Citi Trends, Inc. (NASDAQ: CTRN) is a leading specialty value retailer of apparel, accessories, and home trends primarily catering to African American and multicultural families in the United States. With a focus on providing fashionable merchandise at affordable prices, the company has navigated through recent challenges and is now executing a strategic turnaround to unlock shareholder value.
Business Overview and History
Citi Trends was founded in 1946 and has grown to operate 593 stores across 33 states as of November 2024. The company primarily targets value-conscious consumers, offering a mix of national brands and private-label merchandise at discount prices. Over the years, Citi Trends has established a strong presence in urban, suburban, and rural markets, catering to the unique preferences of its core African American customer base.
In its early years, Citi Trends primarily focused on selling workwear and family apparel in urban markets. As the company evolved, it expanded its merchandise assortment to include more fashion-forward apparel, accessories, and home goods, which helped appeal to a wider demographic and drive growth. A significant milestone for Citi Trends was its initial public offering in 2005, which provided capital to fund further expansion. In the years following the IPO, the company rapidly grew its store base, opening new locations across the country to increase its national footprint.
However, this period of rapid growth also presented challenges, including the need to integrate new stores and manage inventory effectively. In more recent years, Citi Trends has focused on strengthening its operational foundation, optimizing its store fleet, and evolving its merchandise assortment. The company has implemented various initiatives to improve efficiency, including enhanced data analytics, streamlined inventory management, and investments in its supply chain.
Despite these efforts, Citi Trends has faced several headwinds, including the impact of the COVID-19 pandemic, supply chain disruptions, and inflationary pressures. These challenges have weighed on Citi Trends' financial performance, with the company reporting a net loss of $11.98 million for the fiscal year ended February 3, 2024, compared to a net income of $58.89 million in the prior fiscal year.
Turnaround Efforts and Strategic Initiatives
To address these challenges and return the business to profitable growth, Citi Trends has implemented a comprehensive turnaround strategy under the leadership of newly appointed CEO, Ken Seipel. The key pillars of this strategy include:
1. Refocusing on the Core African American Customer: Citi Trends has renewed its focus on its core African American customer base, which represents the majority of its customer demographic. This has involved tailoring the merchandise assortment and in-store experience to better cater to the preferences and needs of this important customer segment.
2. Enhancing the Product Value Proposition: The company has worked to strengthen its product value proposition by offering a balanced assortment of "good, better, and best" merchandise across its categories. This includes increasing the selection of products priced under $5 to appeal to budget-conscious customers, while also introducing more premium branded offerings to drive traffic and average basket size.
3. Expanding the "Treasure Hunt" Experience: Citi Trends has placed a greater emphasis on securing compelling branded deals and "treasure hunt" merchandise to provide customers with a dynamic and engaging in-store experience. The company has bolstered its buying team with an experienced off-price specialist to identify and secure these high-value offerings.
4. Improving Operational Execution: The company has made significant investments in enhancing its operational efficiency, including optimizing its product allocation and inventory management processes, improving supply chain logistics, and implementing disciplined expense management initiatives.
Financial Performance and Outlook
The execution of Citi Trends' turnaround strategy has already begun to bear fruit, as evidenced by the company's financial results in the third quarter of fiscal 2024. During this period, the company reported total sales of $179.1 million, a 0.3% decrease compared to the prior-year quarter, but with a strong 5.7% increase in comparable store sales. Gross margin expanded by 160 basis points to 39.8%, driven by improved product costs and reduced shrinkage.
For the full fiscal year 2024, Citi Trends expects to deliver second-half comparable store sales in the low to mid-single digits, with total sales expected to be flat to slightly down due to the impact of the 53rd week in the prior year and store closures. The company's EBITDA for the second half of the year is now expected to be in the range of $1.5 million to $4.0 million, an improvement from the previous outlook of $0.5 million to $2.5 million.
In the third quarter of fiscal 2024, Citi Trends reported a net loss of $7.2 million, compared to a $3.9 million net loss in the same period of the prior year. This decrease in net income was primarily driven by higher selling, general, and administrative expenses related to strategic initiatives. The company experienced a 7.3% increase in SG&A expenses, which rose to 41.7% of net sales, primarily due to higher corporate, occupancy, and advertising costs, as well as a $2 million gain on insurance recorded in the prior year period.
For the fourth quarter of fiscal 2024, Citi Trends expects comparable store sales to be up low to mid-single digits. Total sales are anticipated to be down mid-single digits due to the 53rd week in the previous year and store closures. Gross margin is projected to be in the range of 39% to 40%, while SG&A is expected to be approximately $76 million, including final strategic expenses. EBITDA for Q4 is forecasted to be in the range of $5 million to $7 million.
Product Segments and Performance
Citi Trends operates three main product segments:
1. Apparel: This segment includes the Ladies, Kids, and Mens categories, which together account for the majority of Citi Trends' net sales. In the third quarter of fiscal 2024, the Ladies category represented 27% of net sales, the Kids category 24%, and the Mens category 17%. The apparel products are designed to provide high-quality, trend-right merchandise at everyday low prices.
2. Accessories & Beauty: This segment represented 16% of net sales in the third quarter of 2024. The accessories and beauty offerings complement the apparel assortment and allow Citi Trends to provide a comprehensive selection of lifestyle products.
3. Home & Lifestyle: Accounting for 10% of net sales in Q3 2024, this category features a variety of home decor, bed and bath, and other lifestyle products.
Liquidity and Financial Position
As of the end of the third quarter of fiscal 2024, Citi Trends had $38.87 million in cash and cash equivalents. The company's debt-to-equity ratio stands at 0, indicating a strong balance sheet with no long-term debt. Citi Trends also maintains a $75 million revolving credit facility, of which $0 was drawn as of Q3 2024, with $1.4 million in outstanding letters of credit under the facility.
The company's current ratio was 1.15 and quick ratio was 0.35 as of the end of Q3 2024, indicating adequate short-term liquidity. Citi Trends expects to end fiscal 2024 with approximately 590 stores and $60 million to $65 million in cash, further strengthening its financial position.
For the fiscal year 2024, Citi Trends reported annual revenue of $747.94 million, with an annual net loss of $11.98 million. The company's annual operating cash flow was -$9.58 million, and annual free cash flow was -$24.45 million, reflecting the challenges faced during the year and the investments made in the turnaround strategy.
Risks and Challenges
While Citi Trends' turnaround efforts are showing promising results, the company still faces several risks and challenges that could impact its future performance:
1. Macroeconomic Conditions: The persistence of inflationary pressures, rising interest rates, and potential recessionary fears could continue to weigh on consumer spending, particularly among the company's core low-income customer base.
2. Competition and Market Dynamics: Citi Trends operates in a highly competitive retail landscape, with discount and off-price retailers vying for the same value-conscious consumers. The company's ability to differentiate itself and maintain its competitive edge will be crucial.
3. Supply Chain and Inventory Management: Disruptions in the global supply chain and the company's ability to effectively manage its inventory levels could impact product availability and margins.
4. Execution Risk: The successful execution of Citi Trends' turnaround strategy will depend on the company's ability to effectively implement operational improvements, enhance the customer experience, and maintain disciplined cost control.
Conclusion
Citi Trends is in the midst of a strategic turnaround, leveraging its focus on the core African American customer, enhanced product value proposition, and improved operational efficiency to drive a return to profitable growth. The company's updated guidance and improved financial outlook for the second half of fiscal 2024 suggest that these efforts are beginning to yield positive results. While Citi Trends faces ongoing macroeconomic and competitive challenges, the early progress in its turnaround initiatives is encouraging. With a strong balance sheet, no long-term debt, and a clear strategic direction, Citi Trends is positioning itself to capitalize on opportunities in the value retail sector and create long-term shareholder value. Investors will be closely watching the company's continued progress in the quarters ahead as it works to solidify its market position and return to sustained profitability.