Citi Trends Dives as Q4 Earnings and Sales Fail to Impress

Shares of Citi Trends Inc. CTRN tumbled about 9.4% on Friday after the company reported dismal fourth-quarter fiscal 2015 sales and earnings.

Earnings per share of 24 cents for the fiscal fourth quarter missed the Zacks Consensus Estimate of 28 cents and decreased 22.6% from 31 cents earned in the prior-year quarter. The decline in earnings can be attributed to difficult income tax comparisons due to an unusually lower effective tax rate in fourth-quarter fiscal 2014.

As a result, while the company’s net income for the fiscal quarter declined 25.5% year over year to $3.5 million, while pretax income jumped nearly 15% to 6 million.
 
Quarter in Detail

Citi Trends’ sales declined 2.8% year over year to $176.1 million but was almost in line with the Zacks Consensus Estimate of $176 million.

Comparable store sales (comps) for the 13-week period fell 5.0% against a 13.9% jump reported in the year-ago period. We note that comps declined 6.5% and 0.9% in November and December, respectively, while January comps plunged 14.2%. The slump in January comps was mainly due to a delayed start to tax refunds. Overall, fiscal fourth-quarter comps remained soft owing to unseasonable warm weather, which in turn adversely impacted apparel sales.

Also, the comps decline reflected a 5% fall in the number of customer transactions along with a 1% decline in average unit sale. These were offset by an upside in the average number of items per transaction.

On the basis of merchandise category, comps at Home division were up 10% compared with an 13% rise in the same period last year while Accessories, which includes footwear, dipped 2% against a 20% increase last year. The Men’s division comps were down 7% versus a 13% rise last year. Also, comps at the Ladies’ and Children’s divisions were each down 8% against 16% and 11% comps growth recorded, respectively, in the prior-year quarter.

Cost of goods sold, as a percentage of sales, fell 110 basis points (bps) in the fiscal fourth quarter, due to enhanced initial markup for the next season’s merchandise as well as a reduction in markdowns driven by efficient inventory management.

Gross margin expanded 110 bps to 38.4% benefitting from efficient inventory management along with new merchandise planning and allocation structure. The latest system enables the company to plan inventory by class, weather zone and store at all its merchandise divisions.

Selling, general and administrative (SG&A) expenses fell 0.7% year over year to $57.1 million. As a percentage of sales, SG&A expenses expanded 60 bps to 32.4% on account of deleveraged costs due to lower comps. Additionally, depreciation expense fell 6.1% to $4.6 million due to fewer stores opened over the past quarters.

Operating income increased 13.5% year over year to $5.9 million, while operating margin expanded 50 bps to 3.4%.

Financials

Citi Trends had no debt on its balance sheet at the end of fiscal 2015. Cash and cash equivalents were $39.1 million compared with $74.5 million as of Jan 31, 2015. Shareholders' equity totaled approximately $212.2 million against $210.6 million in the prior-year period.

Further, the company continued with its recently initiated plan of building shareholder value by announcing a quarterly dividend of 6 cents per share, payable on Mar 15 to shareholders with record as on Mar 1.

In the fiscal fourth quarter, the company bought back shares worth $7.7 million, marking the completion of its previously announced $15 million share repurchase authorization.

Store Update

Citi Trends has successfully opened five new stores so far in the first quarter of fiscal 2016, and has either relocated or expanded five stores. The new stores are located at Windsor in Connecticut; Forest Park in Georgia; Douglas in Georgia; Apopka in Florida; and in Philadelphia. As of Mar 11, 2016, the company operated 526 stores in 31 states.

In fiscal 2016, the company targets to open about 15–20 stores. Moreover, the company plans to relocate or expand 10–15 stores, and remodel about 20 stores.

Outlook

With immediate improvement in fiscal first-quarter sales due to the announcement of tax refunds in the later part of February, the company expects the sales trends to remain positive henceforth. So it foresees flat comps for the ongoing fiscal quarter.

Further, favorable response to spring merchandise and strength seen in the Home division, encourages management to strive for positive comps growth in each quarter of fiscal 2016.

This Zacks Rank #4 (Sell) company expects inventories for fiscal 2016 to improve in the range of 4–6% due to the early and compelling purchase of merchandise for fall and winter 2016. This was facilitated by warm winter weather in November December of 2015. Further, the company expects this to help in better execution in the second half of fiscal 2016, which should fetch improved results for the period. Also, comp store inventory is expected to remain flat to slightly up in fiscal 2016.

Stocks to Consider

Some better-ranked stocks in the same industry are American Eagle Outfitters Inc. AEO and Express Inc. EXPR, with a Zacks Rank #1 (Strong Buy) each, and Abercrombie & Fitch Co. ANF, with a Zacks Rank #2 (Buy).

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