Citi Trends Q3 Loss Narrows Y/Y on Turnaround Strategies - Analyst Blog

Citi Trends, Inc. (CTRN) posted yet another quarter of impressive results as its adjusted loss per share for the third quarter of fiscal 2014 came in at 8 cents, marking a significant improvement from a loss of 17 cents per share reported in the prior-year quarter. However, the quarterly loss came in wider than the Zacks Consensus Estimate by a penny.
 

We believe that the company's strategic initiatives such as better utilization of floor area, improvising merchandise margins and efficient inventory management have helped it toward making this significant turnaround.

Including the impact of a non-recurring expense related to a legal settlement made in the reported quarter, the company recorded a loss of 15 cents a share. This was wider than the reported loss of 11 cents a share in the prior-year quarter that includes the positive impact from a gain on sale of a distribution center.

Quarter in Detail

Citi Trends' sales advanced nearly 8% year over year to $156.7 million and surpassed the Zacks Consensus Estimate of $154 million. Sales benefited from strong performance of its accessories (including footwear) and home businesses which contributed to a major share of total business in the quarter.

Comparable-store sales (comps) in the quarter rose 6.7% from the year-ago quarter, driven by an increase in the number of transactions of over 9%, a 1% pick up in the average number of items per transaction, offset partly by a 3.5% decline in average unit sales.

On the basis of merchandise category, comps at the Home Division were up 11% versus a 15% rise last year while Accessories comps increased 18% on top of a 13% increase last year. Moreover, comparable sales of the Men's and Ladies' divisions improved 2% and 4%, against a 2% and 9% decline, respectively, last year. On the other hand, Children's division sales remained flat compared with a 1% dip reported last year.

By month, comps were up 6% in August, 9% in September and 5% in October. Moreover, the company continues to witness improved comps in the first three weeks of November, which is up nearly 12% so far.

Citi Trends' gross profit for the quarter escalated 9.1% to $58.2 million from $53.3 million in the year-ago quarter, while gross margin expanded 40 basis points (bps) to 37.1 %. The improvement in gross margin was attributed to improved cost of goods sold as a percentage of sales, backed by solid merchandise sales.

Selling, general and administrative (SG&A) expenses in the quarter rose 8.1% year over year to $56.3 million, while depreciation expense fell 7.6% to roughly $5 million. As a percentage of sales, SG&A expenses grew 10 bps to 36%, as the expense connected to a legal settlement incurred during the quarter more than offset a fall in all other expenses as a percentage of sales. Management envisions SG&A to range from $55–$56 million in the fourth quarter, up from $50.2 million reported last year, accountable to greater incentive compensation expense.

Operating loss came in at $3.2 million, compared with a loss of $3.3 million reported in the year-ago comparable quarter.

Financials

Citi Trends had no debt on its balance sheet at the end of third-quarter fiscal 2014. Cash and cash equivalents were almost $66 million compared with $47.6 million at the end of third-quarter fiscal 2013. Combining cash and cash equivalents with short-term and long-term investment securities, the company had about $104 million in hand, compared to $85.9 million last year. Shareholders' equity totaled approximately $205 million, as against $196.7 million in the prior-year period.

Store Growth Strategy

During the quarter, the company introduced four new stores, meeting its previous forecast. Also, Citi Trends closed 1 store just after the third quarter, taking the total store count to 511 across 29 states so far. Moreover, the company launched its eCommerce site during this quarter. This is expected to drive sales significantly, going forward.

Additionally, management intends to open 10–15 stores, relocate or expand 7–10 stores and renovate 20–25 stores in fiscal 2015.

We believe that this Zacks Rank #2 (Buy) company remains highly optimistic about its future performance, given its solid comps, prospective benefits from its online business and efficient inventory management which is expected to augment gross margin. Also, management anticipates its accessories and home divisions to continue being the major contributors to its comps.

Other Stocks to Consider

Other stocks worth considering in the same industry include American Eagle Outfitters, Inc. (AEO), Bebe Stores, Inc. (BEBE) and L Brands, Inc. (LB), each carrying a Zacks Rank #2.