Citi Trends, Inc.
/ (CTRN-NASDAQ)/ Equity Research / CTRN | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 12/19/2014
Current Price (12/18/14) / $25.63
Target Price / $27.00
We have downgraded our long-term recommendation on Citi Trends to Neutral based on the wider-than-expected loss reported for third-quarter fiscal 2014.Additionally, we believe a competitive retail environment and seasonal nature of the company’s business along with sluggish store growth plan may weigh on its performance going forward. However, we believe that the company’s strategic initiatives, such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management, have helped it in making a significant turnaround as evident from the robust sales growth, positive comparable-store sales and improved gross margin in the quarter.Other positivesabout the stock include better cost management, a debt-free balance sheet and strong cash position.
SUMMARY
/ Equity Research / CTRN | Page 1SUMMARY DATA
52-Week High / $25.6352-Week Low / $15.38
One-Year Return (%) / 47.21
Beta / 0.47
Average Daily Volume (sh) / 119,163
Shares Outstanding (mil) / 16
Market Capitalization ($mil) / $399
Short Interest Ratio (days) / 4.76
Institutional Ownership (%) / 89
Insider Ownership (%) / 4
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 1.7
Earnings Per Share (%) / -40.9
Dividend (%) / N/A
P/E using TTM EPS / 54.5
P/E using 2014 Estimate / 45.8
P/E using 2015 Estimate / 31.6
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Small-Blend
Industry / Retail-App/Shoe
Zacks Industry Rank * / 176 out of 267
OVERVIEW
Citi Trends Inc. is a leading value-priced retailer of urban fashion apparel and accessories including nationally recognized brands, private-label products and a limited assortment of home décor items. The company primarily targets fashion conscious African-American customers, offering branded merchandise at about 20% to 70% discount compared with the regular prices at department and specialty stores. The private label products are offered under brands such as “Citi Steps,” “Red Ape,” “Vintage Harlem,” and “Lil Ms Hollywood.”. Citi Trends merchandise includes a wide variety of products for men, women and children; including sportswear, dresses, outerwear, footwear, intimate apparel, accessories, scrubs and home decor.
Citi Trends operates in 29 states in the Southeast, Mid-Atlantic, and Midwest regions of the U.S. as well as in Texas and California. The company’s stores are strategically located in neighborhood shopping centers that are easily accessible to relatively low and moderate-income customers.
REASONS TO BUY
Better Product/Price Mix Provides Competitive Edge Over Rivals: Citi Trends offers merchandise at about 20% to 70% discount compared with other department and specialty stores’ regular prices and therefore appeals more to the value-conscious customers looking for cheaper alternatives in the current sluggish economy. Furthermore, the company’s niche market is focused on the African-Americans, which along with inviting store formats provide an edge over other off-price retailers and mass merchants.
Efficient Inventory Management to Improve Operational Performance: Citi Trends has taken prudent steps to reduce inventory shrinkage. These include enhanced supervision by the operations and loss prevention departments as well as installation of sophisticated surveillance systems in high shrinkage stores. Further, 2014 marked the implementation of the company’s new inventory planning and allocation system, which enables it to plan inventory by class, by weather zone and by store, to about 50% of its merchandise classes. These strategies,taken up to lower inventory levels,were successful in third-quarter fiscal 2014, as reflected in the improved gross margins. Going forward, we expect the company to further improve its operational performance through the roll out of its inventory managementsystem to more stores.
Strategies Paying Off: We are impressed with Citi Trends’ strategies such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management that have been helping it turnaround its operating performance. Further, the company launched its online sales site in the third quarter. Though the site is still in the test phase with only limited offerings, the company plans to add more assortments going forward based on the response from customers. Despite a challenging and highly promotional industry backdrop, these strategies have led the company to narrow its year over year loss over thepast few quarters.The company anticipates these turnaround initiatives will drive sales improvement in fiscal 2014.
Balance Sheet Strength to Drive Growth: Citi Trends ended third-quarter fiscal 2014 with a solid cash position and no debt, reflecting a strong balance sheet. The company’s cash combined with short and long-term investments totaled $104 million at the quarter-end, marking an $18.1 million increase from the year-ago comparable period. This provides the company with ample liquidity as well astheflexibility to fund its turnaround strategies.
REASONS TO SELL
Economic Woes May Impact Citi Trends’ Target Customers: Citi Trends generally targets the low-income segment of the population, which is vulnerable to any adverse economic situation. Consumer confidence and spending behavior may dampen due to macroeconomic factors, including increase in fuel and energy costs, credit availability, high unemployment levels and high household debt levels, which may negatively affect the consumer’s disposable income. This in turn, could affect the company’s performance.
Competitive Pressure: Citi Trends operates in a highly fragmented specialty retail sector and faces intense competition from larger off-price rivals, such as TJX Companies and Ross Stores, as well as mass merchants including Wal-Mart and also smaller specialty retailers, such as Rainbow and Dots. The company primarily competes on the basis of fashion, quality and service. To retain its existing market share, the company may have to reduce its sales prices, which could affect its margins.
Seasonal Risk: Citi Trends’ business is seasonal in nature and typically generates stronger sales during the first and fourth quarters, which are characterized by the spring and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.
RECENT NEWS
Citi Trends Q3 Loss Narrows Y/Y on Turnaround Strategies – Nov 26, 2014
Citi Trends Inc. posted yet another quarter of impressive results as its adjusted loss per share for the third quarter of fiscal 2014 came in at $0.08 cents, marking a significant improvement from a loss of $0.17 per share reported in the prior-year quarter. However, the quarterly loss came in wider than the Zacks Consensus Estimate by a penny.
We believe that the company’s strategic initiatives such as better utilization of floor area, improvising merchandise margins and efficient inventory management have helped it toward making this significant turnaround.
Including the impact of a non-recurring expense related to a legal settlement made in the reported quarter, the company recorded a loss of $0.15 a share. This was wider than the reported loss of $0.11 a share in the prior-year quarter that includes the positive impact from a gain on sale of a distribution center.
Quarter in Detail
Citi Trends’ sales advanced nearly 8% year over year to $156.7 million and surpassed the Zacks Consensus Estimate of $154 million. Sales benefited from strong performance of its accessories (including footwear) and home businesses which contributed to a major share of total business in the quarter.
Comparable-store sales (comps) in the quarter rose 6.7% from the year-ago quarter, driven by an increase in the number of transactions of over 9%, a 1% pick up in the average number of items per transaction, offset partly by a 3.5% decline in average unit sales.
On the basis of merchandise category, comps at the Home Division were up 11% versus a 15% rise last year while Accessories comps increased 18% on top of a 13% increase last year. Moreover, comparable sales of the Men’s and Ladies’ divisions improved 2% and 4%, against a 2% and 9% decline, respectively, last year. On the other hand, Children’s division sales remained flat compared with a 1% dip reported last year.
By month, comps were up 6% in August, 9% in September and 5% in October. Moreover, the company continues to witness improved comps in the first three weeks of November, which is up nearly 12% so far.
Citi Trends' gross profit for the quarter escalated 9.1% to $58.2 million from $53.3 million in the year-ago quarter, while gross margin expanded 40 basis points (bps) to 37.1 %. The improvement in gross margin was attributed to improved cost of goods sold as a percentage of sales, backed by solid merchandise sales.
Selling, general and administrative (SG&A) expenses in the quarter rose 8.1% year over year to $56.3 million, while depreciation expense fell 7.6% to roughly $5 million. As a percentage of sales, SG&A expenses grew 10 bps to 36%, as the expense connected to a legal settlement incurred during the quarter more than offset a fall in all other expenses as a percentage of sales. Management envisions SG&A to range from $55–$56 million in the fourth quarter, up from $50.2 million reported last year, accountable to greater incentive compensation expense.
Operating loss came in at $3.2 million, compared with a loss of $3.3 million reported in the year-ago comparable quarter.
Financials
Citi Trends had no debt on its balance sheet at the end of third-quarter fiscal 2014. Cash and cash equivalents were almost $66 million compared with $47.6 million at the end of third-quarter fiscal 2013. Combining cash and cash equivalents with short-term and long-term investment securities, the company had about $104 million in hand, compared to $85.9 million last year. Shareholders' equity totaled approximately $205 million, as against $196.7 million in the prior-year period.
Store Growth Strategy
During the quarter, the company introduced four new stores, meeting its previous forecast. Also, Citi Trends closed 1 store just after the third quarter, taking the total store count to 511 across 29 states so far. Moreover, the company launched its eCommerce site during this quarter. This is expected to drive sales significantly, going forward.
Additionally, management intends to open 10–15 stores, relocate or expand 7–10 stores and renovate 20–25 stores in fiscal 2015.
We believe the company remains highly optimistic about its future performance, given its solid comps, prospective benefits from its online business and efficient inventory management which is expected to augment gross margin. Also, management anticipates its accessories and home divisions to continue being the major contributors to its comps.
VALUATION
We remain optimistic about the company’s turnaround strategies such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management. However, the company wider-than-expected loss in the third quarter was a letdown. Therefore, for the time being, we have downgraded our long-term recommendation for the stock to Neutral. Our target price of $27.00 is based on 33.3x2015 EPS.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CTRN. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 16.1%, Neutral - 77.6%, Underperform – 6.0%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / CTRN | Page 1