Citi Trends (NASDAQ:CTRN) released first-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.

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Summary

Citi Trends reported a strong Q1 2026 with EBITDA of $13.9 million, more than doubling the previous year's $6.4 million, driven by a 13.9% increase in comparable store sales.

The company's strategic initiatives, such as refining trend, style, and value in merchandising, have shown success with broad-based sales growth across all product divisions.

Citi Trends updated its 2026 guidance, expecting comparable store sales growth of 8-10% and total sales growth of 9-11%, with adjusted EBITDA projected to reach $35-40 million.

Operational highlights include the successful opening of two new stores and 51 store remodels, with plans for 25 new store openings and further remodels throughout the year.

Management emphasized the strength in customer traffic and basket size, indicating strong product and brand resonance, and noted ongoing efforts in inventory efficiency and AI-driven systems.

Full Transcript

OPERATOR

Greetings. Welcome to Citi Trends first quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Nisa McKee, senior associate at ICR. Thank you. You may begin.

Nisa McKee (Senior Associate)

Thank you and good morning everyone. Thank you for joining us on Citi Trends' first quarter 2026 earnings call. On our call today is Chief Executive Officer Ken Seiple and Chief Financial Officer Heather Platino. Our earnings release was sent out this morning at 6:45 am Eastern Time. If you have not received a copy of the release, it is available on the Company's website under the investor sectionat www.cititrends.com. you should be aware that prepared remarks made today during this call may contain non-GAAP information and forward looking statements within the meaning of the Private Securities Litigation Reform act of 1995. Management may make additional forward looking statements in response to your questions. These statements do not guarantee future performance, therefore, you should not place undue reliance on these statements. We refer you to the Company's most recent report on Form 10-K and other subsequent filings within 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 Ken Seiple. Ken

Ken Seipel

thank you Nisa. Well, good morning everyone and thank you for joining us today for our first quarter 2026 earnings call. Simply stated, we had an excellent quarter building on the powerful momentum from 2025. Nearly every metric accelerated during Q1 2026 and we're seeing strong momentum early in Q2 as well as 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 pre release, last week in Q1 we generated $13.9 million of Earnings Before Interest, Taxes, Depreciation, and Amortization (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% and representing a two year stack of 23.8 and also marking 21 consecutive months 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 two year basis is in the upper teens consistent with the momentum we delivered in Q3 and Q4 of 2025 and in the two 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 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&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 one 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 demonstrating that our customers are responding to the strength of our assortment and the compelling value that we're delivering. From a merchandise perspective, we saw disciplined 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 and stock positioning. Women's accessories also posted meaningful gains which is reflecting 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 the result of continued refinement of our three tiered good, better and Best strategy across all merchandising divisions. What's important to note here is that we're 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 their style and trend expectations. At the opening price point. We continue to deliver strong value through our Citi Score 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're continuing to expand our Best tier through both Fashion Forward product and branded extreme value opportunities, often with extreme discounts at the 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 bargaining 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 youn campaign by inviting customers to help modernize the city Trends Bingo 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&A leverage we delivered in the quarter reflects more consistent execution across the organization. As we improve execution, we're able to better leverage the fixed portion of our cost structure and without adding commensurate expense as the business grows. I'm 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, one in St. Louis and one 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'm very pleased to report that our new stores are all performing above expectations. As a reminder here in stores, one of our primary points of differentiation is our neighborhood store locations which are embedded in communities where we built trust over many, many years. The combination of these convenient proximity and strong word of mouth recommendations create sustainable, powerful traffic drivers. Now I'll 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'll return after her remarks to discuss our priorities for the remainder of 26.

Heather Platino (Chief Financial Officer)

Heather thanks Ken and good morning everyone. I'm 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 $$13.9 million, a $7.5 million increase over last year's Q1 adjusted EBITDA of $6.4 million. These results reflect the continued progress of our strategic transformation and the strength of our operating model. Total sales for the first quarter were $$230.9 million, a 14.4% increase to Q1 2025. Comparable store sales increased 13.9% ahead of our expectations, driven by both increased transactions and higher average basket on a two year stack basis, comps increased 23.8% and Q1 2026 marks our seventh consecutive quarter and 21st straight months of comp sales growth. As Ken mentioned, our comp sales growth trend on a two 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've incorporated its impact into the updated outlook. I'll walk you through shortly. First quarter adjusted SG&A expenses totaled $78.3 million compared to $73.4 million a year ago. The increase 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&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 two stores and closed one 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 TASMAS as we call it. In early Q2, we remodeled an additional 26 locations, completing our remodel program for now. Turning to the balance sheet, I'm 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 initiative. 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've 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 2026 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 approximately 50 to 70 basis points compared to 39.6% in fiscal 2025 as we continue to leverage new systems and processes to drive improvements in markdowns and shrink, partially offset by higher freight expenses 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 2025, 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 to $40 million, with adjusted EBITDA margin expected to expand approximately 200 basis points over fiscal 2025. Our real estate plans are unchanged from previous outlook with plans to open approximately 25 new stores, to close four locations, and to remodel approximately 50 locations. Finally, full year capital expenditures are expected to be in the range of 35 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'll hand the call back over to Ken Kennedy.

Ken 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're 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've established three 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. We're 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 26. We'll maintain our disciplined focus on improved style, trend and value across all product categories. And we'll 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, trend 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're 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've also continued 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 product 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've already secured several strong deals that will support continued momentum into the back half of the year. On the marketing front, we're 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's about deepening relationships and reinforcing city treatment to the communities we proudly serve. Our second priority is ensuring strong sales growth throughout flow through to profit. Incremental sales have got to translate into accelerated profit growth. Our plan in 2026 calls for about a 10% sales growth while more than doubling Earnings Before Interest, Taxes, Depreciation, and Amortization (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 IEI based allocation systems, enhanced store technologies to reduce shrink and our ongoing supply chain improvements to increase capacity and efficiency. And as I've 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 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're going to launch our customer relationship management platform that we're calling the Insiders Club. The Insiders Club turns traffic into loyalty, loyalty into frequency and frequency into ebitda. We're 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 Customer Relationship Management (CRM) system learns and scales, it becomes a meaningful contributor to long term shareholder value. The Insiders Club transforms CityTrans 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 hunt excitement that makes shopping with us an experience. We'll 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've 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 27. Our approach is grounded on data driven site selection, local market expertise and disciplined financial criteria. Using AI tools, we've analyzed three 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're 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 in accelerating to approximately 40 new stores in 2027. Equally important to our growth initiatives is the growth of our people. We're 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. As a part of that initiative, we're 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 three 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're beginning to evaluate synergistic acquisition opportunities that align with and complement our strategic priorities. We're 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 CityTrans 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're 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. But we still have a lot of processes to refine product categories to optimize systems to build and growth opportunities to maximize. We're more than a retailer. We are a neighborhood destination for black families delivering style, trend value and trust that no one else can deliver. I'M 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'll turn it to the operator now for any questions.

OPERATOR

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow up question. One moment while we poll for questions. Our first question is from Michael Baker with D.A. davison. Please proceed.

Michael Baker (Equity Analyst)

Okay, thanks guys. So you kind of alluded to the impact of tax refunds and it sounds like probably helped, but certainly more to it than that. But you talked about 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?

Ken Seipel

Yeah, Mike, probably the best way to think about the tax refund trend for us is really from about mid February up to. And this year kind of right up to Easter period, for the most part, about six to seven 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 15th and then coming out after Easter and even into really, even through last week, our trends have remained very consistent with what we experienced. You know, as I mentioned in third quarter (Q3), fourth quarter (Q4). So we've been very encouraged about the overall underlying health of the business. And as we noted in Q1, obviously our sales spiked up to 23.8% on a two 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.

Michael Baker (Equity Analyst)

Yeah. Okay, that makes sense. And then I guess I'll keep it to one question, one follow up. And this does follow up on that, I think, Ken, I think I heard you say high single digits for the foreseeable future. Did I hear that right? And what to you is foreseeable future?

Ken Seipel

Yeah, yeah, you actually did. That's a pretty good nuance in the script, Mike. That's a good catch. Yes, we did say that what we're 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're 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'm often asked by investors, can we continue to comp the comp right? And we have a great deal of confidence in that. There are so many merchandising opportunities that we have on the table. We can kind of go store by store, category by category and take a look at various ways that we can continue to get better executing our three 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 to be more clear, I was speaking very specifically about the foreseeable future being through the end of this year.

Michael Baker (Equity Analyst)

Perfect. Appreciate the caller. I'll turn it over to someone else.

OPERATOR

Our next question is from Jeremy Hamlin with Craig Hallam Capital Group. Please proceed.

Jeremy Hamlin (Equity Analyst)

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 26, but as we get into 27, 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 closeout off price deals? Any color you might be able to share in terms of the merchandising strategy?

Ken 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 kind of 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 two quarters, very, very pleased with their results. And they're at the very beginning, I think if we were to get the team around the table, we're just getting started, we actually see a path there to probably more than double that department over time. And we've got quite a bit of work to do to get that done. But there's certainly significant growth there and I can kind of go around the store and do that same sort of thing. But I would also step back and say that the other area of growth that's probably the most significant is just more broadly appealing to our higher income consumers. They've been responding extremely well. And as we continue to reposition fashion and trend, we were getting good response. You might remember in fourth quarter (Q4) last year we launched young men's trend. Highly successful has continued into today. And we're just beginning to kind of understand how large that business can be. There's 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're just launching some trend. I'm very excited about the team's work for Q3. We've looked at it. The styles are right on, the trends are right on. And we're making some different investments there. And there'll 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're just exploring the implementation and now ultimately the expansion of Missy category of product. And I don't mean to take up the entire call going through here, but there's. The point here is that there's a lot of significant opportunity just getting better doing what we're doing in our three 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's fun to talk about, but reality is it's. It's actually the icing on the cake for us. That's the stuff that drives the excitement, the treasure hunt, and is really kind of compelling. It will drive traffic for us, but we're not reliant on that as our growth engine. That's complementary to our overall core merchandising strategy.

Jeremy Hamlin (Equity Analyst)

Got it. And then switching gears to talk about unit growth. So you're starting to really exercise that muscle. Accelerating to mid single digit and potentially beyond. As we get into 27, I wanted to understand the cadence of openings. You opened two in Q1. How should we be thinking about the remainder of the year? And then as you get into a more consistent unit growth algorithm, you know, how should we be thinking about unit. The timing of unit openings throughout the year?

Ken Seipel

Yeah, perfect. I'll talk a little bit about the last part of your question. I'll ask Heather to kind of fill in on the balance of 2026 for you. But how we're thinking about unit growth going Forward. We're going to put our new store cycle on three 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 kind of get the new stores off to a good start. And so in our model that would mean we were going to open up a block of stores in February in advance of the taxes period. We're going to open up a block of stores in the summer, mostly mid July, in advance of back to school. And then we're going to open up again another block of stores in October in advance of going into holiday. And those three opening sites allow us to a number one, 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 to mature those stores at a much more rapid rate in 2026. We're just getting started obviously. So our opening cadence is a little bit irregular in 2026. I 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 Platino (Chief Financial Officer)

For sure. So we did the two in February in time for taxes. We're thinking three to five in July period and then the balance in October this year. So again that speaks to Ken's 2026 is not what we consider, quote unquote normal for go forward periods. But that's us getting our legs under us.

Jeremy Hamlin (Equity Analyst)

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

Heather Platino (Chief Financial Officer)

Yeah, Ken, I'll grab the mic if you don't mind. So two things. I'll start with a gross margin question. No doubt fuel surcharges were not in our initial guide. Certainly an industry issue. We're not alone that caused our change in our outlook for gross margin from an expansion of 100 basis points points to our updated guide. And that is entirely due to those fuel surcharges. Okay. So we're 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 is getting better because of the investments that we've made and you've heard us speak about quite a bit in these calls about AI based allocation systems, AI based camera systems, both of those are driving goodness in the gross margin line. But you know, fuel SAR charges are real and as I said, we expect that to continue for the balance of the year and it's all incorporated in the guide. And then your second question, Jeremy.

Jeremy Hamlin (Equity Analyst)

I'm sorry, on incentive comp, you know, given the strong comp performance and profitability.

Heather Platino (Chief Financial Officer)

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

Jeremy Hamlin (Equity Analyst)

No doubt well earned as well. Thanks so much for taking the questions and best wishes.

Heather Platino (Chief Financial Officer)

Thanks Jeremy.

Ken Seipel

Thank you.

OPERATOR

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

Ken Seipel

All right, well thank you again everyone for joining us for a call. We appreciate your continued support of our brand. Look forward to talking to you next quarter. Thank you.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.