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Citi Trends (CTRN) Incurs Loss in Q3; Stock Plunges 8.3%

JWN DSW CTRN PLCE

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Citi Trends Inc. (CTRN - Free Report) reported lower-than-expected results for third-quarter fiscal 2016, leading shares of the company to tumble 8.3% during yesterday’s trading session.

The company posted a loss of 6 cents per share in the quarter, as against earnings of 4 cents per share in the year-ago period and the Zacks Consensus Estimate of 3 cents. The dismal year-over-year comparison is partly attributable to a one-time expense benefit realized in the same period last year, which was absent this time.

CITI TRENDS INC Price, Consensus and EPS Surprise
 

CITI TRENDS INC Price, Consensus and EPS Surprise | CITI TRENDS INC Quote

Quarter in Detail

Citi Trends’ sales climbed 1.1% year over year to $160.7 million but fell short of the Zacks Consensus Estimate of $168.1 million. The year-over-year increase was backed by a solid back-to-school selling season and efficient implementation of the company’s miscellaneous strategies to augment the top line.

Comparable store sales (comps) dipped 1% in the quarter. The comps decline was attributed to a 9% drop in average units sold, offset by a more than 6% rise in the average number of items per transaction and a 1.5% increase in the number of customer transactions.

While comps witnessed a year-over-year drop, the company remains on track to achieve sequential comps growth. However, comps were hurt by external factors like Hurricane Matthew that led to store closures and thus, dented business. Also, unseasonably warm weather weighed upon demand for fall products. Nonetheless, trends seemed to improve in October and November, as the weather normalized.

On the basis of merchandise category, comps at the Home division were up for the seventeenth straight quarter, as it recorded a 34% surge compared with a 14% rise in the year-ago period. Meanwhile, comps at Accessories, which includes footwear, remained flat versus a 3% increase in the year-ago period. The Men’s division’s comps slipped 1% compared with a 3% drop in the year-ago period. Also, comps at the Ladies’ and Children’s divisions were down 2% and 7%, respectively, compared with a 3% fall recorded in each division in the prior-year period.

Cost of goods sold, as a percentage of sales, expanded 110 basis points (bps) in the fiscal third quarter, owing to higher freight charges and smaller inventories, coupled with reduced merchandise margin.

Selling, general and administrative (SG&A) expenses went up 3.6% year over year to $57.6 million, mainly owing to costs associated with increased store count and reasonable expense inflation, along with the absence of a pretax benefit recorded last year. As a percentage of sales, SG&A expenses escalated 90 bps to 35.9% due to the same factors, coupled with soft comps. Depreciation slumped about 8% to $4.2 million due to fewer stores opened, when compared to the past.
    
Financials

As of Oct 29, 2016, cash and cash equivalents were nearly $37 million compared with $41.6 million as of Oct 31, 2015. Shareholders' equity totaled approximately $218.4 million compared with $216.5 million in the prior-year period.

The company recently announced a quarterly dividend of 6 cents per share, payable on Dec 13, 2016, to shareholders on record as of Nov 29.

Store Update

During the quarter, the company introduced seven stores, relocated or expanded three stores, and shuttered four stores. As of Nov 22, 2016, the company operated 533 stores in 31 states.

In fiscal 2016, the company aims to open 18 stores. Moreover, it intends to relocate or expand 13 stores, and remodel about 20 stores. In fourth-quarter fiscal 2016, Citi Trends plans to introduce two stores, while relocating or expanding two stores.

Outlook

While Citi Trends posted a loss in the third quarter, management remains impressed with the performance of its Home division and expects a robust show therein in the fourth quarter.

Also, management shed light on the fourth-quarter comps so far. Comps for the first three weeks of November jumped more than 6%, against an 8% decline in the year-ago period, as the Home division continues to outperform and normalized weather has been positively impacting the fall winter offering.

Given these factors and a solid inventory position at the start of the quarter, Citi Trends remains optimistic about its fourth-quarter comps momentum. However, the company now anticipates gross margin to be 38.5% for fiscal 2016, down 50 bps from the old projection. Nevertheless, the company stated that it expects to achieve the previous gross margin target of 39%, when its sales trends improve.

Zacks Rank

Citi Trends currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy), DSW Inc. (DSW - Free Report) and Nordstrom Inc. (JWN - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions in the last seven days.

DSW Inc. has an average earnings beat of 24% in the last four quarters. Moreover, the company’s long-term growth rate of 8.3% and positive estimate revisions for the current fiscal, over the past seven days bode well.

Nordstrom’s long-term EPS growth rate of 9.7% and solid positive estimate revisions for the current fiscal over the past 30 days help it stand strong in the industry. Moreover, the company has delivered back-to-back earnings beat in the last two quarters.

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