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Citi Trends Upgraded to Outperform

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We recently upgraded our long-term recommendation on Citi Trends Inc. to Outperform, mainly on the back of the company’s better-than-expected first-quarter 2012 results.

The value-priced retailer of urban fashion apparel and accessories posted positive earnings of 69 cents per share in the first quarter of 2012, after facing losses for three consecutive quarters. However, quarterly earnings fell 16.9% from prior-year period, primarily due to increased cost of goods sold. Furthermore, despite a 5% decline in comparable store sales, Citi Trends net sales increased 4.5% from prior-year quarter. The company’s earnings and sales for the quarter smoothly surpassed the Zacks Consensus Estimate.

We remain impressed with Citi Trends turnaround efforts due to the fact that despite of declining comps, the company reported increased top line and positive earnings, resulting from effective cost control and inventory management.

On an ongoing basis, Citi Trends continues to take prudent steps to reduce inventory shrinkage, which includes enhanced supervision by the operations and loss prevention departments as well as installation of sophisticated surveillance systems in high shrinkage stores. Consequently, we expect a steady improvement in operational performance for Citi Trends in the future.

Moreover, we believe Citi Trends’ extensive focus on store expansion strategy would help to drive top-line growth in future. During fiscal 2011, the company increased its store strength by approximately 12% with the opening of 55 new stores, and bringing the total store count at the end of fiscal to 511 stores. We expect the company’s debt-free balance sheet along with cash and cash equivalents of $64 million as of April 28, 2012 to offer it the financial flexibility to enhance its store counts.

Dealing in nationally recognized brands, private-label products and a limited assortment of home décor items, Citi Trends has a niche focus on African-Americans and inviting store formats, which provides an edge over other off-price retailers like The TJX Companies Inc. (TJX - Free Report) and Ross Stores Inc. (ROST - Free Report) , and mass merchants like Wal-Mart Stores Inc. (WMT - Free Report) .

Citi Trends offers merchandise at about 30% to 70% discount compared to regular prices of department and specialty stores. Therefore, the company appeals more to the value-conscious customers, who are looking for cheaper alternatives in a sluggish economy. 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.

Keeping pace with our upgraded long-term recommendation, Citi Trends currently retains a Zacks #2 Rank, indicating a short term ‘Buy’ rating on the stock.

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