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Citi Trends Remains Underperform

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We maintain our long-term Underperform rating on Citi Trends Inc. , a value-priced retailer of urban fashion apparel and accessories. The company’s poor performance in the last two straight quarters on account of falling comparable store sales and heightened operating costs keeps us negative on the stock.

Citi Trends’ fourth-quarter adjusted loss per share of 18 cents fell drastically from the year-ago quarter earnings per share of 64 cents. The results, however, bettered the Zacks Consensus Estimate of a loss of 20 cents per share. Comparable store sales dropped 6.2% in the fourth quarter of fiscal 2011.

Poor quarterly results also pulled down the company’s fiscal year results posting an adjusted loss per share of 42 cents, which lagged behind the earnings per share of $1.44 reported in fiscal 2011. Loss per share for the year spiked higher than the Zacks Consensus Estimate of a loss of 35 cents per share.

With a string of weak quarterly results in 2011 amid shrinking comparable store sales, Citi Trends have mostly deterred investor sentiment. Further, due to uncertainty hovering around sales, given the global economic unrest, the company decided not to provide any guidelines unless it finds any near- term catalysts to drive sales.

Further, Citi Trends’ business is seasonal in nature and typically generates stronger sales during the first and fourth quarters, which are characterized by the spring and holiday seasons. As a result, the company is exposed to significant risks if these seasons fail to deliver expected operating performance.

Intense competition from other retailers and risks associated with sourcing merchandise from developing countries may further undermine the company’s future growth prospects.

Citi Trends operates in a highly fragmented specialty retail sector and faces intense competition from larger off-price rivals, such as The TJX Companies Inc. (TJX - Free Report) and Ross Stores Inc. (ROST - Free Report) , mass merchants including Wal-Mart Stores Inc. (WMT - Free Report) as well as smaller specialty retailers, such as Rainbow and Dots.

Currently, Citi Trends has a Zacks #5 Rank, implying a short-term ‘Strong Sell’ rating on the stock.

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