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The long-term recommendation of value-priced retailer of urban fashion apparel and accessories, Citi Trends Inc. (CTRN - Analyst Report), was recently downgraded to ‘Neutral’ on account of the company’s lower-than-expected second-quarter 2012 results. However, the company’s fundamental prospects remain intact, preventing a negative sentiment among investors.

Citi Trends loss of 54 cents per share in the second quarter fared worse than the Zacks Consensus Estimate loss of 44 cents mainly due to comparable sales along with higher operating expenses. Moreover, the company’s net sales of $132.3 million marginally fell short of the Zacks Consensus Estimate of $133 million. We believe the ongoing sluggishness in the economy and rising commodity prices may further dent its future operating performance.

Besides, intense competition from other retailers, seasonal nature of business, and risks associated with sourcing merchandise from developing countries may further undermine the company’s growth prospects.

Nevertheless, the fundamentals of this apparel store chain remain strong as the company’s 30% to 70% discount on offerings continue to appeal to the value-conscious customer looking for cheaper alternatives in a sluggish economy. Furthermore, the company’s niche focus on African-Americans and inviting store formats provide an edge over other off-price retailers like The TJX Companies Inc. (TJX - Analyst Report) and Ross Stores Inc. (ROST - Analyst Report), and mass merchants like Wal-Mart Stores Inc. (WMT - Analyst Report).

We believe Citi Trends’ extensive focus on store expansion strategy may provide an impetus driving the company’s top-line growth. During fiscal 2011, the company increased its store strength by approximately 12% with the opening of 55 new stores, bringing the total store count at the end of fiscal to 511. We believe the company’s debt-free balance sheet along with cash and cash equivalents of $51.7 million as of July 28, 2012 offers it the financial flexibility to enhance store counts.

Further, the company has taken prudent steps to reduce inventory shrinkages, which we believe, will help it improve operational performance. Among such steps is an enhanced supervision by the operations and loss prevention departments as well as installation of sophisticated surveillance systems in high shrinkage stores.

The company 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.

Though our long-term view on the stock has shifted to Neutral, the company has slipped to a Zacks #4 Rank, indicating a short term Sell rating, based on the poor recent quarter results.

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