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Citi Trends Upped to Outperform

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On Sep 7, we upgraded value-priced retailer of urban fashion apparel and accessories, Citi Trends, Inc. to Outperform, based on its improved results in second-quarter fiscal 2013. We are impressed with Citi Trends’ turnaround efforts, which boosted the company’s top-line growth and narrowed its loss despite a challenging macroeconomic environment.

Why the Upgrade?

Citi Trends marked an improvement in its second-quarter results by reporting a loss per share of 34 cents, which fared better than the prior-year quarter loss of 54 cents. Including asset impairment charge, loss came in at 37 cents. The quarterly loss also fared better the Zacks Consensus Estimate of a loss of 43 cents.

During the quarter, Citi Trends’ net sales improved 4.2% to $137.8 million and came marginally ahead of the Zacks Consensus Estimate of $137.0 million.

Furthermore, Citi Trends has witnessed an improvement in its store performance as comps decline in the Ladies segment has softened to single digits from high double digits in the previous two quarters.

Moreover, for the remainder of 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 third and fourth quarters of this fiscal compared with the year-ago quarter level.

Following the release of Citi Trends’ second-quarter results and management’s impressive outlook for the remaining period of fiscal 2013, the Zacks Consensus Estimate for fiscal 2013 has improved to break-even earnings compared with a loss of 4 cents in the last 60 days.

Apart from better-than-expected second-quarter results, the company’s efficient inventory management and healthy financial position underline its strength.

In our point of view, Citi Trends’ extensive focus on store-expansion strategy will likely drive top-line growth. Further, the company has undertaken prudent steps toward inventory management such as enhanced supervision and installation of sophisticated surveillance systems in high-shrinkage stores. We expect these initiatives to help the company improve its operational performance.

Other Stocks to Consider

Currently, Citi Trends holds a Zacks Rank #1 (Strong Buy). Apart from Citi Trends, other stocks in the retail-apparel/shoe sector that are currently performing well include DSW Inc. (DSW - Free Report) , ANN INC. and L Brands, Inc. . All of these carry a Zacks Rank #2 (Buy).

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