Citi Trends' Gridlock

Citi Trends (Nasdaq: CTRN) is still stuck in gridlock, judging by this year's performance.

Third-quarter earnings weren't too inspiring. The company swung to a quarterly loss of $513,000, or $0.04 per share, compared to net income of $2.8 million, or $0.20 per share, this time last year.

Matching its recent performance, Citi Trends' total sales increased by a double-digit percentage, up 14.2% to $99.5 million. Same-store sales increased 1.9%, including a calendar shift this year. On a fiscal quarter basis, comps decreased 2.7%.

Inventories increased 26%, expanding faster than sales. That's been the crux of Citi Trends' problem this year, and while inventories' latest growth improves upon the 40%-plus buildups from earlier this year, the company still has work to do. Nobody wants to see more of the ever-increasing markdowns and lowered profitability that the company has thus far endured.

Citi Trends lowered its 2007 earnings guidance -- it now expects $0.91 to $0.96 per share. Shareholders are surely feeling nostalgic for the company's previous expected earnings of $1.73 to $1.77 per share.

Last May, I believed it was prudent to see whether Citi Trends' shares offered investors a better price over the course of the year. Indeed, the stock has dropped 63% over the last 12 months. Glance at a few metrics, and you could argue Citi Trends is looking pretty cheap, given its forward P/E of 11 and a PEG ratio of 0.71.

Of course, that assessment also requires confidence that Citi Trends can pull itself together after such a rough year -- and hold up despite powerful macroeconomic factors. Can this company effectively compete with discount retail rivals like Ross Stores (Nasdaq: ROST), TJX (NYSE: TJX), and Retail Ventures' (NYSE: RVI) Value City? Given the potential for a recession, and major pressures such as high heating and gas prices, will its lower-income customers put apparel lower on their list of priorities? These shoppers are not as resilient as Target's (NYSE: TGT) target demographic, after all.

And most importantly, will Citi Trends improve its inventory-management skills? Citi Trends certainly bears watching, but I'd like to see some more heartening signs before I truly consider this stock a buy.

Get the skinny on Citi Trends:

• Check out Rich Smith's Foolish Forecast for this quarter.
• Last quarter, inventory bogged down Citi Trends.
• Back in May, it didn't look trendy enough, either.