Urban apparelier Citi Trends (NASDAQ:CTRN) reports fiscal second-quarter 2007 earnings results Wednesday afternoon. 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? Seven analysts spot Citi Trends, with four giving it a buy rating and three more saying hold. The Motley Fool CAPS community isn't quite as bullish as Wall Street, offering the company just two out of five stars.
  • Revenue. On average, they're looking for 27% sales growth to $96.8 million.
  • Earnings. Profits, however, are predicted to fall 44% to $0.05 per share, which is the upper end of management's guidance.

What management says:
Like every other apparelier from Abercrombie (NYSE:ANF) to Zumiez (NASDAQ:ZUMZ), Citi Trends reported its sales results in early August. Recently, peers like American Eagle (NYSE:AEO) and Aeropostale (NYSE:ARO) have suffered declining comps. However, the company managed to report a 3.4% increase in same-store sales, despite the weakening retail market. Citi Trends declined to play Wall Street's month-by-month sales game, instead providing only detailed numbers on its quarterly results (for the record, we're cool with that).

Specifically, Citi Trends advised that total sales were up 27% to $96.8 million -- precisely what analysts parroted! (Er, I mean, "predicted.") Profits-wise, Citi Trends warned that it earned a "lower gross margin and higher expenses than expected." As a result, we're now told to expect per-share profits of $0.02 to $0.05 on Wednesday.

What management does:
Belying the company's name, no particular long-term trend in margins jumps out at us here. Gross margins are holding pretty steady, wobbling just 10 basis points up or down over the last 18 months. Operating and net margins, in contrast, have been far more volatile.

Margin

1/06

4/06

7/06

10/06

2/07

5/07

Gross

38.3%

38.4%

38.4%

38.2%

38.3%

38.2%

Operating

7.3%

8.0%

7.9%

7.5%

7.9%

7.3%

Net

4.9%

5.6%

5.6%

5.4%

5.6%

5.1%
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:
Most recently, though, we've seen operating costs run slightly ahead of revenue growth at Citi Trends. While cost of goods sold tracks sales at 24% average growth over the last couple of quarters, selling, general, and administrative expenses are trending higher at 29%.

Where this growth story really begins to break down, however, is not on the income statement, but on the balance sheet. There we see that even as sales grow in the mid-20s, inventory is outpacing that growth -- up 41% year over year over the last two quarters. Surprisingly, to date, this buildup of unsold merchandise has had little discernible effect on either gross margins or free cash flow at Citi Trends. But if the firm doesn't manage to shrink the disparity, I'd expect to begin seeing such effects soon.

This isn't the first time we've noticed the pile of inventory quietly growing in the corner. Read more about this disturbing trend in:

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Fool contributor Rich Smith does not own shares of any company named above. Disclosure is always in fashion at The Motley Fool.