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Foolish Forecast: Citi Trends Downward

Urban apparelier Citi Trends (Nasdaq: CTRN  ) reports fiscal Q3 2007 earnings results just the other side of this weekend. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Eight analysts spot Citi Trends, with three giving it a buy rating and five more saying hold.
  • Revenues. On average, they're looking for 14% sales growth to $99.5 million.
  • Earnings. And yet, they expect the firm to post a $0.06-per-share loss.

What management says:
We called it. Three months ago in this column, I pointed out the danger posed to Citi Trends' profits by inventory growth that was outpacing sales growth nearly two to one. (Unsold inventory must ultimately be sold somehow -- often at a steep discount.) Just days later, the company reported its Q2 numbers and confirmed my fears. Fellow Fool Jeremy MacNealy described the carnage: "[T]he company put higher markdown rates to work and took an inventory write-off charge in the quarter," which combined to drop profits more than 50% year over year at Citi Trends.

You might think that the worst is now over, and perhaps it is. But perhaps it isn't. Jeremy observed that even after last quarter's price-slashing spree, inventories remained 40% higher year over year. And in Citi Trends' recent sales report, management warned of an "increase in clearance markdowns" that, combined with weaker-than-expected sales numbers, will probably result in the quarterly loss of $0.06 predicted above.

What management does:
Finally! A trend is forming at the company named for them. Unfortunately, it's not a good one. Lower sales prices mean lower profits on the sales they engender, and so we see that rolling gross, operating, and net margins are all headed downward. Citi Trends hasn't yet gone as low in this regard as, say, rival TJX (NYSE: TJX  ) . But neither is it measuring up to competitors like Urban Outfitters (Nasdaq: URBN  ) and Abercrombie & Fitch (NYSE: ANF  ) .

Margins

4/06

7/06

10/06

2/07

5/07

8/07

Gross

38.4%

38.4%

38.2%

38.3%

38.2%

38.0%

Operating

8.1%

7.9%

7.6%

7.8%

7.2%

6.6%

Net

5.6%

5.6%

5.4%

5.6%

5.1%

4.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Citi Trends fans will probably argue that the company is making the tough decisions necessary to face its inventory backlog head-on and work it down to ensure future profitability. I say the opposite.

Ordinarily, I don't hold much truck with "sequential" comparisons for the intensely seasonal and fashion-sensitive retail industry. But in this case, it may be instructive to note that between fiscal Q1 and fiscal Q2 this year, sales declined 9.2% -- but Citi Trends continued building inventory. Sequentially, inventories rose 10%. So, as aggressive as its price tag cutting may have been last quarter, it looks to me like even deeper cuts were needed. This month's sales news tells us that more cuts were in fact made during Q3, but what we'll really want to look at come Monday is the inventory news -- to learn if Citi Trends cut deep enough this time around.

What did we expect out of Citi Trends last quarter, and what did we get? Find out in:


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