The long-term recommendation of value-priced retailer of urban
fashion apparel and accessories,
Citi Trends Inc.
), was recently downgraded to 'Neutral' on account of the company's
lower-than-expected second-quarter 2012 results. However, the
company's fundamental prospects remain intact, preventing a
negative sentiment among investors.
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Citi Trends loss of 54 cents per share in the second quarter fared
worse than the Zacks Consensus Estimate loss of 44 cents mainly due
to comparable sales along with higher operating expenses. Moreover,
the company's net sales of $132.3 million marginally fell short of
the Zacks Consensus Estimate of $133 million. We believe the
ongoing sluggishness in the economy and rising commodity prices may
further dent its future operating performance.
Besides, intense competition from other retailers, seasonal nature
of business, and risks associated with sourcing merchandise from
developing countries may further undermine the company's growth
Nevertheless, the fundamentals of this apparel store chain remain
strong as the company's 30% to 70% discount on offerings continue
to appeal to the value-conscious customer looking for cheaper
alternatives in a sluggish economy. Furthermore, the company's
niche focus on African-Americans and inviting store formats provide
an edge over other off-price retailers like
The TJX Companies Inc.
Ross Stores Inc.
), and mass merchants like
Wal-Mart Stores Inc.
We believe Citi Trends' extensive focus on store expansion strategy
may provide an impetus driving the company's top-line growth.
During fiscal 2011, the company increased its store strength by
approximately 12% with the opening of 55 new stores, bringing the
total store count at the end of fiscal to 511. We believe the
company's debt-free balance sheet along with cash and cash
equivalents of $51.7 million as of July 28, 2012 offers it the
financial flexibility to enhance store counts.
Further, the company has taken prudent steps to reduce inventory
shrinkages, which we believe, will help it improve operational
performance. Among such steps is an enhanced supervision by the
operations and loss prevention departments as well as installation
of sophisticated surveillance systems in high shrinkage stores.
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.
The company s stores are strategically located in neighborhood
shopping centers that are easily accessible to relatively low- and
Though our long-term view on the stock has shifted to Neutral, the
company has slipped to a Zacks #4 Rank, indicating a short term
Sell rating, based on the poor recent quarter results.