first started trading on the New York stock exchange in 1972,
investors were reasonably impressed with the company's slow and
steady growth trajectory. But that was a lost decade of stocks, and
the Arkansas-based retailer mostly flew under the radar. Ten years
later, though, investors knew that they were looking at a growth
stock with a very long runway. Shares rose nearly +1000% from 1983
to 1993, by which time the company had become a household name.
Sales didn't grow that fast, but a steady expansion in the
price-to-earnings ratio (P/E)
gave the stock its bright sheen.
While in search of the next +1000% retail gainer, investors should
also seek out stocks that are somewhere along the continuum of that
growth trajectory. They may already be somewhat established, but
they also have ample room to further flesh out their retail
concept. One of my favorite potential high-growth retailers is
Citi Trends (Nasdaq: CTRN)
, which sells urban-focused apparel and footwear.
Citi Trends' roots go back to Savannah in 1946. And for five
decades, it was a fairly slow-growing enterprise. As recently as
2002, annual sales never topped $100 million. But since then,
management has sought to put the company on a faster path to
growth, opening new stores at a measured clip and adjusting the
sales mix to boost revenues. Sales went on to grow at least +20% in
every year through 2007. But in the last three years, a slowing
economy pushed annual sales growth down into the +10% to +15%
range. Not bad, but enough to push out the high-growth crowd of
investors, which sent shares down from nearly $60 in 2006 to below
$10 during the financial crisis.
Since then, shares have rebounded, but still trade for about half
of that 2006 peak. More important, sales growth has begun to
re-accelerate. In the fiscal first quarter ended April, sales rose
an impressive +27%, thanks to a combination of 19 new stores and a
+9.6% gain in stores that had been opened for at least a year. That
performance came at a time when consumer spending remains very
depressed. Just ask Walmart, whose quarterly same-store sales
figures have been trending just above or below the 0% mark.
Results in the next few quarters should range between decent and
spectacular. They'll only be decent if same-store sales cool,
offset by the fact that the company's retail footprint is expanding
by +15% this year. They'll be spectacular if same store sales stay
above 5% for the remainder of the current
. Right now, analysts are expecting Citi Trends to boost sales at
least +20% in the current quarter that ends in a few weeks, and
per-share profits should be handily above last year's break-even
Then again, analysts have underestimated the company's earnings
strength for a number of quarters. That's because Citi Trends, with
more than 400 stores, has hit the retail sweet spot. Sales have
whereby the company's merchandisers can secure better deals,
bringing in more gross profits for the company. Gross margins have
risen from 36.3% in fiscal (January) 2008 to 38.6% in fiscal 2010.
In the most recent quarter, they were just shy of 40%. Rising
margins are a big factor behind management's prediction that
per-share profits can hit $1.80 this year, an impressive +32% above
last year's results. In contrast, Walmart's profits are expected to
rise around +10% both this year and next.
Future years may not be as robust, but you can get a sense of where
the numbers are headed. Modest improvements in same-store sales,
coupled with a steady expansion in the number of stores, yielding
better purchasing power, should keep the
growing at a +15% or even +20% clip. Meanwhile shares are trading
for less than 15 times next year's profits.
Action to Take -->
Once investors begin to appreciate the recurring growth built into
, shares should start to trade at or above the earnings growth
rate. And once the consumer picks up steam, investors will really
warm to retail stocks like this. Could a trip back to $60 be in the
cards in a few years for this name?
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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