This Urban Fashion Retailer Is A Good Buy On The Dip

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May 30, 2015

Citi Trends (CTRN, Financial), a retailer of urban fashion apparel and accessories, posted its first-quarter fiscal 2015 results which was a case of mixed bag as the retailer failed to impress analysts on top-line, while readings were better on the bottom line. Year-to-date, the stock is down almost 4%. So does this present a chance for buying? Let’s take a look.

First-Quarter numbers

During the quarter, comparable-store sales, or comps, increased 1.8% year-over-year on the back of 4% year-over-year growth in number of transactions, partly offset by 2% decline in average unit sale. This represented fifth consecutive quarter of comps growth. Inclement weather in February impacted the sales performance of the retailer.

As a result, consolidated sales grew 3.7% year-over-year to $194.9, but was not enough to beat consensus estimate. The strongest growth merchandise categories were Home, Accessories and Ladies which registered year-over-year comps growth of 13%, 2%, and 7% respectively. The ladies category has registered comps growth for the third consecutive quarter in a row.

On the other hand, comps at Men’s and Children’s division declined 1% and 3%, respectively.

As a result of healthy sales and efficient inventory management, adjusted earnings per share grew 21.3% to $0.74, beating analysts’ expectations by $0.01

Citi exited the first quarter with zero debt on balance sheet. In addition it had cash and cash equivalents of $86.8 million and shareholders' equity of around $222.1 million.

Growth drivers

Besides driving up comps, opening stores is another growth driver. During the quarter, the retailer opened four new stores, including two in new states. During fiscal 2015, Citi plans to open 10 to 15 new stores, besides remodeling 20 to 25 stores, and expanding or relocating 7 to 10 stores. The retailer has a debt free balance sheet so the store expansion plans should not be much of a problem.

Inventory management is critical to driving profitability growth. With the new inventory management and allocation system in place, the company can now micro-manage inventory by class, by weather zone, by store. During the first quarter, efficient inventory management had already contributed to gross margin expansion.

Projections are good

The retailer started second quarter on a great note. For example, comps in the first two weeks of second quarter were up by 13% and sales were up by 3% year over year. Sales have warmed up across all categories as the weather has become conducive.

Hence, the company is confident of delivering positive comps growth for the next three quarters while inventories are expected to remain flat or decline.

Final take

Citi Trends posted a decent first-quarter results and the second quarter is off to a good start. Efficient inventory management and effective floor space utilization will go a long way in managing margins growth. The company has a strong balance sheet with zero debt.

P/S ratio of 0.54 and forward P/E of around 19 make the stock look primed for growth. In fact, analysts expect next five years compound annual growth of 15% versus decline of more than 34% in previous five years.

Hence, the stock is a good buy on the dip.