Earlier this month, in the New Stock Ideas discussion board that's part of the Motley Fool Rule Breakers newsletter service, community member tim1198 asked whether Citi Trends (NASDAQ:CTRN) is a worthy growth stock. He pointed to how the urban retailer had scored comps of roughly 25% in recent months.
I'll admit that I wasn't all that familiar with Citi Trends at the time. The publicly traded specialty apparel retailers I knew of were either hitting the cover off the ball in same-store sales, like Urban Outfitters (NASDAQ:URBN), or had stumbled recently on that front, like American Eagle (NASDAQ:AEOS) and Aeropostale (NYSE:ARO). Citi Trends had just gone public in May, so it really wasn't on my radar.
Had Tim gotten Citi Trends' comps confused with something else? It does happen. Sales growth can be pretty brisk for a fast-growing concept, but it's hard to achieve sales at the individual store level in the 25% range.
But no, Tim was right. Whatever Citi Trends was doing to keep its patrons coming back was clearly working. Every month since the company's springtime IPO has been a welcome treat.
| Month | Comps |
|---|---|
| May 2005 | 11.1% |
| June 2005 | 14.5% |
| July 2005 | 8.5% |
| August 2005 | 20.3% |
| September 2005 | 19.8% |
| October 2005 | 37.0% |
Citi Trends was the Allied department store chain for decades, until it stabilized about five years ago into its current form following a pair of ownership changes and format tweaks. There are a few concepts out there -- like Ross Stores (NASDAQ:ROST) -- that specialize in Citi Trends' model of providing trendy fashions at marked down prices. However, Citi Trends takes specialty retailing to a different level by targeting its efforts ethnically. Its stores are located in metropolitan neighborhoods that are predominantly African-American. Discounting hip-hop fashion brands like Rocawear and Russell Simmons' Phat Farm has worked well for Citi Trends -- so well. in fact, that its stock shot up nearly 10% last night after the company announced stellar third-quarter results.
The company earned $0.18 a share for the period, three times more than the $0.06 that Wall Street was expecting. When you're a new company, with just six analysts publicly tracking your performance, these kinds of refreshing disparities do happen.
Citi Trends now sees itself earning between $1.00 and $1.03 per share this year and $1.12 to $1.17 a share come 2006 (excluding the expensing of stock options). The retailer is basing next year's profit targets on same-store sales gains of just 2% to 3%. That means that investors spoiled by the past few quarters of stellar comps will be in for a softer landing or that the company is lowballing its true potential. Either way, Citi Trends has earned my attention in a hurry. This kind of favorable momentum as it heads into the crucial holiday selling season is huge.
My response to Tim at the time was that the numbers looked good but that I was concerned about the proliferation of cheap-chic apparel retailers. I may have underestimated Citi Trends once, but it probably won't happen again.
If you want access to the hundreds of quality stock ideas that have been generated in Rule Breakers' New Stock Ideas board, time is ticking. Take us up on atrial subscriptionthat will grant you free access to the boards for the next 30 days.
Longtime Fool contributor Rick Munarriz wants to know why he won't be able to enjoy his Thanksgiving leftovers in peace as he gets barraged by monster retailer sales. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
