CITI TRENDS INC CTRN
October 19, 2015 - 5:21pm EST by
jcp21
2015 2016
Price: 25.85 EPS 0.92 0
Shares Out. (in M): 16 P/E 28 0
Market Cap (in M): 402 P/FCF 26.8 0
Net Debt (in M): 0 EBIT 21 0
TEV: 316 TEV/EBIT 15 0

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Description

store growth potential. Specifically, Citi Trends focuses primarily on African American retail consumers. Economic data
now points to an acceleration of a long-term uptrend for African American consumer purchasing power.
 
First, as you can see, the African American demographic is outperforming the broader labor market. 
 
 
The favorable economic trends are the result of several factors:
1) African Americans were harder hit by the great recession than the rest of the economy. Some of the current strength
is the rebound effect;
 
2) The job market is improving. In particular, the lower wage portion of the job market is accelerating the most.
According to UBS, low wage jobs are growing at 1.6% per year while high wage jobs are growing at 1.0% per year.
Furthermore, the minimum wage is going up in a growing number of cities and states around the country. Since 2014, 26
states have increased their minimum wage. Right now, a large number of cities have substantial minimum wage
increases on the ballot (up to $15 per hour).
 
All this puts upward pressure on wages. Even in states where minimum wages aren’t going up, “market minimum
wages” are in effect. For example, if the minimum wage in a state is $8, you can’t hire anyone for below $9 per hour due
to the strong demand and reduced supply.
 
As the African American demographic is currently more weighted toward low wage jobs, the outperformance
disproportionately benefits the demographic. The below chart illustrates the shift in bargaining power from employers to job seekers. 
 
 
 
3) The prior chart indicates a cyclical trend that could be nearing an end. There are still secular trends to consider. The
number of undocumented workers making it into the U.S. is dropping for a variety of reasons explained in this report -
http://realestateconsulting.com/docs/JBREC_Mexico_ConstCosts201509.pdf. Clearly, a reduced supply of low skilled
labor will help the low income job market for years to come.
 
4) Roughly 10,000 baby boomers are retiring each day. The mix of people retiring is weighted toward higher income
individuals. Yet, when the overall labor pool comes under pressure, it can create secondary effects. For example, call
centers have worker shortages and are now open to hiring lower skilled workers from industries like warehousing. And,
because warehousing is growing relatively quickly, that industry is expanding the profile of people they are willing to
wire.
 
5) Since 2010 African American population growth has outpaced the U.S. average by a 1% CAGR. What is also worth
noting is African American population growth in suburban, as opposed to urban or rural areas, is 3.8% per year versus
only 1.9% for the U.S. This is a sign of increased African American prosperity. Population growth combined with job
growth will support relatively high African American consumption growth.
 
 
Additionally, these positive economic trends lead to the generation of social capital via: 1) providing funding for higher
education or other skill development; 2) building “resume experience” capital; 3) neighborhood and community
development that flows back into longer-term economic growth. Overall, the long-term outlook is improving for the
African Americn demographic.
 
Company Valuation
Citi Trends is trading at 7x TTM EV/EBITDA with no debt and $79m or $5 in cash on the balance sheet. Growth will come
from a few places:
 
1) Store openings: the company still has very limited coverage in several parts of the U.S., as it is primarily
concentrated in the south east. The company plans to open 13 stores by the end of 2015.
Currently, the company has between 1 store for every 31k to 716k African Americans (79k median). My model
shows there is an opportunity to add 114 more stores (versus the current 518) in states where Citi Trends is
currently present. That calculation is based on assuming states with less than 1 store per 79k African Americans
ramp up to the median. Obviously there is no way the company is going to open 114 stores any time soon. But
at a minimum, this calculation indicates opening 13 stores per year is a sustainable trend.
 
In states where the company doesn’t have stores, the African American populations are relatively low. Most of
the growth will come from states where the company already has a presence. From a management perspective,
this dynamic makes the expansion much less costly (i.e. they have existing managers who know the states they are
attempting to grow in).
 
2) Depending on how long the current cycle lasts, income growth should support spending growth. Currently,
nominal wages are being held artificially low due to the commodity price weakness. However, that will either be
a neutral or positive year-over-year factor in 2016 which, combined with the tight labor market, will result in an
acceleration of incomes and spending.
 
3) The African American demographic, as mentioned above, should disproportionately benefit from the above
mentioned trend.
 
 
Combining these factors leads to the conclusion that Citi Trends is well positioned for growth both during the current
cycle but also over a long-term period of time (5-10+ years).
 
Risks:
 
1) If the labor market falls apart, Citi Trends will struggle;
 
2) The expansion story is to some degree driving the
stock. If new stores fail to deliver, the valuation will go down;
 
3) The economy is in “late cycle” mode. From a macro/timing
standpoint, having a hedge would seem to make sense (other high priced high beta retailers?);
 
4) Despite the strong labor market, low income consumers overall are not in great shape (see Wal-Mart’s earnings).
If this worsens, the positive trends seen above might reverse and cause sales growth issues for Citi Trends.
Yet, given the low wage job growth, that trend could reverse.
 
5) If Citi Trends fails to meet the needs of their target market the company will struggle.  

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

- Same store sales and store count growth.

- Wage inflation heading into 2016. 

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    Description

    store growth potential. Specifically, Citi Trends focuses primarily on African American retail consumers. Economic data
    now points to an acceleration of a long-term uptrend for African American consumer purchasing power.
     
    First, as you can see, the African American demographic is outperforming the broader labor market. 
     
     
    The favorable economic trends are the result of several factors:
    1) African Americans were harder hit by the great recession than the rest of the economy. Some of the current strength
    is the rebound effect;
     
    2) The job market is improving. In particular, the lower wage portion of the job market is accelerating the most.
    According to UBS, low wage jobs are growing at 1.6% per year while high wage jobs are growing at 1.0% per year.
    Furthermore, the minimum wage is going up in a growing number of cities and states around the country. Since 2014, 26
    states have increased their minimum wage. Right now, a large number of cities have substantial minimum wage
    increases on the ballot (up to $15 per hour).
     
    All this puts upward pressure on wages. Even in states where minimum wages aren’t going up, “market minimum
    wages” are in effect. For example, if the minimum wage in a state is $8, you can’t hire anyone for below $9 per hour due
    to the strong demand and reduced supply.
     
    As the African American demographic is currently more weighted toward low wage jobs, the outperformance
    disproportionately benefits the demographic. The below chart illustrates the shift in bargaining power from employers to job seekers. 
     
     
     
    3) The prior chart indicates a cyclical trend that could be nearing an end. There are still secular trends to consider. The
    number of undocumented workers making it into the U.S. is dropping for a variety of reasons explained in this report -
    http://realestateconsulting.com/docs/JBREC_Mexico_ConstCosts201509.pdf. Clearly, a reduced supply of low skilled
    labor will help the low income job market for years to come.
     
    4) Roughly 10,000 baby boomers are retiring each day. The mix of people retiring is weighted toward higher income
    individuals. Yet, when the overall labor pool comes under pressure, it can create secondary effects. For example, call
    centers have worker shortages and are now open to hiring lower skilled workers from industries like warehousing. And,
    because warehousing is growing relatively quickly, that industry is expanding the profile of people they are willing to
    wire.
     
    5) Since 2010 African American population growth has outpaced the U.S. average by a 1% CAGR. What is also worth
    noting is African American population growth in suburban, as opposed to urban or rural areas, is 3.8% per year versus
    only 1.9% for the U.S. This is a sign of increased African American prosperity. Population growth combined with job
    growth will support relatively high African American consumption growth.
     
     
    Additionally, these positive economic trends lead to the generation of social capital via: 1) providing funding for higher
    education or other skill development; 2) building “resume experience” capital; 3) neighborhood and community
    development that flows back into longer-term economic growth. Overall, the long-term outlook is improving for the
    African Americn demographic.
     
    Company Valuation
    Citi Trends is trading at 7x TTM EV/EBITDA with no debt and $79m or $5 in cash on the balance sheet. Growth will come
    from a few places:
     
    1) Store openings: the company still has very limited coverage in several parts of the U.S., as it is primarily
    concentrated in the south east. The company plans to open 13 stores by the end of 2015.
    Currently, the company has between 1 store for every 31k to 716k African Americans (79k median). My model
    shows there is an opportunity to add 114 more stores (versus the current 518) in states where Citi Trends is
    currently present. That calculation is based on assuming states with less than 1 store per 79k African Americans
    ramp up to the median. Obviously there is no way the company is going to open 114 stores any time soon. But
    at a minimum, this calculation indicates opening 13 stores per year is a sustainable trend.
     
    In states where the company doesn’t have stores, the African American populations are relatively low. Most of
    the growth will come from states where the company already has a presence. From a management perspective,
    this dynamic makes the expansion much less costly (i.e. they have existing managers who know the states they are
    attempting to grow in).
     
    2) Depending on how long the current cycle lasts, income growth should support spending growth. Currently,
    nominal wages are being held artificially low due to the commodity price weakness. However, that will either be
    a neutral or positive year-over-year factor in 2016 which, combined with the tight labor market, will result in an
    acceleration of incomes and spending.
     
    3) The African American demographic, as mentioned above, should disproportionately benefit from the above
    mentioned trend.
     
     
    Combining these factors leads to the conclusion that Citi Trends is well positioned for growth both during the current
    cycle but also over a long-term period of time (5-10+ years).
     
    Risks:
     
    1) If the labor market falls apart, Citi Trends will struggle;
     
    2) The expansion story is to some degree driving the
    stock. If new stores fail to deliver, the valuation will go down;
     
    3) The economy is in “late cycle” mode. From a macro/timing
    standpoint, having a hedge would seem to make sense (other high priced high beta retailers?);
     
    4) Despite the strong labor market, low income consumers overall are not in great shape (see Wal-Mart’s earnings).
    If this worsens, the positive trends seen above might reverse and cause sales growth issues for Citi Trends.
    Yet, given the low wage job growth, that trend could reverse.
     
    5) If Citi Trends fails to meet the needs of their target market the company will struggle.  

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    - Same store sales and store count growth.

    - Wage inflation heading into 2016. 

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