We are maintaining our long-term Underperform recommendation on Citi Trends Inc. (CTRN) based on the company's disappointing third-quarter 2011 results.
Citi Trends' falling comparable store sales, coupled with rising input costs and operating expenses, battered the third-quarter 2011 results. The company witnessed a quarterly loss of 38 cents per share that widened over 12 folds from the prior-period loss of 3 cents. The Zacks Consensus Estimate for the quarter was a loss of 37 cents per share.
Moreover, due to uncertainty hovering around sales, the company rolled back its earnings guidance range of $1.25 to $1.35 per share for fiscal 2011. The company decided not to provide any guidelines unless it finds any near-term catalysts to drive sales.
Further, Citi Trends' business is seasonal in nature and typically generates stronger sales during fiscal first and fourth quarters, characterized by the spring and holiday seasons. Therefore, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.
Additionally, the company sources a substantial portion of its merchandise from countries outside the U.S, such as China and other countries in the Far East. Accordingly, Citi Trends is vulnerable to political, social and economic risks related to sourcing from these developing countries.
Besides, the company operates in a highly fragmented specialty retail sector and faces intense competition from larger off-price rivals, such as The TJX Companies Inc. (TJX) and Ross Stores Inc. (ROST), mass merchants including Wal-Mart Stores Inc. (WMT) as well as smaller specialty retailers, such as Rainbow and Dots.
Additionally, the company also competes with local off-price specialty stores, regional chains as well as traditional department stores. Consequently, this may dent the company’s future operating performance.
Citi Trends is a leading value-priced retailer of urban fashion apparel and accessories including nationally recognized brands, private-label products and a limited assortment of home décor items. The company primarily targets fashion conscious African-American customers, offering branded merchandise at a discount of 30% to 70% compared to the regular prices of department and specialty stores.
Citi Trends currently has a Zacks #5 Rank, implying a short-term Strong Sell rating on the stock.
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