Citi Trends (CTRN) Q1 Earnings & Sales Miss; Stock Down

Citi Trends Inc. (NASDAQ:CTRN) began fiscal 2016 on a dismal note, as its first-quarter sales and earnings missed estimates for the third straight time. Moreover, both top and bottom lines declined year over year, leading the stock to crash 10.4%.

The company’s quarterly adjusted earnings of 61 cents per share lagged both the Zacks Consensus Estimate and the year-ago figure of 74 cents by 17.6%. Including asset-impairment charges, the company’s earnings amounted to 60 cents per share.

Quarter in Detail

Citi Trends’ sales dipped 0.6% year over year to $193.7 million and fell short of the Zacks Consensus Estimate of $197 million.

Comparable store sales (comps) for the quarter slipped 2.7%, trailing the company’s expectations, mainly impacted by a delayed start to the tax refund season. Further, the comps decline reflected a 2% fall in the number of customer transactions, along with a 3% drop in average unit sale. These were partly compensated by a 2.5% rise in the average number of items per transaction.

On the basis of merchandise category, comps at the Home division were up 22% following a 13% rise in the same period last year. Meanwhile, Accessories, which includes footwear, jumped 4% after witnessing a 2% increase in the year-ago period. The Men’s division comps dropped 2%, following a 1% dip a year ago. Also, comps at the Ladies’ and Children’s divisions were down 9% and 8%, respectively, compared with a 7% rise and a 3% decline recorded in the prior-year period.

Cost of goods sold, as a percentage of sales, expanded 50 basis points (bps) in the fiscal first quarter, mainly owing to greater markdowns stemming from soft comps.

Selling, general and administrative (SG&A) expenses escalated 4.5% year over year to $58.3 million, owing to expenses related to store openings and inflation. As a percentage of sales, SG&A expenses expanded 150 bps to 30.1% on account of deleveraged costs due to lower comps. Additionally, depreciation expense fell 7.7% to $4.4 million due to fewer stores opened over the past quarters.

Operating income slumped 23.3% year over year to $12.9 million, with the operating margin contracting 190 bps to 6.7%.

Financials

Citi Trends had no debt on its balance sheet at the end of the first quarter. Cash and cash equivalents were $53.0 million compared with $86.8 million as of May 2, 2015. Shareholders' equity totaled approximately $219.8 million against $222.1 million in the prior-year period.

Concurrently, the company announced a quarterly dividend of 6 cents per share, payable on Jun 14, 2016, to shareholders of record as on May 31.

Store Update

During the quarter, the company introduced 5 stores and relocated or expanded 6 stores. As of May 18, 2016, the company operated 526 stores in 31 states.

In fiscal 2016, the company aims to open about 15–20 stores. Moreover, it plans to relocate or expand 10–15 stores, and remodel about 20 stores. In second-quarter fiscal 2016, Citi Trends plans to introduce 4 stores, while relocating or expanding 3 stores.

Outlook

Going forward, Citi Trends remains hopeful of driving sales, given the strength in its non-apparel business, better strategy for the spring to fall transition period, and enhancements to apparel variety.

Owing to the intense promotional activities in the apparel space, coupled with greater sales of home merchandise – which carries lower average units sold (AUS) – management anticipates AUS to remain pressurized in fiscal 2016 and be down in low to mid-single digits. However, it expects the number of transactions to trend upward, thus providing partial relief.

Also, the company is pleased with its inventory position as it entered the second quarter. It plans to utilize the extra inventory to sponsor its purchases for the next season, and for new stores, home expansion and core spring categories.

Zacks Rank

Citi Trends currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Abercrombie & Fitch Co. (NYSE:ANF) , New York & Company Inc. (NYSE:NWY) and The Children's Place, Inc. (NASDAQ:PLCE) , each with a Zacks Rank #2 (Buy).

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