Foolish Forecast: Citi Trends Spotting

Urban hipsters and stock market investors, unite! Tomorrow, Mr. Market's got a treat for you both, as Citi Trends (NASDAQ:CTRN) reports its Q1 2006 numbers. What's the clothier got up its sleeve? We lay out a few hints for you below.

What analysts say:

• Buy, sell, or waffle? Since we last checked in, in March, Citi Trends has lost one of its gaggle of analysts. It's now down to one buy rating and five holds.
• Revenues. Sales are expected to shoot up 32% for the quarter, to $83.8 million.
• Earnings. But profits are predicted to rise "only" 23%, to $0.37 per share.

What management says:
Here we have yet another company that doesn't file all of its press releases with the SEC. In the Fool's ongoing effort to make life easier for you, the investor, here's the address to bookmark for keeping abreast of company news; and here's the most important recent press release, on April and Q1 2006 sales results. (Citi Trends, like most retailers, releases its quarterly sales data a few days before the official earnings come out.)

According to the May press release, Citi Trends has already bested analyst estimates for this quarter's sales, which increased not 32%, but 44%, to $91.7 million. Part of those additional sales came from the chain's increased store count, but nearly half -- 21% -- came in the form of greater same-store sales (usually defined as sales increases posted by stores already in operation for a year or more.) Think that's good? Then you'll be amazed to hear that in April, the company's sales growth actually accelerated. Same-store sales grew 48% for the month, and total sales increased a staggering 75%. Give credit for the difference to a store base that continues to expand, with Citi Trends opening six new stores in April alone.

What management does:
Now we get to the strange part. Sales are going gangbusters, and over the last 18 months, the company has steadily grown its gross, operating, and net margins. So why, pray tell, are analysts expecting profits growth to lag sales growth?

One Fool says:
There are a handful of factors that interrelate with sales growth, causing profits to either rise or fall. Increase margins while increasing sales (as Citi Trends is doing) and your profits will grow faster than sales. However, that's absolute profits we're talking about. Things can turn out quite differently on a per-share basis if shares outstanding rise and the profits get divvied up among more shares.

In Citi Trends' case, the comparisons we're looking at today are between a post-May 2005-IPO diluted share count of 11 million, and a share count that, at last report, stood at 14.4 million. That amounts to 31% share dilution, and explains why profits per diluted share aren't rising nearly as fast as firmwide sales. Expect to see that effect moderate next quarter, as we begin to run apples-to-apples comparisons between post-IPO levels of share count. But be aware that "moderate" isn't the same thing as "disappear." Post-IPO, the share count has already risen 6% in less than a year. This is a number we'll want to keep an eye on going forward, to ensure that shareholders receive the full benefit of their company's explosive growth.

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Fool contributor Rich Smith does not own shares of any company named above.