this dynamic operating environment while remaining focused on our strategic initiatives. Now let's turn to specifics of our Q2 financial results. As mentioned in our earnings release, we are comparing select operating results for the second quarter and first half of 2022 relative to the same periods in 2019 in order to provide a more normalized comparison of performance. Total sales for the second quarter were $185 million, a decrease of 22% versus Q2 2021, or an increase of 1% versus Q2 2019. Comparable sales decreased 25% compared to last year, lapping a 26% increase in Q2 2021 versus Q2 2019, representing a three-year stack of 1%.
Sales in the quarter were approximately 90% of first quarter 2022 sales, consistent with pre-pandemic historical results. Absolute transactions and conversion in the second quarter remained stable and consistent with Q1. Importantly, as David mentioned, our year-to-date average basket size contracted only 5% compared to the first half of 2021, a period impacted by unprecedented government stimulus assistance. Gross margin was 38.1% in the quarter compared to 40.8% in Q2 2021 and 37.3% in Q2 2019. Our strong gross margin results are reflective of our disciplined inventory management and product assortments that continue to strongly resonate with our core customers.
With regard to the supply chain environment, we have successfully navigated inbound and outbound freight headwinds, resulting in substantial cost mitigation with only a 20 basis point increase in Q2 2022 versus Q2 2021. While SG&A expense dollars declined 9.2% versus Q2 2021, the softer top line resulted in outsized pressure on our SG&A rate. We experienced SG&A expense deleverage of 520 basis points versus Q2 2021 to a rate of 37.0% of sales. As David noted, the management team has been working to aggressively lower our expenses aligned to our revised sales expectations, and we look forward to reducing SG&A deleverage versus last year by more than 50% for the second half of the year. Operating loss was $3.3 million in the quarter compared to operating income of $0.2 million in Q2 2019.
Net income was a loss of $2.5 million in Q2 2022 compared to net income of $0.4 million in Q2 2019. Second quarter EBITDA was $1.9 million compared to $4.8 million in Q2 2019. Finally, Q2 2022 diluted loss per share was $0.31 compared to diluted earnings per share of $0.03 in Q2 2019, or $0.06 on an adjusted basis. Now I'll turn to some brief highlights from the first half of 2022. Total sales for the first half were $393.2 million, a decrease of 25% to prior year and a 1% increase to 2019. Comparable sales declined by 27% versus 2021 on top of a 30% increase in 2021 sales versus 2019, a three-year stack of 3%.
Gross margin in the first half was 38.6% versus 41.8% in 2021, and 37.4% in 2019. EBITDA in the first half of 2022, adjusted for the gain on the sale of a distribution center, was $12.1 million versus $65.1 million in 2021 and versus $19.6 million in 2019 as adjusted. Year to date earnings per diluted share of $3.34, $0.12 as adjusted for the first quarter sale leaseback transaction, compared to $4.63 in the first half of 2021 and $0.68 in 2019, or $0.76 as adjusted. Turning to our balance sheet. Total inventory at quarter end increased 26% to Q2 2021 and 8% to Q2 2019.
Excluding Packaway Goods, inventory increased 8% versus Q2 2021 and decreased 4% versus Q2 2019. Average in-store inventory increased only 3% in dollars versus last year, a decrease of 4% in units. Average in-store inventory decreased 13% in dollars versus Q2 2019, a 26% decrease in units. We are comfortable with our level of inventory and thank the team for their continued commitment to agile, disciplined inventory management. As it relates to our buyback program, year to date, we repurchased approximately 331,000 shares at an aggregate cost of $10 million, leaving approximately $50 million remaining on our program. We ended the quarter in a strong capital position with 27.9 million of cash and no debt.
Capital allocation remains a primary focus of our board of directors, and in light of the dynamic macro environment, we are carefully evaluating our cash and investments to ensure we maintain adequate liquidity. Now turning to our guidance for the balance of the year. In light of the challenging macro backdrop, we have revised our outlook for the year and have pivoted quickly to managing and aligning our expense structure to a more normalized sales environment based on predictable historic trends. Our updated guidance, including the impact of the sale leaseback of the Roland distribution center, is as follows: We expect low single digit increase in second half total sales compared to first half total sales. For the full year, this represents an 8%-10% decline from the midpoint of previous guidance of $870 million.
We anticipate growth margin in the high 30s% to low 40s% range for the second half. We expect significantly less SG&A deleverage versus prior year in the second half compared to the first half due to aggressive expense reductions, net of incremental lease expense from sale leaseback transactions. Finally, as David mentioned, we are prudently reducing our capital expenditures by approximately $10 million to ensure we have additional liquidity to chase opportunities as they arise. Resulting in 2022 capital expenditures of approximately $22 million for the year. With these factors, we expect second half operating income to be approximately in line with the results from the second half of 2019. Year-end cash balance is expected to be approximately $85 million-$100 million, including the proceeds from the Roland sale leaseback transaction.
In summary, Q2 proved to be a challenging quarter, with meaningful inflationary headwinds impacting our customers' discretionary spending. We expect this uncertain selling environment to persist through the balance of the year. We will continue to aggressively and diligently manage inventory, control expenses, and fortress the balance sheet. Regarding the top line, I can assure you that we are getting better every day in delivering the right trends at the right value across our 617 stores. I look forward to updating you on our strategic progress on our next call. With that, I will turn the call back to David for closing comments. David?
Thanks, Heather. Before we wrap up, let me close the loop on the health of our core customers. As we have seen across our 76-year history, it shows us time and time again that when macro challenges subside, our customers return to Citi Trends. The Citi Trends customer is local, loyal and resilient, and we will remain dedicated to our neighborhood to serve the entire family for their apparel, home, and accessories needs through both tough times and good times, all anchored by our city life purpose to live bold, live proud, and respect all. As the rest of the year unfolds, we are in the process of deploying our city reimagination plan across our buy, move, sell, and support functions by being hyper-focused on areas we have consistently acted on and shared with you. They are as follows. Number one, our product.
Continuing to broaden the appeal of Citi Trends to new multicultural, lower income households in search of trend right apparel, home and accessories at prices that don't break the bank. Number two, our fleet. Continuing to upgrade our customer experience via our CTx remodel program and by providing better tools to our store management team to increase sales productivity. Number three, our infrastructure. Completing important investments in our buy and move functions that will contribute to a smarter, faster and data-centric customer and associate solution. Number four, our balance sheet. Long a strength of Citi Trends, our focus is on the here and now and applying fresh and innovative thinking to managing Opex, working capital and cash usage. Last but not least, number five, making a difference.
Whether it's paying out a customer's layaway when they are a bit short or pitching in for families in need during these tough times, we will ensure we never lose our focus in supporting our customers and associates in the neighborhoods in which they live. We continue to believe there is significant white space to expand the Citi Trends brand, and we look forward to reestablishing growth once the operating environment fully normalizes. We have confidence in our customers, who we know to be resilient and loyal, will allow us to return to a position of growth in time. As always, I want to thank the entire Citi Trends team, all the women and men that are the face of our brand, creators of our culture, and drivers of our customer engagement. Their hard work and endless efforts in making a difference in the neighborhoods we serve never goes unnoticed.
Their passion to live our purpose is shining bright and will carry us into the future. We are now ready to take your questions. Rita, back to you.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Again, as a reminder, to register for a question, it is the one followed by the four on your telephones. One moment, please, for the first question. Our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.
Thanks for taking the question. I wanted to start by asking about kind of the store growth. I know that there's remodels happening to the CTx format, et cetera. You know, with your CapEx budget getting cut to $22 million, wanted to get a sense for the remainder of the year, you know, openings, and then really in the context of, you know, how to think about FY 2023, given how challenging the environment is currently for your customer. You know, does this reset your thinking on a go-forward basis to, you know, a much lower store growth?
Good morning, Jeremy. Thanks for joining us. Let me take a crack at your store growth question. First off, on fiscal 2022, as you're aware, we have trimmed our store growth assumptions from the beginning of the year to be a bit more prudent in this environment, and also to be able to continue to open successful new stores. As we look at the rest of the year, we are going to slow our growth a bit here. We'll probably kinda end up in the range of about 15-ish new stores as we close the year out. We've had some difficulty in, I'll call it, the supply chain of new stores, largely driven by landlord and building delays, things outside of our control, which has pushed some stores later.
Part of it's reflected in our slightly more conservative CapEx spend to allow for some liquidity in this year to chase opportunities, as noted on the call. When it comes to 2023, it's too early to comment. We have tons of great stores in the pipeline for 2023, and we're in the midst, as you can imagine, of working through our here-and-now plans so that we can deliver the second half as indicated in the call today. We'll get hard after what 2023 looks like in early to mid-fall. More to come on what that looks like, but too early to predict.
Okay. In terms of the change to sales guidance and, you know, I think when we compare versus 2019 now, you know, the picture becomes a little clear that, you know, we've just reverted to, you know, similar levels. But I did wanna get a sense in terms of your more recent trends, kind of the cadence of sales over the last couple of months and here in the, you know, first, you know, month of Q3. Have you seen any improvement, or is this just kind of it's stabilized at a lower level than you had expected, and that's what you're anticipating on a go-forward basis, you know, given that your guidance does imply for, you know, slightly better back half of the year results. Wanted to get a sense for what you're seeing currently.
Sure, Jeremy. Happy to add a little bit of color on that. Good question about kind of the year-to-date trends and how we're thinking about the second half. With regards to the year-to-date trends, as we mentioned in one of our comments in the call, absolute transactions and our conversion rates have been extraordinarily consistent. I think the good news is as you look at the pressures and how it's impacted our lower income customers, the silver lining in a way we've held. I would use your word, we've definitely seen a stabilization. The way Q1 and Q2 unfolded, it's been really consistent, not a lot of, you know, big ups or big downs.
We believe, as you heard in the call, this idea of having a loyal, resilient customer and those that have the means to come back on a regular basis and shop relatively frequently, which is a hallmark of the brand, has definitely been the case. We're just seeing an absolute lower level of footsteps in the door given the pressures on the, in particular, the low income bracket of our total target audience. As we look at the second half, we have definitely chosen after a lot of rigorous analysis as best we can, and as you know, it's hard to predict through these times. We've sort of indicated, as you could tell in the guide, that it's gonna kinda maintain that stable level.
You know, we're not sure as most retailers aren't, you know, whether it will improve drastically or not. We got a little bit of improvement built in there, which we think is prudent, given what we're seeing in a little bit of the early Q3 read. Overall, it's a stable trend as supported by strong conversion, strong basket, strong UPT, all of the right metrics showing the right levels of performance. It's just that with that pressure on traffic and absolutely the number of people coming in the door. Does that make sense?
Yeah. No, that's helpful for sure. Okay, last one, and then I'll hop out of the queue. In terms of the sale-leaseback transaction, when taken in combination with what was done with the first DC, you know, clearly you guys, you're gonna have very strong, you know, cash balance by the end of the year. Wanted to get a sense for taking the two transactions in total, what is the annual rent cost that is going to be added by having those kind of sold DCs? You know, so that we can kinda think about that on an FY 2023 basis. I assume that all of those dollars flow through your SG&A line. Could you confirm?
Sure. I'll hop in and take that. As Jeremy, the rent expense for the two distribution center leases is just shy of $8 million. You can think about it as a 1% on a SG&A rate basis, assuming $800 million of sales.
Okay, got it.
It's
And so-
Yep.
Does that imply then, in terms of, you know, the expense cuts that you've had, you know, I don't know how much of that's coming out of the stores versus the DC versus corporate. You know, but I think that would imply that actually your levels are lower, your staffing levels are lower than 2019, given the $8 million increase in your rent expense. Is that a pretty fair assumption?
There's so many puts and takes in that, Jeremy. I'd say it's yes, it's consistent with 2019 from a headcount perspective. If you think about stores and DCs, we've been dealing with wage rate increases over time, so we've offset that with improved productivity. As we mentioned, we are aggressively attacking our expense structure in the second half of the year, which is really across the board, right? The headcount changes like David mentioned, that we're into everything from what do we spend on pen and paper to how do we further improve productivity in DCs in the stores. It's really across the board.
Got it. Well, best wishes, you know, on the second half of the year and definitely been dealt a tough hand. Thanks for taking the questions.
Thanks, Jeremy.
Thanks, Jeremy.
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good morning, everyone, and welcome, Heather.
Thanks.
David, as you mentioned about the consumer cohorts and 50% of the consumers having household incomes of $25,000 and below, what are you seeing in purchase patterns? Is there differences in terms of the income levels given that your basket size is holding up and you're getting high conversion? On the merchandise assortment, anything being tweaked in terms of price and value that you're offering or category sell-through that you're seeing? Then I have a follow-up.
Hi, Dana. Thanks for joining. Great questions. In terms of the cohort specificity, it's interesting. We're not seeing tremendous differences in their baskets. However, there has been a slight skew towards more of the essential centric basket amongst the lower income cohort, e.g., they are picking up more of what's in our expanded Q line, think, soaps and lotions and HBA and even some things like batteries and such. We're seeing a slight skew in their basket, which makes sense to us, especially as we've grown that business and sought to create a bit more of a one-stop local neighborhood store where you can get far more than apparel. I would say that the higher income cohort is. We'll frame that as sort of the 40-50 carriers.
We're seeing quite a bit of new customer influx in that income cohort, and they are showing a little to no resilience to our higher AURs in primarily the apparel cities. That's, as you know from our last couple of years, been driven by, in most cases, changes in our quality, trend, features and benefits, embellishments and so forth, and thereby enabling us to capture a bit higher AUR. It's almost like there's two ends of the spectrum, you know, the lower income cohort enjoying some of the very new assortment enhancements we've been making over the last year, and then the higher income cohort loving what trends we're putting down. I would probably give a big shout out to the guy.
Our guy, as I mentioned, the strength of our men's casual business is he's just rocking with us, and we're enjoying his loyalty and a pretty big increase in his dedication and devotion from his wallet to us. That's a little bit about the cohorts. On pricing and category mix and so forth, you know, the good news is, you know, well over 60% of our unit mix is well under $10 in our store. We have never, through these last 2.5 interesting and different years than we could have predicted, really wavered from being extreme value. That unit factor that I shared with you is pretty powerful, and even a big portion of the 60% is under $7.
That's great to see that our merchants are maintaining a strict adherence to the value equation, especially during these tough times. That's kind of from a pricing standpoint. Then on a category mix front, you know, it's been really nice to watch the box present a slightly different look from a category mix standpoint. I'll point out a couple things, some of which I already mentioned, but the expansion of our Q line is not to be missed. It's significant. It's creating incremental sales in the box, you know, offsetting some softness throughout the rest of the box. We're seeing a distinct set of indicators as we continue to test and roll our more, I'll call it, multicultural positioning out to the marketplace.
As you remember, we've talked about adding more of a Latinx friendly assortment to the box. We have not stopped that at all. In fact, we're playing offense in that area, and we're appealing to more and more multicultural customers within our current fleet that's been around for a while and also within new stores built in the last two to 3 years. That's another example of what's working. You know, there are many, you know, great pockets. I'll give a fun one. We never carried wide width shoes, and that business will be pretty significant for us this fiscal year because we got our arms around doing that, and our customers responded in droves based on having a shoe that will fit her a bit better for the outfit she's purchasing from Citi Trends.
Those are some examples. Like during the call, we're playing offense, you know. Despite a lower sales expectation, we're fortunate enough to be able to have the liquidity and a great team to chase the right trends. Then I'll give a nod to what I said during the call of doing better in footwear and ladies. We think we have distinct opportunities to expand our footwear usage occasions that we kind of paused a bit during the pandemic years, and we're ready to roar back into some usage occasions that we have not been a part of, so to speak. Then on the ladies front, it's really been a master class in catching up with and responding to the most current trends.
For example, wear to work and a slight change we're seeing in kind of the casualization of apparel that's different from what we saw during the pandemic years. All that's in motion, and we're seeing really good traction.
Great. Then CTx, I know that's been a big topic, and the performance of those stores have performed others. As you think about CTx currently, given the inflation pressure environment, is there still a difference? Then just my other two are, on the SG&A reduction path, where are we? Any outlook in terms of what you're thinking about either 2023 or what other buckets of SG&A to evaluate? Same thing on inventory, given that obviously you have some Packaway, how you're thinking of inventory levels as we go through the year. Thank you.
Absolutely. Good questions. I'll take the CTx question, and then I'll turn it over to Heather for SG&A inventory. Quickly on CTx, we are so pleased with the results that we've seen year to date. No real differences. Even despite continued macro pressures, these stores that we've completed are rocking and rolling. We couldn't be more pleased with how they present the brand, how our associates get so excited about showing up to work every day to serve a host of new and existing customers who continue to say, "What'd you do with my old Citi Trends? But I love the new one." We're seeing and hearing just great feedback, and we're gonna do a handful more this year because of the strong performance we've seen year to date. Heather, do you wanna speak to SG&A and inventory?
Sure. Dana, your question was where are we, right?
Yes
As we mentioned, we have a $10 million of cost reductions in the second half of the year. We've captured, call it about 40% of that and are in line of sight for the remainder piece, right? We are working hard, diligently, aggressively. Can't pepper enough words in here to capture the other $6 million. It's been identified where we're gonna find those savings, just going after it and banking it in the P&L. We will absolutely get it done. What I will tell you when we think about FY 2023, about half of the $10 million I would put in the category of restructure, right? Changing programs, changing organizational structure, changing services, et cetera, et cetera.
10% I'd put in the volume related category, and then there's some one-time in there, right? If we think about it going into 2023, I would keep all of that in mind, right? There are some one-time items that will reset in 2023, but we are firmly dedicated to making sure that we continue to leverage SG&A into the new year. Your question on inventory and how to think about pack away going forward. I think your question was how to think about pack away going forward.
Yes
We do have an amount of Packaway sitting in the DCs that we are very excited to start releasing in September in support of fall and holiday sales. We'll start to see that amount come down pretty dramatically over the balance of the year.
Got it. Thank you.
You bet.
Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, thanks a lot. Congrats, Heather, on the new responsibilities. My question's on the guidance. I'm curious if the expected gain on the Roland DC is included in your second half EBIT assumption, which I believe is for it to be equal to the second half of 2019.
Yeah. Great question, Chuck. I'm gonna hop right in on that, David. That statement that we will be in line with 2019 is exclusive of the gain on the sale-leaseback transaction. That said, it does include the impact of the lease expense.
Okay. It excludes the gain. Any sense on what you think the gain will be? I know the proceeds are gonna be about $36 million.
We're still working that number, Chuck. I think it's a little early to share that.
Okay. Great. Then just on the second quarter, David, you know, you said that things were consistent, but, you know, there's a lot of volatility in gas prices throughout the quarter, particularly in the back half of July and when prices came down. Just curious if the business changed at all. As you think about those pressures that you highlighted. Do you feel like the baton is getting passed from, you know, higher gas prices to now higher utility prices and food? Any sense for when you walk stores and talk to your customer?
Hi, Chuck. Yeah, good question. As you can probably recall, in the last earnings call, we talked about speaking to our customers and associates in a couple of informal focus groups. What we heard then was gas by far was the biggest concern, followed by rent, utilities, and actually food was in kind of a fourth place. We kind of refreshed some of that data as we saw the gas prices come down most recently. The good news is we saw a pretty good, at least qualitative correlation in terms of, "Oh, gosh, what a relief, gas prices coming down," particularly in some of our, you know, midsize markets where we do a lot of volume and where we saw it kind of.
We heard, I should say, most of the, "Oh, you know, these gas prices are just really hurting us." I think to put it quickly on that one, when the gas prices came down, we did feel both relief based on talking to customers and associates. You know, there's a lot going on when they were coming down because it was sort of during back to school and some payday shifts. Overall, you know, we did see some interesting sales response and traffic response to or during the time period of gas prices coming down. I think we're cautiously optimistic that that could be a nice little tailwind provided they stay down. Then we asked, of course, "Well, what if they're coming down? What else is bothering you?
Any updates from last time we spoke to you? Food definitely rose. You know, I think the reality of food wasn't easing up much at all. If maybe it was even going up a little bit in some of our neighborhoods and then grocery stores they shop in, which typically are passing on price pretty aggressively to the consumer. We heard food rise in their kind of importance list. So there's some gives and takes there, but having the number one reason that was giving them agita come down definitely is a good sign, and a good development. So I think we're gonna cautiously observe that over the rest of the quarter and the half year and, you know, see how it shakes out.
Okay, great.
Yeah. I think I answered.
Sorry. Go ahead.
All your questions, but let me know if I didn't.
Yeah, I just didn't know if there was also some benefit from state tax holidays this year. I think, you know, across the country, roughly, you know, 50% more days than last year. I don't know if you saw maybe more amplification of the state tax holiday benefit this year. I don't know if you've had a chance to look at that data yet.
Great question. Yes, we have. We have seen some positive impact from more days and in some cases earlier days than prior years. As we've looked at our kind of pre-cohorts of back-to-school time period grouping, you know, early back to school, mid, late is how we call them. We've seen some early and mid tax-free holidays produce some nice gains as compared to 2019 and help fight the 2021 high, so to speak. Yeah, we're liking what we're seeing during those days.
Okay, great. My last question will just be essentially how you arrived at the back half view. It looks like you're sort of extrapolating the three-year comp stack from the second quarter of roughly down 5.6% into the back half of the year. Is that sort of how you got there, even though it sounds like August, you know, might be a little bit better on the top line than what the second quarter run rate was?
That is how we got there, Chuck. Maybe mixed with a dose of what has been our traditional quarter-to-quarter builds or debuilds prior to the pandemic. That we kind of threw a bunch of data points into the blender and got to the kind of relationship that I'm sure you'll kind of back into in terms of three absolute volume compared to two, compared to one and before as well. Those relationships we believe for the rest of this year, given the uncertain environment we're operating in, will kind of largely hold up. In the call Q2, kind of in a more stabilized way, it'd be about not sending Q1 volume extraordinarily well to history. We use some of that in addition to the geometric stuff to get to this.
Okay, great. Thanks very much for the color.
Thanks, Chuck. Have a great one.
Thank you. Our last question comes from the line of John Lawrence with BofA. Please proceed with your question.
Good morning and welcome, Heather.
Thanks, John.
David, could you start off just a little bit by reminding us of the process of attracting the new merchandise? I mean, you've talked about being able to free up cash to get the available deals. Remind us how that process works and have you been able to get that or is it just more of an effort of just getting more steps in the door rather than the newness and the freshness of a new deal?
Hi, John. Nice to hear from you. That's a great question. Both are important, right? We're aiming to develop the most engaging assortments at the greatest values for our customers, but we're also trying to entice and kind of, you know, combat this headwind of lower traffic. I would tell you the priority, given our maniacal focus on expense conservation, the priority's been on really buying the right stuff at the right time for the right customer, more so than putting incremental dollars into marketing and such. We just don't have that luxury yet.
Back to what we've been focusing on, you know, I'd take you back to the beginning of the year, highlight that our merchants during the supply chain disruption period of late 2021 and early 2022, we're all aware of, they dove into those marketplaces progressively to pick up very attractive goods meant to sell later in the year. As Heather commented on, we're possessing really nice Packaway inventory that built during November, December, January, and now we're literally seeing the starting August first, and that'll take place through November, December to deliver back to school, fall, and holiday. That's so germane to our model because what's in that Packaway are really great values and a mix of product that we don't always get our hands on, right? Given our model, these are kind of opportunistic buys.
That's one part of our process, and it's literally coming out of our buildings as we speak, going into our 600+ stores, and we're liking what we're seeing. Then the rest of their days, so to speak, are really spent on identifying the right trends that we can get across men's, women's, kids, accessories, home, footwear and the like, and making sure we ladder back to our customer. The customer is nicely evolving for us, meaning we're including more than our lifeblood African American customers, and we're adding more and more apparel, accessories, home, et cetera, that appeal to a broader audience, namely our Latinx customers that we have so many of in our current communities and neighborhoods, and that we're so pleased to serve, but we can serve them better.
This squarely falls under, kind of back to your question, the process. We're evolving our process pretty rapidly. I would tell you we're ahead of schedule, and we are going after it with full vigor to broaden the appeal of the brand as we buy the goods suitable for now, really two large audiences, African Americans and Latinx populations. We're excited about that. As we move forward, we're pretty excited about what we have for the rest of back to school, fall, and then holiday and gift giving throughout the year. That's how it kind of works mechanically, and I think we'll see some good things going forward. Hope that answers your question.
Great. Thanks. One last longer-term question, just strategic. I know you started right before the pandemic. You built the team up, all of that, and now macro conditions sort of dictate making some changes. How do you balance that looking long term versus short term as far as cutting into the muscle of the business. I'm sure you've thought about that, but just sort of a deeper dive there just a little bit.
Sure. Happy to add some color on that. I'll start by saying it was a very, very difficult decision. We in general are not a bloated organization. We in general have very defined roles. We have not a ton of, you know, layers. We all work very, very collaboratively to get a culture that supports contributions from all levels. It was very difficult to study and make very hard decisions about which roles would be eliminated. The overall picture though, John, is definitely a picture of balancing both the individuals that we really need for this business to tick, but also recognizing that we're evolving how we work. We're also evolving what we provide to our teams in the form of data, technology, and automation, to name a few.
Some of what we're going through is a product of, as you've heard us speak about, investing in data and technology, for example, that will make certain functions more efficient and productive. Unfortunately, it may require a few less people, which is tough on the people front, but nonetheless, will enable us to operate that particular function with less headcount over time. Where we are today is doing the appropriate right sizing for a smaller business space. Then of course, as we look to the future and return to a position of growth over time, we'll evaluate and monitor. You know, we'll also have a much better handle on how effective our systems and improvements in infrastructure are.
We're nothing but optimistic about those improvements as we've done a couple already this year with huge success. We're already seeing benefits associated with them that allow us to be more productive. Short-winded it would be, we're balancing it. You're absolutely right. We're being cautious, but at the same point, we had no choice but to take certain actions to right-size our expense structure.
Great. Thanks for that. Good luck in the second half.
Thanks, John. Talk to you later.
Thank you. Mr. Makuen, I will now turn the call back to you. Please continue with your presentation or closing remarks.
Thanks so much, Rita. Thanks everybody for joining. Have a great rest of your summer. Talk to you next time. Bye-bye.
Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.