Business Overview and History

Citi Trends, Inc. is a leading specialty value retailer of apparel, accessories, and home trends primarily serving African American and multicultural families in the United States. With a focus on providing fashionable merchandise at everyday low prices, Citi Trends has carved out a defensible niche in the retail landscape.

Citi Trends was founded in 1999 and is headquartered in Savannah, Georgia. The company started with a single store in Savannah and has since grown to operate 597 stores across 33 states as of August 3, 2024, targeting urban, suburban, and rural markets. Citi Trends' unique positioning within the African American and multicultural communities has been a key driver of its success.

Over the years, the company has focused on expanding its store footprint. By 2011, Citi Trends had grown to over 400 stores and entered into a $50 million credit facility to help fund future growth. The expansion continued, reaching over 550 locations by 2020.

In January 2023, Citi Trends faced a significant challenge when it experienced a cyber disruption that impacted its back office and distribution center IT systems. This incident resulted in $1.7 million of costs in the first half of fiscal 2023. In response, the company enhanced its cybersecurity measures and implemented process improvements to prevent future disruptions. Several lawsuits have been filed against the company regarding the incident.

The company's financial performance has seen both highs and lows. In fiscal year 2022, Citi Trends reported strong results with revenue of $991.6 million and net income of $62.2 million. During this period, the company executed a $115 million share repurchase program, demonstrating its healthy financial position and confidence in the business. However, fiscal year 2023 saw a decline, with revenue of $795.01 million and net income of $58.89 million. This downturn was partly attributed to the impact of the cyber incident and other market challenges.

Despite these headwinds, Citi Trends has demonstrated resilience. The company's current leadership, under Interim CEO Ken Seipel, has implemented strategic initiatives to position the business for long-term success. These efforts include a renewed focus on the core African American customer, optimizing the product assortment, and improving operational efficiency.

Financials

As of the end of the second quarter of fiscal year 2024, Citi Trends' current ratio stood at 1.16, indicating a healthy current liquidity position. The company's quick ratio, a more stringent measure of liquidity, was 0.43, suggesting the ability to meet short-term obligations. Citi Trends' debt-to-equity ratio was 0.36, demonstrating a conservative capital structure.

Citi Trends' second quarter fiscal 2024 results showed a net loss of $18.4 million, or $2.21 per share. However, the company's management has provided an outlook for the second half of the fiscal year, expecting positive EBITDA in the range of $0.5 million to $2.5 million, a significant improvement over the first half. This guidance reflects the strategic actions taken to address inventory challenges and improve operational efficiency.

For the most recent fiscal year (2023), Citi Trends reported revenue of $795.01 million, net income of $58.89 million, operating cash flow of $5.75 million, and negative free cash flow of $16.53 million. In the most recent quarter (Q2 2024), the company reported revenue of $176.55 million, a net loss of $18.41 million, operating cash flow of $5.62 million, and free cash flow of $1.66 million.

Year-over-year, revenue increased by 1.7% in Q2 2024, driven by a shift in the retail calendar, partially offset by a 1.7% decrease in comparable store sales. However, net income decreased significantly due to $13.4 million in one-time charges for an inventory reset ($9.4 million) and higher than expected shrinkage ($4 million). Operating cash flow decreased by 36.5%, while free cash flow decreased significantly due to the one-time charges.

As of Q2 2024, Citi Trends had $59.30 million in cash and cash equivalents and access to a $75 million revolving credit facility, with $1.4 million in letters of credit outstanding.

Operational Improvements and Initiatives

One of the key focus areas for Citi Trends has been optimizing its product assortment. The company has identified opportunities to enhance its balance of "good, better, and best" merchandise, with an increased emphasis on opening price point goods and branded offerings. This strategy aims to better cater to the price-conscious needs of the core African American customer base.

Additionally, Citi Trends has made strides in addressing its inventory management challenges. The company took strategic actions in the second quarter to clear through aged inventory, creating room for new, more relevant products. This inventory reset, while impacting short-term profitability, is expected to position Citi Trends for improved working capital efficiency and better responsiveness to customer demands going forward.

The company has also made progress in addressing shrinkage, a persistent issue in the retail industry. Citi Trends has implemented various initiatives, including updated in-store theft prevention equipment, increased exception reporting, and the engagement of a consulting firm to help identify and implement corrective measures across internal theft, administrative, and external theft categories.

Navigating Macroeconomic Headwinds

Citi Trends' operations have not been immune to the broader macroeconomic challenges, such as inflationary pressures and the impact on consumer spending. The company's management has acknowledged these headwinds and has taken proactive steps to adapt its strategies accordingly.

One such measure is the focused approach on the core African American customer segment, which has historically demonstrated resilience in the face of economic volatility. Citi Trends' deep-rooted presence within these communities and understanding of their unique needs have allowed the company to maintain customer loyalty even during difficult times.

Furthermore, the company's emphasis on value-priced merchandise and the expansion of its branded product offerings are designed to resonate with price-conscious consumers, positioning Citi Trends as an attractive destination for budget-minded shoppers.

Outlook and Risks

Looking ahead, Citi Trends' management has provided guidance for the second half of fiscal 2024, anticipating flat to low single-digit comparable store sales growth and a return to gross margins in the high 30% range. This outlook reflects the company's confidence in the effectiveness of its strategic initiatives and its ability to navigate the current macroeconomic landscape.

Specifically, for the second half of fiscal 2024, Citi Trends expects comparable store sales to be flat to up low single-digits, with total sales down mid-single-digits due to the 53rd week last year and store closures. Gross margin is expected to be approximately 39%, and EBITDA is projected to be positive in a range of $0.5 million to $2.5 million, a significant improvement over the first half results.

The company plans to close 10 to 15 underperforming stores in 2024, ending the fiscal year with approximately 590 stores. Citi Trends expects to end the year with $60 million to $70 million in cash, with capital expenditures of approximately $13 million, down about 35% from their previous outlook.

However, Citi Trends is not without its risks. The company's heavy reliance on the African American and multicultural customer base could expose it to demographic and cultural shifts that may impact consumer preferences and spending patterns. Additionally, the highly competitive nature of the retail industry, particularly in the value-oriented segment, requires Citi Trends to continuously adapt its merchandising and operational strategies to stay relevant.

Product Segments and Offerings

Citi Trends operates across several product categories, catering to the diverse needs of its target market:

Ladies: This segment includes a variety of ladies' apparel such as dresses, sportswear, outerwear, lingerie, and hosiery.

Kids: The kids segment offers apparel, accessories, and sleepwear for infants, toddlers, and juveniles.

Accessories & Beauty: This segment includes fashion jewelry, handbags, luggage, perfumes, cosmetics, and hair care accessories.

Men's: The men's segment offers a selection of casual wear, dress shirts, ties, suits, sportswear, and outerwear.

Home & Lifestyle: This segment includes home decor, fragrances, home basics, and lifestyle items.

Footwear: The footwear segment offers a variety of shoes, boots, and sandals for the entire family.

Industry Trends

The value retail apparel industry has seen modest compound annual growth rate (CAGR) of 2-3% in recent years, driven by continued demand for affordable fashion. However, the industry faces macroeconomic headwinds such as inflation, rising interest rates, and economic uncertainty that have pressured consumer spending. Despite these challenges, Citi Trends has demonstrated resilience, particularly in its core African American customer segment.

Conclusion

Citi Trends has carved out a unique niche in the retail landscape, serving the underserved African American and multicultural communities with fashionable merchandise at everyday low prices. Despite facing various challenges, including the impact of the COVID-19 pandemic and macroeconomic headwinds, the company has demonstrated resilience and a willingness to implement strategic initiatives to position itself for long-term success.

With a renewed focus on the core customer, optimized product assortment, and improved operational efficiency, Citi Trends appears poised to capitalize on the loyalty of its target market and navigate the evolving retail environment. The company's recent performance, including growth in customer traffic and positive single-digit comparable store sales growth in the back-to-school period, indicates that these strategies are gaining traction.

As the company continues to execute its turnaround strategy, investors will closely monitor Citi Trends' ability to deliver sustainable growth and profitability in the quarters and years ahead. The management's guidance for the second half of fiscal 2024, including expectations of positive EBITDA and improved gross margins, suggests a cautiously optimistic outlook for the company's near-term performance.