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Citi Trends Q2 Earnings Beat; Unveils Investor Reward Plan

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Shares of Citi Trends Inc. surged a whopping 25.2% yesterday after the company reported better-than-expected second-quarter fiscal 2015 sales and earnings. Moreover, the company initiated its first-ever dividend and share repurchase program.

Citi Trends reported adjusted earnings per share of 1 cent for the second quarter as against a loss per share of 17 cents reported in the prior-year quarter. This marked the company’s first profitable second quarter since 2008. Quarterly earnings also outdid the Zacks Consensus Estimate of a loss of 11 cents.

We believe that the company’s strategic initiatives, such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management, aided results.

Quarter in Detail

Citi Trends’ sales advanced 6.1% year over year to $153.9 million, marginally ahead of the Zacks Consensus Estimate of $153 million.

Comps in the quarter rose 3.9% from the year-ago quarter, mainly driven by improvement in the number of customer transactions as the average number of items per transaction and average unit sale remained nearly flat.

On the basis of merchandise category, comps at the Home Division were up 17% compared with a 28% rise last year while Ladies’ division improved 7% against a 4% decline last year. Moreover, comps for Accessories, which includes footwear, increased 6% compared with a 24% increase last year. Comps at the Men’s division were down 1% versus a 1% increase last year, while at Children’s division too, it fell 1%, same as last year.

Further, the company indicated that the third quarter has started on a strong note with comps up 6% for the first two weeks of August, driven by a shift in the tax free holiday to August this year from July end last year. Moreover, a better transition from spring to fall season merchandise this year drove the improvement in comps.   

Citi Trends' gross profit for the quarter escalated 13.5% to $60.7 million from $53.5 million in the year-ago quarter, while gross margin expanded 250 basis points (bps) to 39.4%. The improvement in gross margin was attributed to efficient planning and allocation system that allows better inventory management in relation to sales, thereby reducing markdowns.

Selling, general and administrative (SG&A) expenses in the quarter rose 4.7% year over year to $55.7 million. As a percentage of sales, SG&A expenses fell 50 bps to 36.2% on account of better cost management. Additionally, depreciation expense fell 9.6% to $4.6 million due to fewer stores opened in the past.

Operating income came in at $0.4 million as against operating loss of $4.9 million reported in the year-ago quarter.

Financials

Citi Trends had no debt on its balance sheet at the end of second-quarter fiscal 2015. Cash and cash equivalents were $54.4 million compared with $70.7 million at the end of second-quarter fiscal 2014. Shareholders' equity totaled approximately $223.2 million, as against $206.4 million in the prior-year period.

Further, expressing its commitment to building shareholder value, the company initiated its first-ever dividend and share repurchase program. The company’s board of directors authorized an annualized dividend of 24 cents per share and a share repurchase program of up to $15 million.

The company announced its first quarterly cash dividend of 6 cents, which is payable on Sep 15 to shareholders with record as on Sep 1. Further, the company revealed that it plans to use its cash on hand to buy back shares.

Outlook

Through the rest of fiscal 2015, the company expects to retain its ongoing comps growth trend as all of its businesses remain strong. For the next two quarters, the company expects to deliver positive comps. Further, with its inventory management system in place the company believes that an annualized gross margin of 39% is sustainable.

In fiscal 2015, management intends to open 13 new stores, relocate or expand 13 existing stores, renovate 20–25 stores and close 3 stores.

Citi Trends currently has a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same industry are American Eagle Outfitters Inc. (AEO - Free Report) , with a Zacks Rank #1 (Strong Buy), Aeropostale Inc. and DSW Inc. (DSW - Free Report) , both carrying a Zacks Rank #2 (Buy).

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