Citi Trends' Markup

When I saw that Citi Trends' (Nasdaq: CTRN  ) stock was up more than 25% in today's trading, I admit, I expected a bit more from its fourth-quarter financial results. A 19% drop in fourth-quarter net income? I really didn't see that coming.

Citi Trends' fourth-quarter net income dropped to $8.4 million, or $0.59 per share (although last year's results contained an additional week). Total sales increased 6.2% to $134.6 million, with a same-store sales decrease of 1.1%. (The comps figure measures the 13 weeks ended Feb. 2, 2008, with the same 13 weeks last year.) Since inventory has been a red flag in the past, it's worthwhile to note that it increased by 12.4%, and while that's an improvement, it still outpaces its sales increase.

Investors' jubilation reflects that, even with the dip in profit, Citi Trends still beat analysts' expectations. In addition, the retailer said it expects to earn $1.10 to $1.15 per share in 2008, with a 2% to 3% increase in same-store sales. Although that is an improvement over this past year -- after all, Citi Trends' 2007 net income dropped 34% to $14.2 million, or $1.00 per share -- it's still playing catch-up, seeing how it earned $1.51 per share in 2006.

Citi Trends is an admittedly interesting retailer, placing its discount-oriented stores in neighborhoods where residents aren't exactly flush with cash (in both urban and rural areas), and competing with rivals like Ross Stores (Nasdaq: ROST  ) , TJX (NYSE: TJX  ) , and Retail Ventures' (NYSE: RVI  ) Value City. 

However, I'm not convinced that the stock's surge today is warranted. I mean, for goodness' sake, it now sports a trailing P/E of 18.8! This company's had a rough time lately, and it may face more challenges in the current economic environment. Plus, there are plenty of retailers trading at far more reasonable multiples -- how about American Eagle Outfitters (NYSE: AEO  ) , trading at a measly 10 times trailing earnings?

I'm generally a fan of discount retailers like Costco (Nasdaq: COST  ) , especially now that consumers are pinched. However, I suspect that Citi Trends lacks the same exposure to varying income demographics, given its stores' locations. Plus, our current economic hardships may leave Citi Trends' customers particularly short on cash these days.

Sure, it's always nice when a quarter or an outlook is "better than expected," but that's not good enough to command this kind of premium. I believe Fools interested in this stock should wait for a much better price.  

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