Citi Trends, Inc. (NASDAQ:CTRN)

CAPS Rating: 3 out of 5

A value-priced retailer of urban fashion apparel and accessories for the entire family.

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Member Avatar XMFConnor (97.83) Submitted: 6/23/2011 12:51:31 PM : Outperform Start Price: $14.78 CTRN Score: +7.04

I put some real skin in the game today-- even though my CAPS is already up like 6% on this pick. I think it is just way too cheap at less than 3X EV/EBITDA, 35% market cap in net cash, and strong growth prospects. I also like how it has fared very well in the market decline today.. may indicate that most of the selling pressure is done and that this thing has already hit its trough. Many thanks to people such as TMF1000 who helped me find this idea. I thought I'd return the favor to the CAPS/ MF community by posting my own thoughts. Fool on.

While Citi Trends (CTRN) is undeniably subject to the many risks of a rapidly growing fashion retailer, at the current price, investors are more than compensated for these risks. The company is currently selling for book value, which includes 76 mm in cash (35% of market cap). Other metrics also point towards value: TEV/EBITDA: 2.68, TEV/Sales: 0.22, P/E: 10.47. These seem too cheap for a company with an excellent balance sheet, solid management, and strong growth prospects.

Background

Citi Trends operates a chain of more than 450 retail stores selling nationally recognized clothing brands aimed at a young African American customer base. The stores sit in neighborhood shopping centers in both urban and rural settings and include trendy fashion lines such as Roca Wear, Phat Farm, Baby Phat, and Apple Bottoms by Nelly. Citi Trends also carries in-house brands and offers apparel, intimates, footwear, and accessories for men, women, kids, and infants, as well as home decor.
• Strategy: They aim to provide nationally recognized branded merchandise at discounts to department and specialty stores’ regular prices of up to 60%.
o Their merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans
o Purchasing is controlled by a 25-plus member buying team located at our Savannah, Georgia headquarters and our buying office in New York, New York. We purchase merchandise through planned programs with vendors at reduced prices and opportunistically through close-outs, with the majority of our merchandise purchased for the current season and a limited quantity held for sale in future seasons.
o They have purchased merchandise from approximately 1,000 vendors in the past 12 months.
o Approximately 46% of their net sales are represented by nationally recognized brands. They also offer a wide variety of products from less recognized brands and a lesser amount representing private label products under their proprietary brands such as “Diva Blue,” “Red Ape,” “Vintage Harlem,” and “Lil Ms Hollywood.”
Strong Financial Results
• Their niche market has been hit particularly hard the past few years, but they have still been able to grow revenue and net income every single year of their 8-year existence as a public company.
• Their stores have generated rapid payback of investments, typically within 12 to 14 months.
• In 2010, they began to test a new store format with the assistance of a retail design consulting firm. They opened their first new prototype store in Savannah in July 2010 and later opened five more stores with the new prototype design. The stores feature a new color palette and logo, a new layout, new fixturing, dressing room, graphics and lighting, a redesigned checkout area and an expanded footwear department. Based on the reactions from our customers and the results of the new stores, we decided to open all new stores in the new prototype format in 2011.
o From 10-Q: “There were thirteen stores relocated or expanded since last year’s first quarter, all of which impacted comparable store sales. Sales in comparable relocated and expanded stores increased 5.4% in the first quarter of 2011, while sales in all other comparable stores decreased 7.5%.” I can see why the new stores have done better—they are pretty cool. I think these stores will continue to be successful and help them boost sales.
? http://files.shareholder.com/downloads/CTRN/1281571083x0x405640/1a81fa71-12d7-4765-8391-9ec0b530656c/citiNew_Store_Prototype.pdf

Why the Opportunity Exists

CTRN’s stock was hammered on May 17 after it indicated EPS guidance of $1.25-$1.35 for fiscal 2011, much lower than analysts’ consensus estimate of $1.54. Also, they said same store sales should be down 1-2%, including a 1-2% increase in the last three quarters of the year. The stock fell from $21 to $17 and has now drifted down to its 52 week low just below $15.

While the guidance was disappointing, I think that the stock market overreacted for three reasons:

1) The first quarter of 2010 made for a tough comparison since same stores sales were up 9.6%
a. Furthermore, the company did say that same store sales should increase 1-2% in the last three quarters of the year

2) The Store Renovations seem to be a big success
b. As mentioned above, sales in comparable relocated and expanded stores increased 5.4% in the first quarter of 2011, while sales in all other comparable stores decreased 7.5%. While the renovations only occurred over 13 of their stores, I think that there is a good chance that the remodeling efforts continue to have this level of success and can be applied to both future store openings and their existing stores.

3) Management seems to be taking the right steps to keep CTRN in the right direction
i. Their CEO, David Alexander, has 30 years of retail experience including ten years with Family Dollar Stores. I think that the decision to test the new store format at the beginning of 2010 will turn out to be a great move. In addition, their brand sales did significantly worse than their non-branded sales or what they call their fashion merchandise. He plans to focus on shifting the brands in his stores, scrapping the worst sellers, and increasing exposure to the best-selling items
In short, I think that the market overreacted to one quarter to lower guidance.

While disappointing, I think it is merely a bump in the long road of growth that Citi Trends still has in front of it.

a. The Company has 473 stores in 27 states, but about 42% of those stores are in only four states. I think that they can approximately double their store count without saturating the market. Just as a reference, there are 890 current TJ Maxx stores.
b. The company is accelerating the rate of store growth from 60 last year to a planned 65-70 this year.
c. It only recently launched a Facebook fan page. After 4 months, it already has over 121,000 fans: https://www.facebook.com/cititrends

• They are currently estimating 2011 earnings per share in a range of approximately $1.25 to $1.35, which includes an assumption that comparable store sales will be up 1% to 2% in the final 3 quarters of the year. Using comp multiples on the low and high end (10-16X ttm earnings), this would result in a fair price in the range of $12.50- $21.60. This equates to $2.33 of downside risk and $6.77 of upside, or a nearly 3:1 risk/reward from the current market price.

Conclusion

The bottom line is that the market hammered Citi Trends (CTRN) after missing guidance, but there are a lot of reasons to think that this was overdone. Ignoring their large capex spend for their new distribution facility (which should last the company for the next five years), the company would have had positive FCF last year. At less than 3X EV/EBITDA, I think a lot of the potential concerns about CTRN’s future are already price into the stock, and investors get an opportunity to pick up a fast-growing, differentiated retailer with a large margin of safety.

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Member Avatar TMF1000 (99.71) Submitted: 6/10/2011 5:15:41 PM : Outperform Start Price: $15.10 CTRN Score: +3.22

Citi Trends (CTRN)
Price $15.01
Dow 11,951.91
S&P500 1,270.98
Oil $99.06 a barrel
Gold 1,530.40

My five year Caps score for CTRN wasn't good. My five years expired, so I closed it at a loss and reupped it. I believe the next five years will be much better for the Company. I own the stock and plan to use the lower prices to add to my position.

Revenues were up 4.3% to $189.168 million from $181.4 million last year. Same stores sales were down 6.9%. Transactions were down 8%; offset some by slightly higher ticket price. The first quarter of 2010 made for a tough comparison since same stores sales were up 9.6%. These numbers were disappointing, but I think the CEO is taking the right steps to boost future sales. He is experimenting with the new Citi Lights format which has done well for them so far, much better than the rest of the chain stores. Their brand sales did significantly worse than their non-branded sales or what they call their fashion merchandise. They plan on changing their brands, increasing better selling ones while reducing exposure to worse selling brands. He plans to shift the brands in his stores, losing worse sellers and increasing those that are selling the best. And their fashion merchandise or non-branded items sold much better and represent a better value.

Gross margins were 39.7% down from 39.9% last year. Core merchandising margins declined by 40 basis points but was offset by a 20 basis point improvement in shrinkage costs. Shrinkage costs were 0.8% of sales down from 1% last year.

Net income was $12.1 million or $0.83 per share down from $12.4 million or $0.86 per share last quarter.

TTM cash flow was negative $14.79 million. Cash flow for the quarter was $14.5 million down from $16.79 million. It is important to note that capital expenditures were $40.7 million in 2010 which was much higher than $22 million spent in 2009. If the capital expenditures were equal to the 2009 spend, the Company would be cash flow positive.

In 2010, they built 60 stores up from 49 stores and they spent about $11.2 million to buy and equip their new distribution center in Roland, Oklahoma. They expect the new facility at Roland will meet their distribution needs for the next five years, so we shouldn’t see any more big capital expenditure blips in the near future, so I expect them to be cash flow positive in 2011.

The Company has 473 stores in 27 states. They opened 15 stores, relocated or expanded 5 others and closed 3 stores in the first quarter of 2011. About 42.1% of all stores are located in Georgia, Texas, South Carolina and Florida.

Guidance:
Earnings for 2011 are expected in the range of about $1.25 to $1.35. The guidance is based on same stores sales declines of 1% to 2% for the full year, including a 1% to 2% increase in the last three quarters.

ThompsonFN estimates: June 10, 2011
** 2Q:2011 ($0.12)
** 3Q:2011 ($0.10)
** Fiscal 2011 $1.29
** Fiscal 2012 $1.46

Risk Factor:

Steve and Barry’s was a discount apparel store that served low to moderate income customers. They offered a no-frill store that offered jeans and other clothing even cheaper than was being sold at Wal-Mart. They didn’t survive the recession.

Stores that sell higher end goods probably aren’t exposed to the risk of a weakened economy as much as their value-based peers. Their customers have more money and although they may slow their spending habits, they are still probably going to spend more. Citi Trends offer higher priced items then Steve and Barry’s and is priced similarly to TJX. This should give them better margins than Steve and Barry’s.

Lower income customers can delay buying new pants and shirts when things are rough. Those with less discretionary income will stick to a tighter budget. Food and home bills are necessities, but clothes can be used longer when the economy is weak and one’s job may be at risk. Also Wal-Mart is a good destination for cheap clothes and many apparel stores will have deep discounts on slower moving merchandise. Today, I went to Tuesday Morning and bought several shirts for $2.49 each. They are pretty neat looking, but designed for teens since they featured teen pop culture. But they are perfect for me to garden in and nice enough to wear places, though the pop culture thingy may not be a good fit with my gray hair. Hehehe I still like them and you can’t beat the price. Many retailers offer deep discounts during rough times which generates some stiff competition for customers' dollars.

They launched their facebook page during the quarter. They now have about 100,000 fans following them on facebook. They will use it as a tool to understand their customer’s needs and preferences.

Their Citi Lights conversions are doing very well. They had positive comps while the chain’s comps were negative. In the fourth quarter, they converted 15 stores to the Citi Lights format and had 25 such stores at the end of the fourth quarter. I don’t believe they added any more stores in the first quarter. They are waiting to see if the new format stores continue to do well. If they do, they believe they will have the confidence to develop a conversion plan for more stores.

The new stores are really nice. Watch out TJ Maxx! These stores are neat, carpets on the floor with a wide variety of merchandise. I think these stores will be successful and help them boost sales.

http://files.shareholder.com/downloads/CTRN/1281571083x0x405640/1a81fa71-12d7-4765-8391-9ec0b530656c/citiNew_Store_Prototype.pdf

Alexander R David Jr is President and CEO of Citi Trends. He previously worked as CEO of Portrait Corporation of America (PCA) which operates photography studios for Wal-Mart stores. He comes with some big-time experience having served ten years with Family Dollar stores. He was their President and CEO between 2003 and 2005. He was Executive Vice President and CEO between 2000 and 2003.

Conclusion:

Sales were up on only 4.3% and management believes high unemployment and higher commodity prices are hurting sales. But Citi Trends didn’t do too badly during the Great Recession. Like so many other retailers their low point came on November 21, 2008 when their stock price hit $7.01. Their TTM earnings were $1.12, which was solid, for a PE ratio of 6.26. That wasn’t too bad considering the times. At the end of fiscal 2006, they made $1.51 which was a pre-recession record. Today TTM earnings are $1.41. This gives them a PE Ratio of 10.65 based on a price of $15.01.

Their balance sheet is excellent. They have $93.22 per share in cash and long-term investments or $6.40 per share and no debt. They are selling for about 2.3 times cash.

In 2010, they paid for a new distribution center when should take care of their distribution needs for the next five years, so cash flow suffered. In 2009, they made $19.2 million in cash flow and I think they can manage that even with normal store growth. If they make $19.2 million in 2011, it would represent about $1.32 per share giving them a yield of 8.78% which I think is very good. In 2009, they made $1.36 per share in earnings on $551 million in revenues. Today they are making $1.41 in TTM earnings on $622.5 million in revenues so cash flow could be higher. Guidance is four about $1.29 for the year, so they expect TTM earnings to fall.

Although, the new Citi Lights format is just beginning, it shows promise and those new conversions, though few in number so far, showed positive comps while the rest of the chain was significantly negative. In time, I think they new format will be adopted by the company and that will lead to stronger sales.

Alexander David has a long history at Family Dollar, a Citi Trend competitor, so I think he has the skills to tweak their branded merchandise which was very weak. Citi Trends fashion merchandise had positive comps and I think the CEO can find easy ways to shift merchandise among their branded merchandise and perhaps push their fashion merchandise since their sales are strong and the prices are cheaper making them a better value.

The Company has 473 stores in 27 states, but about 42% of those stores are in only four states. So they have a lot of room to grow. I think they can and will adapt to harder times. Those hard times may not last so long if oil prices will go down.

May 18, 2011 1Q:2011 earnings’ highlights:
** Revenues were $189.168 million up 4.3% from $181.406 million
** TTM revenues $630.29 or $43.47
** Earnings were $0.83 down from $0.86
** TTM earnings were $1.41
** Stores 473
** Diluted share count 14.567 million
** Cash flow was $14.5 million down from $16.79 million
** TTM cash flow was Negative ($14.79 million)
** Cash and long term investments $93.22
** Gross margins were 39.7% down from 39.9% last year
** Trading range between May 18, 2011 and the present June 10, 2011 was $15.90 to 17.06: PE Ratio range was 11.28 to 12.1

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Member Avatar btthus (22.13) Submitted: 5/26/2011 1:05:23 AM : Outperform Start Price: $16.70 CTRN Score: -7.14

Held by insiders   98.2%   
Held by institutions   12.1%   

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Member Avatar colddrink73 (90.67) Submitted: 5/23/2011 10:51:27 AM : Outperform Start Price: $16.70 CTRN Score: -7.19

Ummm I think that the drop may have been a lilttle bit oveer down. Looking for a bounce and a recovery.

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Member Avatar tenmiles (99.46) Submitted: 5/18/2011 9:45:33 AM : Outperform Start Price: $17.06 CTRN Score: -8.67

Likely long term value around $17 for this debt free retailer with almost 30% of market cap in cash - potential free takeover "option" given from these levels.

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Member Avatar smith972 (78.93) Submitted: 2/24/2011 4:47:50 PM : Outperform Start Price: $21.40 CTRN Score: -40.58

HG with no debt. I will go with it.

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Member Avatar SorosTracking (45.83) Submitted: 2/22/2010 7:54:51 AM : Outperform Start Price: $29.86 CTRN Score: -101.65

1,198,157 owned
- Q409 13F - Soros Fund Management LLC

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Member Avatar hrtrader (< 20) Submitted: 6/25/2009 9:34:07 AM : Underperform Start Price: $23.53 CTRN Score: +122.69

among the overprice retailers, chart appears to be topping

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Member Avatar jstegma (29.44) Submitted: 5/12/2009 2:39:02 PM : Underperform Start Price: $11.45 CTRN Score: +29.94

Retail is way overpriced right now. This is one of the areas that is going to get hit the hardest by increasing unemployment. The rate of job losses may have slowed, but employment is still definitely in a negative trend that is unlikely to reverse any time soon. Spending and lifestyle changes still lay in the future for many Americans. Stay away from discretionary retail that can easily be substituted for with something cheaper.

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Member Avatar supercoffee (97.78) Submitted: 7/31/2008 5:06:03 PM : Underperform Start Price: $23.12 CTRN Score: +60.12

NEED MORE LOCATIONS

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Member Avatar ctd1892 (< 20) Submitted: 4/11/2008 3:37:35 PM : Outperform Start Price: $14.86 CTRN Score: +4.57

Discount retailer of close-outs and cancellations. IPO less than 2 years ago and topped out around $45 per share. Recent concerns regarding internal theft have adversely impacted the stock price. New store openings remain on track at > 100 per year. Outside consulting has provided guidance that should be reflected no later than the Q3 results.

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Member Avatar Dublin063 (56.08) Submitted: 4/8/2008 5:52:04 PM : Outperform Start Price: $19.00 CTRN Score: -28.66

Shares of Citi Trends Inc. are rising, after the apparel maker said fourth-quarter profit beat expectations and it offered a strong 2008 forecast.

The company forecast a profit of $1.10 to $1.15 per share, while analysts polled by Thomson Financial predict a profit of $1 per share. Citi Trends said fourth-quarter net income fell 19 percent to $8.4 million, or 59 cents per share, as it increased markdowns to clear inventory. Analysts expected a smaller profit of 44 cents per share.

Wachovia Capital Markets analyst Lyn Rhoads Walther said the company has made a number of changes to help profit, including paring down inventory, installing surveillance cameras to reduce theft and more closely aligning payroll hours with sales.

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Member Avatar mvsramakrishna (44.29) Submitted: 3/28/2008 6:55:09 AM : Outperform Start Price: $19.04 CTRN Score: -30.11

Nice clean balance sheet

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Member Avatar ANALYST10 (95.32) Submitted: 11/28/2007 12:57:17 PM : Underperform Start Price: $17.00 CTRN Score: +1.49

Latest Earning Report this past week WAS weak, as is the fashion-mix for this company.

Combine this with the downward trending apparel market this holday season and you have a worsening picture for 1st Quarter '08.

The latest major swing to a loss combined with the company's lowered guidance should raise a big enough red flag.

If you must be in Retail, there are many other more attractive options than CTRN, which will not recover until well into 2008 (if then).

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Member Avatar TimmyTheGeek (54.08) Submitted: 11/26/2007 3:48:01 PM : Outperform Start Price: $14.50 CTRN Score: +19.38

Ok. I'm making this pick minutes before they announce earnings so I'm guessing we're near bottom. They've already lowered guidance, recognized trouble with inventory levels and inside theft. I'm guessing they will make improvements in these areas. Also, p/e is too low to resist, cash flow is not a problem, and southeast region where they operate is probably not the worst place to be now, while other regions offer future growth options.

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Member Avatar sugardadE (98.24) Submitted: 8/28/2007 12:34:02 PM : Outperform Start Price: $24.06 CTRN Score: -46.11

Bottoming out now. The institutional investors made their money and are dumping the stock. Long-term the story looks good. CTRN is almost totally based in the south now. East Coast penetration no farther than Baltimore. Think of all the untapped ghetto markets. NJ/NY and California are beckoning. I did go to a store to check it out and almost got shot. The things I do to make money....

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Member Avatar NetscribeRetail (91.76) Submitted: 5/30/2007 6:40:40 AM : Underperform Start Price: $37.91 CTRN Score: +78.39



Trends for the Citi Trends (CTRN) do not seem to follow a healthy trend considering the unsupportive market conditions. Although, revenues in the first quarter of fiscal 2007 which is one of the best selling quarter has spurt by 16.2 percent, the bottom-line suffered, as a result of massive deleveraging in the operating expenses. Easter has been one of the prime selling period of the company however, unseasonably cool weather has curtailed the sales of spring and summer apparel in 2007 thereby truncating the revenue growth immensely.

Lately, SG&A expenses were the main culprits in the reduced net income of the company. These expenses are primarily related to store opening and distribution and corporate costs related to the openings. Management has plans to open 28 to 30 more stores in the remaining period of fiscal 2007. However, the probability of driving sales in the future arouses skepticism as the economic slowdown and rising oil prices would aggravate consumer spending. This could put pressure on the margins considering the expenses incurred to build new stores.

Target market for the company, which is African Americans, looks good considering their wide presence in southeast and the spending levels. However, management expects bleak same-store sales growth for fiscal 2007 based on the poor revenue performance in the best season. As a result, company expects a measly over 8% rise in their EPS, which is much lower than the historical levels. Thus, CTRN looks pretty expensive scrip to buy at the current levels.

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Member Avatar ByteTinker (94.33) Submitted: 2/18/2007 4:03:04 PM : Outperform Start Price: $44.25 CTRN Score: -94.25

A regional to national story. Lots of room for growth

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Member Avatar dixiecarr (< 20) Submitted: 1/3/2007 10:09:06 AM : Outperform Start Price: $39.22 CTRN Score: -89.34

Great growth potential in the african american market.

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Member Avatar corrida (49.74) Submitted: 11/26/2006 10:08:38 AM : Outperform Start Price: $43.12 CTRN Score: -98.53

A regional to national story. Month to month sales increases bode well for this company. Recent spike in price does not make in an ideal time to buy. Suggest waiting for a drop to under 40 and then grabbing a bite.

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