Shares of fashion apparel retailer Citi Trends (CTRN +3.28%) tumbled 11.2% through 2:45 p.m. ET on Tuesday after the company reported a massive (and much larger than expected) loss for the third quarter this morning.
Heading into the quarter, analysts were already feeling pretty gloomy about the quarter, predicting Citi Trends would lose $0.17 per share (adjusted for one-time items) on $186 million in sales.
But things turned out much worse. Sales missed by only about 3.5%, coming in at $179.5 million. Citi Trends' loss, however, was a whopping $0.56 per share -- three times as bad as expected.
NASDAQ: CTRN
Key Data Points
Citi Trends sales and earnings
Sales for the quarter declined 6.7% year over year, and gross profit margins on those sales slid 170 basis points to 38.2%. Last year's operating profit reversed, leaving the company with a $6 million operating loss.
On profits, really the only good news is that the company's loss under generally accepted accounting principles (GAAP) was only $0.47 per share, a bit better than the adjusted loss that spooked Wall Street.
On the other hand, that GAAP loss was still a complete reversal from the profit of $3.02 per share that the company earned one year ago.
CEO David Makuen described the selling environment in clothing as "very challenging," and especially so for the company's "primarily low-income customer base." But he added that Citi Trends is still generating strong gross margins (even if a bit weaker than last year) while keeping its operating expenses flat.
What happens when declining sales meet flat margins
The problem is that if margins decline even slightly -- and operating costs even only hold flat, rather than declining in tandem with sales -- declining sales mean that profits decline more sharply -- or in Citi Trends' case, evaporate entirely.
I fear that this means the following: Management is now forecasting a mid-single-digit decline in sales through the end of this year. Gross margins are expected to remain in the upper 30s. Management hopes to keep earnings before interest, taxes, depreciation, and amortization (EBITDA) in positive territory.
But even so, when you consider that Citi Trends has now racked up losses of $1.89 per share year to date, the chances of meeting consensus forecasts for no more than a $0.72-per-share loss by year end seem slim.
My prediction: After missing earnings bigly today, Citi Trends is on course for an even bigger miss three months from now.
