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Yesterday, Citi Trends Inc. (CTRN - Analyst Report) posted better-than-expected bottom-line results for the third quarter of fiscal 2013. The company’s adjusted loss narrowed to 17 cents per share from a loss of 25 cents in the comparable year-ago quarter. Moreover, it fared better than the Zacks Consensus Estimate of loss of 18 cents per share.

This year’s adjusted earnings figure does not include a benefit of 6 cents per share related to pre-tax gain on sale of the company’s former distribution center. Including this, Citi Trends’ loss per share for the quarter came in at 11 cents. 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 to make a significant turnaround.

Quarter in Detail

Citi Trends reported sales of $145.4 million, marking a decline of 2.4% from $149.0 million in the prior-year quarter. Moreover, the sales were below the Zacks Consensus Estimate of $151.0 million.

However, comparable-store sales in the quarter inched up 0.6% from the year-ago quarter, mainly driven by an increase of 6% in the number of customer transactions and marginal rise in the average number of items per transaction. However, comparable-store sales performance was negatively impacted by over 5% fall in average unit sale.

Citi Trends reported strong comparable-store sales in August and October, while the month of September witnessed fall in comparable-store sales. On the basis of months, the company’s comparable store sales were up 2% in August, down 3% in September and again up 3% in October.

On the basis of merchandise category, comparable store sales of Home Division and Accessories increased 15% and 13%, respectively. On the other hand, sales of the Children, Men and Ladies divisions were down 1%, 2% and 9%, respectively.

Citi Trends' gross profit for the quarter rose 4.1% to $53.3 million from $51.2 million in the year-ago quarter, while gross margin expanded 230 basis points (bps) to 36.7%. The improvement in gross margin came on the back of lesser markdowns and strong inventory control.

Selling, general and administrative (SG&A) expenses in the quarter increased approximately 2% year over year to $52.1 million, while depreciation and amortization expenses waned 8.6% to $5.5 million. As a percentage of sales, SG&A expenses increased 160 bps to 35.9% due to decline in total sales.

Loss from operation on a reported basis declined to $3.3 million from $6.6 million of loss reported in the year-ago comparable quarter.

Financials

Citi Trends had no debt on its balance sheet at the end of the reported quarter. Cash and cash equivalents were $47.6 million compared with $36.2 million at the end of third quarter fiscal 2012. Shareholders' equity totaled $196.6 million, as against $196.0 million in the prior-year period.

Store Count

Following a conservative store growth strategy in fiscal 2013, Citi Trends closed 1 store during the third quarter. However, it relocated or expanded 3 stores. This brought the company’s total store count to 505 at the end of third-quarter fiscal 2013. At present, the company operates across 29 states in the Southeast, Mid-Atlantic and Midwest regions as well as in the states of Texas and California.

Outlook

Looking at fiscal 2013, the company expects to continue posting positive comparable store sales and improved gross margin with lower levels of inventory. Citi Trends intends to keep lesser inventory in the fourth quarter of this fiscal compared with the year-ago quarter level.

Other Stocks to Consider

Citi Trends currently holds a Zacks Rank #3 (Hold). However, some better-ranked apparel retail stocks include Hanesbrands Inc. (HBI - Analyst Report), Quicksilver Inc. (ZQK - Snapshot Report) and DSW Inc. (DSW - Snapshot Report). While Hanesbrands has a Zacks Rank #1 (Strong Buy), Quicksilver and DSW carry a Zacks Rank #2 (Buy).

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