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.
