Citi Trends: Q1 2022

CTRN-Citi Trends, Stocks

What were the last Citi Trends results?

On May 24th, Citi Trends published a press release with the results for its first quarter of 2022. In it, they confirmed their previous guidance, disclosing a decrease of revenue of 27% versus the first quarter of 2021. Comparable store sales were also down 29.2%, as well as the rest of the primary metrics.

As with the rest of the retailers, the macro environment, especially the high inflation, hurts sales. In addition to that, the strength of last year’s first quarter, with significant stimulus in the US, does not help. In fact, total sales grew 1.6% if we compare them to the first quarter of 2019 (before the pandemic).

It is true that inflation, especially in food and energy, is hurting more Citi Trends’ target customers, and it probably will go on doing it in the following months. But, even though Citi Trends is still profitable. So it is not clear if, at these market prices, it deserves such a high amount of short interest (39.4%).

What is the intrinsic value of Citi Trends?

In terms of outlook, the Management expects to finish the year with a range of total sales of $860-$880 million and an adjusted operating income of $23.8-$30.6 million.

With a midpoint of operating income of $27.2 million, if we use a multiple of 10, add the current net cash ($61.66 million) and divide it by the number of shares (8.44 million), we get a target price of $39.5, which would give us a potential revaluation of around 33% from the current price ($29.76).

What is the Citi Trends Capital Allocation?

A catalyst that can make Citi Trends close the gap with its value is the repurchase of shares it is currently doing.

During the first quarter of 2022, Citi Trends repurchased 170,000 shares at a total cost of $5.3 million. That makes an average price of $31, which we could consider a reasonable price from the Management perspective.

But at $29,76, and considering that they still have an approved amount of $54.7 million for this purpose, they could repurchase around 20% of the current market capitalization.

This repurchase of shares could create a short squeeze that catapults even higher its shares’ price.

 

David Makuen, CEO of Citi Trends, highlighted the company’s achievements in the fourth quarter and throughout fiscal year 2022. He emphasized the following points:

  1. The company achieved a healthy gross margin of 39.1% in 2022 and reduced operating expenses by 9% compared to 2021.
  2. The company managed its inventories well and ended the fiscal year with a better-than-expected cash position of nearly $104 million and no debt.
  3. Citi Trends has been investing in enhancing the in-store experience and its infrastructure, and now 13% of their stores reflect the improved CTX experience.
  4. Despite a challenging economic environment, the strong balance sheet enables the company to invest in key product categories to continue delighting customers with fresh, exciting products at affordable prices.

For 2023, the company will focus on four main priorities:

  1. Driving comparable store productivity, focusing on opportunities to capture market share in areas such as footwear, beauty, kids’ apparel, and juniors and missy ladies’ apparel.
  2. Managing inventory and maximizing margin, expanding select categories, recouping sales in specific categories, and broadening the brand’s appeal to new multicultural families.
  3. Controlling SG&A expenses and leveraging the balance sheet, using analytics to eliminate unnecessary costs and establishing solid controls for spending decisions.
  4. Executing technology enhancements, continuing to develop the technology infrastructure to improve operational efficiency across the business.

However, the first quarter of 2023 has had a slower start than expected due to unfavorable economic factors affecting Citi Trends’ customers. The company remains cautiously optimistic and expects an improvement in the economic situation throughout the year.

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