Citi-Trends CTRN
July 06, 2011 - 8:39pm EST by
SpocksBrainX
2011 2012
Price: 15.51 EPS $0.00 $0.00
Shares Out. (in M): 15 P/E 0.0x 0.0x
Market Cap (in M): 226 P/FCF 0.0x 0.0x
Net Debt (in M): -93 EBIT 0 0
TEV: 133 TEV/EBIT 0.0x 0.0x

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Description

Citi-Trends is a revision to the mean idea turnaround - asset play that ought to work sometime in the next three years.  It closed today at $15.51 (though traded near $15) with a 52 week high/low of $34.52-$14.70.  The company operates apparel and accessories stores for primarily African-Americans of all ages (though I've seen a heavy Hispanic element in the store along with lower income white folk).   There is a somewhat optimistic presentation on the company here:

 http://files.shareholder.com/downloads/CTRN/1314658708x0x329774/bdaa24c4-d5ce-43c9-a780-c91bcb2ece65/Citi_Trends_Slides.pdf

 Here is a list of positives and negatives associated with the idea:

 Positives

*stellar balance sheet.  Company has $93m in cash (no debt) and investments, or $6.40 or 41% of the current market cap.  They aren't going anywhere.

*plenty of trailing cash flow.  Trailing earnings plus d/a is 42m, or 31% of the current enterprise value.  It isn't free cash flow, but again - this company isn't going anywhere.

*lots of growth potential.  CTRN operates 461 stores currently with a saturation guesstimate at 800 to 1,000, or 51% saturated at the current level.  CTRN is currently expanding sqft by 15%.

*no buybacks in their history.  Sure, many view this as a negative, but given the volatility in this area, not only does it not bother me but provides the all-important element you need in any potential turnaround - time. 

*nobody is dying to get into this space.  TJX recently threw in the towel on their ethnic concept and given variable results here others are not in a hurry to open stores in this space (main competitors, besides many moms and pops, might be It's Fashion Metro (run by Cato) and dd's discounts (run by Ross stores)

*history of profits.  Company came public in 2005 and has earned 14.2-21.4-14.2-17.4-19.7-20.9 from 2005-2010.  Operating margins tend around 8.0% (VL) with net margins of 3-4%. 

*same store sales have sucked and will soon become this year's comparison (Jul11 is the first of negative numbers with compares getting easier as the year progresses)

 Negatives

*cash flow is not free cash flow.   Trailing CapEx is 46m and I would expect a similar amount for the year.  So, for now at least while they remain in growth mode, they wont' be adding much cash to the BS. 

*comps have been indifferent last few quarters.  Oct10 was down 8%, with Q4 down 11.4% and Q1 ending April11 down 6.9%.   By the way, despite comps being down this much in Q1 and Q4, net income nearly matched the previous year

*May11 isn't off to a good start either - down 12% in the first two weeks, putting enormous pressure on the stock price as investors extrapolate these results

*nobody believes the forecast - company's forecast is for $1.25-1.35 with 1-2% down comps which implies improvement from here but nobody believes them at this point.  Why should they?

 What Has to Happen for this Idea to Work

1 - positive comps.  They fluctuate, so going up again in the future is not a stretch.  If they do, investors can rethink this as an asset play/turnaround and remember it is a growth company too in terms of sqft.  Company blames current weakness on weak branded sales but, and this is just an opinion, I think this is all macro as others have experienced some weakness in apparel (see FDO latest call)

2 -  gas prices go down.  They are off the highs and given this store's ethnic customer (20 to 40k household income, so rising gas prices have an enormous impact here), this alone could make a huge difference

3 - another Hurricane or some even which impacts the South.  Katrina was a horrible thing but it was a clear boost to this company's fortunes (comps were up 16.7% in FY05 and 8.2% in FY06)

4 - people figure out that even if cash flow gets cut in half, the PCF ratio based on EV is still 6x.  You would also figure that if things get bad enough, management will put a stop to expansion

5 - don't count on it, but price is right at the opening bid, so....insider ownership is only 2.6%.  The time to buy these retailers is when the news is rotten, not good, and maybe somebody could take this private at these prices ++.  Dress Barn do you hear me (highly unlikely, but they seem to buy retailers at a bargain vs. most private equity who seems to only buy when things are peachy)

 I think CTRN makes sense for a well-diversified portfolio and is particular apt for a scaling approach - 20% moves are all that matters here.  The stock fluctuates like a deranged monkey.  All time low was $7, all time high was $57.8.

  Notes -   2010 AR

Finished with 461 stores

Top 5 States: 61 in GA, 45 Tx, 44 Fl, 44 Sc, 39 Lou

In fall weakness in long denim

They have a new store model - Citi Lights

65-70 stores mentioned; Mn and Nbrska new states; expand and relocate 12

New DC in OK

Proxy - CEO made 1.2m, others 368-670k

Insiders only at 2.6%

FMR owns 14.8%, MFS 10.5%, MS 8.7, Well 6.1, others

 

Comp History 

Q4-Dec10                             -11.4%

 

Jan                                         -23.5

 

Dec                                         -10.7%

 

Nov                                        -2.6%

 

Q3 - Oct 10                          -4.2%

 

Oct                                         -8%

 

Sep                                         -4%

 

Aug                                        -1%

 

 

 

Jul10                                     -0.6%

 

                July                        -4%

 

                June                       +0

 

                May                       +2%

 

 

 

Apr10                                    +9.6%

 

                April                      -8.9%

 

                March                   +22.8

 

                Feb                         +10.6%

 

Jan10                                    +1.2%

 

                Jan                         -8.1

 

                Dec                         +6.1

 

                Nov                        -0.3

 

Oct09                     392         +6.3%

 

                Oct                         +4

 

                Sep                         +15

 

                Aug                        +1

 

Jul09                     370         -12.4%

 

                Jul                          -12

 

                Jun                         -14

 

                May                       -10

 

Apr09                    365         +7.4

 

Jan09                    357 (e)   -1.9%

 

Oct08                     341         -4.2%

 

Jul08                     335         +6.5%

 

Apr08                    331         +0.3%

 

Jan08                    319         -1.1%

 
 
 
 
 

Catalyst

positive comps - one day
    sort by   Expand   New

    Description

    Citi-Trends is a revision to the mean idea turnaround - asset play that ought to work sometime in the next three years.  It closed today at $15.51 (though traded near $15) with a 52 week high/low of $34.52-$14.70.  The company operates apparel and accessories stores for primarily African-Americans of all ages (though I've seen a heavy Hispanic element in the store along with lower income white folk).   There is a somewhat optimistic presentation on the company here:

     http://files.shareholder.com/downloads/CTRN/1314658708x0x329774/bdaa24c4-d5ce-43c9-a780-c91bcb2ece65/Citi_Trends_Slides.pdf

     Here is a list of positives and negatives associated with the idea:

     Positives

    *stellar balance sheet.  Company has $93m in cash (no debt) and investments, or $6.40 or 41% of the current market cap.  They aren't going anywhere.

    *plenty of trailing cash flow.  Trailing earnings plus d/a is 42m, or 31% of the current enterprise value.  It isn't free cash flow, but again - this company isn't going anywhere.

    *lots of growth potential.  CTRN operates 461 stores currently with a saturation guesstimate at 800 to 1,000, or 51% saturated at the current level.  CTRN is currently expanding sqft by 15%.

    *no buybacks in their history.  Sure, many view this as a negative, but given the volatility in this area, not only does it not bother me but provides the all-important element you need in any potential turnaround - time. 

    *nobody is dying to get into this space.  TJX recently threw in the towel on their ethnic concept and given variable results here others are not in a hurry to open stores in this space (main competitors, besides many moms and pops, might be It's Fashion Metro (run by Cato) and dd's discounts (run by Ross stores)

    *history of profits.  Company came public in 2005 and has earned 14.2-21.4-14.2-17.4-19.7-20.9 from 2005-2010.  Operating margins tend around 8.0% (VL) with net margins of 3-4%. 

    *same store sales have sucked and will soon become this year's comparison (Jul11 is the first of negative numbers with compares getting easier as the year progresses)

     Negatives

    *cash flow is not free cash flow.   Trailing CapEx is 46m and I would expect a similar amount for the year.  So, for now at least while they remain in growth mode, they wont' be adding much cash to the BS. 

    *comps have been indifferent last few quarters.  Oct10 was down 8%, with Q4 down 11.4% and Q1 ending April11 down 6.9%.   By the way, despite comps being down this much in Q1 and Q4, net income nearly matched the previous year

    *May11 isn't off to a good start either - down 12% in the first two weeks, putting enormous pressure on the stock price as investors extrapolate these results

    *nobody believes the forecast - company's forecast is for $1.25-1.35 with 1-2% down comps which implies improvement from here but nobody believes them at this point.  Why should they?

     What Has to Happen for this Idea to Work

    1 - positive comps.  They fluctuate, so going up again in the future is not a stretch.  If they do, investors can rethink this as an asset play/turnaround and remember it is a growth company too in terms of sqft.  Company blames current weakness on weak branded sales but, and this is just an opinion, I think this is all macro as others have experienced some weakness in apparel (see FDO latest call)

    2 -  gas prices go down.  They are off the highs and given this store's ethnic customer (20 to 40k household income, so rising gas prices have an enormous impact here), this alone could make a huge difference

    3 - another Hurricane or some even which impacts the South.  Katrina was a horrible thing but it was a clear boost to this company's fortunes (comps were up 16.7% in FY05 and 8.2% in FY06)

    4 - people figure out that even if cash flow gets cut in half, the PCF ratio based on EV is still 6x.  You would also figure that if things get bad enough, management will put a stop to expansion

    5 - don't count on it, but price is right at the opening bid, so....insider ownership is only 2.6%.  The time to buy these retailers is when the news is rotten, not good, and maybe somebody could take this private at these prices ++.  Dress Barn do you hear me (highly unlikely, but they seem to buy retailers at a bargain vs. most private equity who seems to only buy when things are peachy)

     I think CTRN makes sense for a well-diversified portfolio and is particular apt for a scaling approach - 20% moves are all that matters here.  The stock fluctuates like a deranged monkey.  All time low was $7, all time high was $57.8.

      Notes -   2010 AR

    Finished with 461 stores

    Top 5 States: 61 in GA, 45 Tx, 44 Fl, 44 Sc, 39 Lou

    In fall weakness in long denim

    They have a new store model - Citi Lights

    65-70 stores mentioned; Mn and Nbrska new states; expand and relocate 12

    New DC in OK

    Proxy - CEO made 1.2m, others 368-670k

    Insiders only at 2.6%

    FMR owns 14.8%, MFS 10.5%, MS 8.7, Well 6.1, others

     

    Comp History 

    Q4-Dec10                             -11.4%

     

    Jan                                         -23.5

     

    Dec                                         -10.7%

     

    Nov                                        -2.6%

     

    Q3 - Oct 10                          -4.2%

     

    Oct                                         -8%

     

    Sep                                         -4%

     

    Aug                                        -1%

     

     

     

    Jul10                                     -0.6%

     

                    July                        -4%

     

                    June                       +0

     

                    May                       +2%

     

     

     

    Apr10                                    +9.6%

     

                    April                      -8.9%

     

                    March                   +22.8

     

                    Feb                         +10.6%

     

    Jan10                                    +1.2%

     

                    Jan                         -8.1

     

                    Dec                         +6.1

     

                    Nov                        -0.3

     

    Oct09                     392         +6.3%

     

                    Oct                         +4

     

                    Sep                         +15

     

                    Aug                        +1

     

    Jul09                     370         -12.4%

     

                    Jul                          -12

     

                    Jun                         -14

     

                    May                       -10

     

    Apr09                    365         +7.4

     

    Jan09                    357 (e)   -1.9%

     

    Oct08                     341         -4.2%

     

    Jul08                     335         +6.5%

     

    Apr08                    331         +0.3%

     

    Jan08                    319         -1.1%

     
     
     
     
     

    Catalyst

    positive comps - one day

    Messages


    SubjectRE: ctrn new stores
    Entry07/07/2011 09:48 AM
    MemberSpocksBrainX
    no easy answer, but I think measuring from 07 is misleading cause that's when you had that hurricane related surge.  since 07, we've had - let's see - a Great recession, higher umployment, gas price spikes - you name it, so I don't get too involved in looking backwards (plus, as you already know, some of the latest CapEx has been related to new DCs and upgrading of their systems which apparently needed some major upgrading).  If it were a lot higher than this I would more about these sorts of things, but not at these prices.
    as you know, I'm not particularly sophisticated in how I view these things, but point in time analysis IMO can lead to some very strange conclusions so I try not to engage in them

    SubjectRE: ctrn new stores
    Entry07/07/2011 10:01 AM
    MemberSpocksBrainX
    100% cash return is based on 1.675m in sales per that presentation - they are doing 1.4m per store, so not sure where they get 1.68 - as noted, their numbers are 'optimstic' unless I am missing something

    Subjectright on cue
    Entry07/07/2011 06:52 PM
    MemberSpocksBrainX
    my usual sub-4 rating.....{sigh}
    I think I ought to get an extra point for tenure....

    Subjectfwiw
    Entry07/08/2011 09:56 AM
    MemberSpocksBrainX
    there is also a previous write-up on this idea nicely presented by elan
    minor comment - but in the latest back and forth on that idea, which I didn't read by the way before posting this, there is a suggestion that black folk ought to go to WMT for their $5 shirts and such and thus why would they spend money here?
    the answer IMO is pretty simple - WMT doesn't sell merchandise sold by CTRN (visit a store to confirm this - WMT is heavy into simple basics and has nowhere near the selection across family lines that CTRN does which is just crammed full of stuff), CTRN pricing isn't that high anyway, and lastly my job is not to question why something happens over many years but rather to make a note that it does happen.  And sure, if this particular economic class gets squeezed over time that would be tough for them as a group but this is a big world and any competitor's desire to enter this space would be greatly lessened.  As noted, TJX punted already, and they are a pretty spiffy operator.   Finally, I've seen a lot of different types of folks in these stores - blacks, hispanics, whites, you name it, and all the locations I've been in have been in pretty attractive - financially, often near a big lots of some other half empty strip - in terms of rent paid no doubt.

    SubjectRE: RE: fwiw
    Entry07/08/2011 01:25 PM
    MemberSpocksBrainX
    honestly, i don't have a clue, and I don't spend much time thinking about it to be honest.  I figure if there is a fashion issue, they will solve as best as they are able, but my feeling - feeling only - is this is really 95% macro.  We know this customer buys very close to need, and even a few days slip in a check, tax refund, unemployment payment, etc. can play havoc on CTRN comps.  Gas prices in particular have to be incredibly important here, don't you agree?  So I don't think that CTRN got stupid all of a sudden on us RE:  fashion items. 
    But I'm just the poster of these ideas, not the be-all knower of things.  Different opinion?

    SubjectGrowth Destroying Value?
    Entry07/26/2011 08:49 AM
    MemberSiren81
    Took a quick look at the numbers here...  Looks like pre-tax ROI has fallen from about 24% to 14% and sales/ sq foot have fallen 16% since 2006 despite cumulative comps being about flat.  The implied new unit sales contributions are pretty low. This implies to me that the raid growth is destroying value... as such maybe this is the right multiple....
     
    Any thoughts on what the real incremental ROI is here (not what mgmt says it is)?.

    SubjectRE: Growth Destroying Value?
    Entry07/26/2011 07:46 PM
    MemberSpocksBrainX
    honestly, I don't know, but I think what you are doing is point in time analysis, and the returns in previous years were obviously helped by oddball events (hurricanes).  I'm not willing to say that today's returns are not oddball too, given various economic issues and gas prices and the like.  In my experience, rapid growth, if paid for internally, either works or not, and getting involved in incremental ROI measurement over time misses the fact that at the heart of the matter these are commodity businesses that are going to experience fluctuating returns - which change overnight (unfortunately, the latest annoucement proves this in a negative way, but one dose of bad news doesn't mean the patient is dead, esp in this industry).  Again, I don't pretend to be sophisticated enough to tell what is going on, but I don't think management is stupid.  If growth really is killing this concept, then I'm sure they will cut back on expansion.  
    I do know this - apparel can change on a dime, and if you've ever been in a CTRN you'll be convinced pretty quick that these stores don't take much to open. 

    SubjectRE: RE: Growth Destroying Value?
    Entry08/03/2011 03:34 PM
    MemberSpocksBrainX
    fwiw, highlighted in Barron's this week as a pick, but as is often the case with Barrons they don't bother to ask the guy why he thinks CTRN is cheap as cheap as it is...

    SubjectRE: RE: fwiw
    Entry08/15/2011 03:08 PM
    MemberSpocksBrainX
    maybe chrs?
    healthy chain - Lane Bryant - hiding in the mass of Fashion Bug and Catherine's.  company does generate a ton of cash flow, so if they can ever get things turn around - and they are closing stores like crazy - then eventually something might happened.  Plus, nobody wants to own anything in retail right now, so the price is moving lower.  Again, no catalyst - almost an anti-catalyst - but if you don't mind small positions maybe the time to start is now?

    SubjectRE: Author Exit Recommendation
    Entry08/17/2011 09:42 PM
    MemberSpocksBrainX
    sorry about this, but it hasn't worked, it doesn't look like it going to work any time soon, and I don't own the stock myself;  If there is a lesson here, it is that in the future I'll try to avoid revision to the mean ideas until there is a clearer catalyst to drive it back to the mean.    I STILL think it could work in the next three years, but in the next 6 months?  You never know - really, you never know - but even the good stories are hated right now, so I'm going to find other things. 
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