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Citi Trends Slips to Underperform

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We downgraded our long-term recommendation on Citi Trends Inc. to Underperform with a target price of $9.50, based on continued losses suffered over the past several quarters as well as a troubled ladies apparel division.

Why the Downgrade?

Citi Trends posted loss per share of $0.05 in the fourth quarter. Although the company’s losses narrowed from $0.36 reported in the year-ago quarter and compared favorably with the Zacks Consensus Estimate of a loss of $0.07 per share, it continues to struggle to resolve fashion issues in its ladies apparel division. Net sales declined 1.5% to $175.7 million and missed the Zacks Consensus Estimate of $186 million.

Though the company has made significant progress in resolving pricing issues and remains on track to resolve fashion issues in 2013, the company expects its first and fourth quarter of fiscal 2013 to be impacted by the shift of one week of fiscal 2013 in fiscal 2012, due to the additional week that was accounted for in fiscal 2012.

Following the dismal fourth-quarter earnings results, the Zacks Consensus Estimate for the first quarter of fiscal 2013 has gone down considerably. The Zacks Consensus Estimate for the first quarter has been lowered by 13.8% to 56 cents in the last 30 days.

Cause for Concern

Operating in the consumer-driven retail industry, we believe Citi Trends remains significantly impacted by the macroeconomic issues, wherein its customers continue to feel the pinch of increased payroll tax, higher fuel prices, high unemployment rate and delayed tax refunds. Moreover, the seasonal nature of the company’s business 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 the seasons fail to deliver the expected operating performance.

Additionally, the highly fragmented specialty retail sector compels Citi Trends to compete with larger off-price rivals, mass merchants as well as smaller specialty retailers on the basis of fashion, quality and service. To retain its existing market share, the company may have to reduce its sales prices, which could affect its margins.

Given the fourth-quarter results and the limited near-term catalysts, we expect the company’s share performance to remain strained in the near term.

Specialty Retail Stocks That Warrant a Look

While we prefer to avoid Citi Trends until we see signs of improvement in the company's performance, other specialty retail stocks worth a look are Sears Holdings Corp. , Costco Wholesale Corp. (COST - Free Report) and Bebe Store Inc. . Sears Holdings has a Zacks Rank #1 (Strong Buy), while Costco and Bebe hold a Zacks Rank #2 (Buy).

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