|Shares Out. (in M):||15||P/E||0.0x||0.0x|
|Market Cap (in $M):||188||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||56||EBIT||0||0|
Citi Trends (the "Company") is an off-price retailer in the midst of turnaround. The key corrective actions of the turnaround - bringing back the old CEO who presided over the Company's successful growth years and replacing the chief merchandising officer with a mandate to return to off-price roots - are showing signs of progress including posting the first positive same-store-sale comp in 10 quarters last quarter. These improvements are not recognized in the current share price and have set up an attractive risk-reward situation. I estimate fair value to be c 2x current levels with limited risk of permanent capital loss given the strong balance sheet (estimate around $6/share of cash at the end of the current quarter; no debt), conservative lease position, and strong cash generative profile of the business.
Citi Trends (the "Company") is an off-price retailer focusing on urban fashions. It has c 500 stores that are mostly located in poor areas targeting a 18-25 year-old customer with household income of c $30k. The majority of the Company's customers are African American and Hispanics. It sells a mix of branded and non-branded product and offers best prices through late-season inventory purchases and carry-over of inventory into the proceeding season.
From 2001 to 2009 the Company grew stores from 123 to c 400 and comparable store sales averaged in the high single digits. Following the retirement of longtime CEO Ed Anderson, the business suddenly deteriorated in 2010 and 2011. The main reason for the decline was a flawed change in merchandising strategy led by the new team that moved away from close-out buying toward full priced on-trend buying. The change in strategy was aimed at increasing profits through a higher-end assortment, but it backfired because the diminished value proposition could not stand up to the weak economy, which disproportionately impacted the Company's target customers. The strategy was also unsuccessful because at the same time the Company had pre-committed to buy, on long lead times, various urban fashions, the fashion trends themselves shifted away from what the Company was buying.
Performance worsened throughout 2011. Responding to the weak results, the Company fired the CEO and brought back Ed Anderson, who had become the Company's chairman after retiring. It also replaced its Chief Merchandising Officer with Jason Mazzola (previously with AJ Wright division of TJX). The Company also announced a reduction in force to cut costs and scaled back its expansion plans for 2012 and beyond.
Messrs Anderson and Mazzola have now been with Citi Trends for almost one year. In that time they have been most focused on returning the business to its historical mix of close-out buying. Such close-out buying trades predictability and consistency of merchandise for great bargain prices that it can pass on to its customer, which were core to the Company's historical success. These changes could not be implemented immediately because of buying commitments undertaken by the prior team, which have been rolling off. Same store sales and gross margins have been improving and last quarter (ending October 2012) the company reported its first positive comp in ten quarters.
The Company has a market capitalization of c $190m and enterprise value of c $135m ($55m of cash and no debt; c $4/share of net cash). I estimate that cash on the balance sheet will be c $6/share at the end of this quarter. At its peak the business generated c $50m of EBITDA and c $1.4 of EPS on a base of c 20% fewer stores.
On currently depressed results, the Company trades at 3-4x EBITDA and is generating high teens free cash flow yield to EV. During the worst of its problems it generated positive EBITDA and cash flow.
I estimate fair value of CTRN in the low-mid 20s per share based on 5-6x next year EBITDA of $40-45m, which assumes continued modest improvement of the business into next year.
Citi Trends represents a very attractive risk reward. As discussed above, I estimate fair value at twice the current price. In a rather bleak downside scenario where the Company's challenges are more structural and long-term than I appreciate, the company has c $7/share of cash and does trough EBITDA of $14m (4 quarters ended April 2012). Using a conservative 2.5x trough EBITDA, downside value is about $9.50/share.
(1) Execution risk around turnaround. Company needs to change its product assortment, offer lower price points, and potentially change its format to compete successfully in this environment. This is a challenging task for any team.
Mitigant: New CEO has strong track record. CMO has experience from TJX that is highly relevant.
Mitigant: Results over the last few quarters demonstrate that the changes being implemented are working.
(2) Niche could be structurally challenged. Lack of product innovation within the "urban" category may have shifted customers toward more traditional product/fashion lines.
Mitigant: Company objective is not to dictate fashions, but respond to customer demand, and it refreshes its "urban" look via merchandise choices.
(3) Target Customers could be challenged for a while. Difficult economy may not abate and the customers core customers could remain challenged for the next several years. Is this really the right time to invest in a consumer turnaround with customer headwinds?
Mitigant: There is no need to underwrite heroic growth assumptions. Company will generate a lot of cash flow without a strengthening economy.
|Entry||01/10/2013 09:15 PM|
the latter disclosure about position ownership was clicked in error. funds we advise have a position
|Subject||RE: a couple questions|
|Entry||01/11/2013 10:10 AM|
Regarding recent price action, there are a few things one could point to from a fundamental perspective. First, the payroll tax increase of 2% of gross income will hit weaker customers harder than others. This may results in a few less dollars per week available to spend, which could negatively impact sales for CTRN on the margin. Second, dollar stores have been weak independent of the payroll tax issue, so perhaps that is a little carry over from that. Third, there will likely be a delay in tax refunds this year v last year as consequence of changes to tax code stemming from fiscal cliff. This will push back some tax refund fueled by from January to February and could hurt the 4Q comp slightly. We tend to think this impact will be small, and have zero real impact on the value of the company. All of these fundamental possibilities are likely second or third order relative to the primary effect of the return to an off-price strategy.
Having said all of that, we have closely followed the trading flows for months now and tend to think that this is an orphaned situation with close to zero institutional interest. We know there were 2 sellers out there (maybe only one now) and believe that has kept the stock depressed since the last quarter rather than possible negative tax impact.
By "next year" EBITDA we refer to FY14 ending January 2014.
Re: RAD, haven't followed it in a while. I have been truly impressed that they have remained distressed or quasi distressed for nearly 12 years at this point w/out filing BK. Unfortunately, all the value from that long-term distress seems to have accrued to their creditors thus far.
|Subject||RE: RE: a couple questions|
|Entry||01/11/2013 01:09 PM|
could also be - inventory up 16% which they said 50% was opportunisitic but you have to wonder; plus, they said layway would be hurt by lower AUR and lastly while they don't report monthly they do report during the EA call and said sales were flat in first 3 weeks. I agree with that this has the feel of an improving story and I was really happy they brushed off those dumb buyback questions too...
|Subject||RE: RE: Marginal Retailer|
|Entry||01/11/2013 06:30 PM|
well...if they do about 20m in free cash flow next year on a market cap of 127m then everything will be a-ok. In a really good year, they might do 30. If they get another hurricane, it might be 40m. Bad stores can be shut down. Management isn't going to p&ss aways cash anymore on dumb store openings. All those figures and such are very impressive though.
|Subject||Responses to questions|
|Entry||01/13/2013 06:58 PM|
First a clarification on the Citi Trends concept: CTRN is a zero-frills discount retailer operating out of small stores in cheap, undesirable locations. The company uses $420k of capital to open a store, signs a relatively short-term lease (5 year with extensions) at very cheap ($6-7 psf) lease rates, and tries to provide its customers with styles specific to their unique urban tastes at prices that can not easily be matched in their neighborhoods. Being local is an advantage, as many customers do not have access to cheap, convenient transportation. Local competition is weak and mostly in the form of mom and paps. Is this market desirable enough to draw new entrants? The answer is generally no. Customers are perpetually strapped for cash and there are safety, security, and shrink issues to navigate. This is what makes in an attractive niche. CTRN is the big fish in the small pond.
Given CTRN's business model, having much lower sales per square foot than other retail concepts such as TJX is not problematic or a sign that stores are uneconomic, since CTRN pays rent that is 2-3x lower than TJX and achieves high 30s gross margins when executing well. If the ongoing turnaround could increase sales per square foot back near the recent peak of $160 while maintaining healthy margins, that would still leave the company at less than half of TJX, but would produce earnings and store-level returns on capital that are quite satisfactory.
Regarding returns on capital, the criticism strikes me as misplaced. The CTRN business model provides great returns on capital. The company invests $420k-- $280k for build out, $30k in pre-opening expenses, and $110k of net inventory-- and targets first year cash flow to be $335k. I am not pointing this out as anything special among retailers, am just saying that I don't understand the criticism. As is typical in this type of business, not much capital is put up, so returns on capital whip around with operating performance. The comment that "RoE has never been above the mid-teens" is not true, as is evidenced by the financials of years 2007 and earlier.
Finally, I appreciate the comments about recent inventory trends and am happy to provide my understanding. As discussed in the write-up, CTRN is in the process of transitioning from on-trend buying back to the close-out buying strategy it had during its successful years. Close-out buying is often done at the end of the season and necessitates paying for the merchandise and warehousing it for the off-season. Thus, we have seen a one-time increase in the working capital required for the business. I believe that most of the working capital increase necessitated by the merchandise switch is reflected as of the most recent quarter-end. Importantly, I believe the current inventory position is reasonably strong in that it presents a healthy in-stock position without excessive risk of markdowns.
|Entry||05/23/2013 09:32 AM|
Cititrends reported first quarter results yesterday. We view the -4% comp as a decent result considering the negative impact from colder weather, lack of tax refund related buying this year, and increases in the payroll tax. The sales cadence improved in the latter portion of the quarter with April +9% and May MTD +2% v Feb -7% and Mar -8% where the tax and weather had the most significant impact.
Management discussed improvements in the women's business on the call where the shift away from urban brands toward unbranded urban fashion is working. The women's business has been the largest problem area for the company and fixing it should fuel sales in other categories given that 75% of CTRN shoppers are women buying for themselves, spouse/boyfriend, child, etc. Have never heard the team this confident about the changes they are making. Comps should be easier for the rest of the year from an average unit price standpoint.
Cash at quarter was just over $80m but was understated by $10-$20m due to some one-off timing issues within accounts payable. Inventory in good shape. Continue to believe this is a very attractive risk reward where merchandise changes will fuel positive SSS into the back half the year.
|Entry||08/22/2013 08:55 PM|
CTRN reported second quarter results yesterday with positive sales growth of 4.2%, positive SSS of 1.7%, and improved gross margin of 237bps. In the context of the sales growth, believe that the pick-up in gross margin was particularly strong. Improved trends basically across all categories. Outlook from management quite constructive especially with regards to improvement in the women's category where they believe that merchandizing changes they have made are resonating with customers - this has also been the greatest source of the company's problems. Take all this as evidence the turnaround is going in the right direction. Company reported $85m of net cash as of quarter-end (nearly $6/share).