Shares of Citi Trends Inc. CTRN plunged 10.2% on Friday despite reporting strong fourth-quarter fiscal 2014 results and providing a favorable fiscal 2015 outlook. The probable reason behind the fall in share price could be the retirement of CEO, Edward Anderson, or weak first quarter-to-date comparable-store sales (comps) performance.
Citi Trends’ results, however, were impressive yet again as adjusted earnings per share for the fourth quarter came in at 31 cents, marking a significant improvement from 10 cents reported in the prior-year quarter. Moreover, quarterly earnings were ahead of the Zacks Consensus Estimate of 24 cents.
We believe that the company’s strategic initiatives such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management aided this significant turnaround.
Quarter in Detail
Citi Trends’ sales advanced nearly 15% year over year to $181.1 million and came in line with the Zacks Consensus Estimate. Sales benefited from strong performance at all five business segments and benefits from tax refund driven sales in January instead of February.
Comps in the quarter rose 13.9% from the year-ago quarter driven by an increase in the number of transactions to over 13%, a 1% pick up in average unit sales and flat average number of items per transaction.
On the basis of merchandise category, all the five divisions reported double-digit comps growth in the fourth quarter. Comps at the Home Division were up 13% versus a 9% rise last year while Accessories comps increased 20% over a 12% increase last year. Moreover, comps of the Men’s and Ladies’ divisions improved 13% and 16%, against a 6% and 15% decline, respectively, last year. On the other hand, Children’s division comps were up 11% against a 6% dip reported last year.
Though the company’s businesses remain healthy, comps so far in first-quarter fiscal 2015 have declined 3% primarily due to the absence of the aforementioned benefits from early tax refunds in February this year.
Citi Trends' gross profit for the quarter escalated 17.2% to $67.5 million from $57.6 million in the year-ago quarter, while gross margin expanded 70 basis points (bps) to 37.3%. The improvement in gross margin was attributed to improved cost of goods sold as a percentage of sales, backed by solid merchandise sales and efficient inventory management.
Selling, general and administrative (SG&A) expenses in the quarter rose 14.5% year over year to $57.5 million, while depreciation expense fell 7.5% to roughly $5 million. As a percentage of sales, SG&A expenses fell 100 bps to 31.8%.
Operating income came in at $5.2 million, compared with $1.9 million reported in the year-ago quarter. Operating margin of 2.9% expanded 170 bps from 1.2% in fourth quarter last year.
Financials
Citi Trends had no debt on its balance sheet at the end of fiscal 2014. Cash and cash equivalents were $74.5 million compared with $58.9 million at the end of fiscal 2013. Shareholders' equity totaled approximately $210.6 million, as against $198.9 million in the prior-year period.
Outlook
Going into fiscal 2015, the company expects to retain its ongoing comps growth trend as all of its businesses remain strong. Additionally, management intends to open 10–15 stores, relocate or expand 7–10 stores and renovate 20–25 stores in the fiscal.
Management Changes
Concurrent with the earnings release, the company announced the retirement of CEO, Edward Anderson, and promoted Jason Mazzola to the position of CEO. However, Edward has been appointed as the Executive Chairman. Bruce Smith, current CFO, has been promoted to Chief Operating Officer, while he will retain the role of CFO.
Other Stocks to Consider
Citi Trends currently has a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the same industry include American Eagle Outfitters Inc. AEO, DSW Inc. DSW and Aeropostale Inc. ARO, each carrying a Zacks Rank #2 (Buy).
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