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On Dec 11, 2013, we reiterated our long-term recommendation on Citi Trends Inc. (CTRN - Analyst Report) at Outperform, based on improved third-quarter fiscal 2013 results and the company’s narrowed losses in recent quarters.

Why Outperform?

We remain impressed with the company’s strategic initiatives such as better utilization of floor area, improvised merchandise margins and efficient inventory management as these helped to reduce losses in the near term. The company has efficiently reduced losses in 6 out of the past 7 quarters despite a challenging and highly promotional industry backdrop.

In the third quarter of 2013, Citi Trends’ 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, reflecting a positive earnings surprise of 5.6%.

We also applaud the company’s conscious efforts to lower inventory levels to drive comps and gross margin growth. In addition, Citi Trends is witnessing improvement in its store performance and has posted positive comps sales in 6 of the last 7 months. Overall comps expansion, along with a rebound in sales at the troubled ladies segment are expected to boost top-line growth in the future.  

Other factors that justify our positive stance on the stock include better cost management, a debt-free balance sheet and strong cash position. The company’s cash combined with short and long-term investments totaled $86 million at the quarter-end, marking a $30 million increase from the previous year. Furthermore, inventory was down 16% year over year. This provides the company with flexibility and ample liquidity to fund its turnaround strategies.   

Other Stocks Worth Considering

Currently, Citi Trends has a Zacks Rank #2 (Buy). Other stocks that are worth considering in the retail industry include G-III Apparel Group Ltd. (GIII - Snapshot Report), Hanesbrands Inc. (HBI - Analyst Report) and Mohawk Industries Inc. (MHK - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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