Citi Trends: Trending Higher, With New Growth Strategy

Summary

Citi Trends is an undervalued specialty apparel retailer with a debt-free balance sheet and all-new leadership.

The market is discounting the earnings growth potential of new store openings, store remodels, more productive merchandising management, and new supply-chain efficiencies.

Citi Trends specializes in an underserved customer niche, with neighborhood stores as one-stop shops for African-American and Hispanic families.

We anticipate Citi Trends will pre-announce better-than-expected 2021 holiday sales, instill greater confidence with an updated multi-year growth plan, and reinstate its dividend.

We expect the stock to re-rate higher as these catalysts bear fruition, resulting in shares increasing by at least 37% to $107 over the next 12 months.

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Citi Trends ( CTRN ), a specialty apparel value-priced retailer, has compelling competitive advantages that its new leadership team is leveraging for substantial earnings growth. CTRN is a rare specialty retailer that serves an underserved niche, African American and Hispanic families. Investors underappreciate the significant earnings growth potential of this retailer’s turnaround strategies, while focusing instead on misperceived challenging comparisons for next year. New management is transforming operations to modernize merchandising strategies and logistics, with new processes and technology. With stronger profitability, CTRN has resumed its regional-to-national store expansion and launched a remodeling campaign for existing stores. With a debt-free balance sheet and at least high-teen EPS growth for the foreseeable future, CTRN shares are undervalued at less than 10x our F2022 EPS estimate. Our 12-month price target of $107, represents 37% upside (base case), while our bull case of $137 and bear case of $59 illustrate the asymmetric risk/reward profile. Company Overview

Citi Trends is a leading specialty value retailer catering primarily to African-American and Hispanic families and merchandising apparel, accessories, and home goods. This retailer operates 602 stores in 33 states. Data by YCharts New Management Leading Transformation

Citi Trends rebuilt its management team and embarked on a turnaround strategy, following a two-year activist shareholder campaign with Macellum Capital Management that resulted in new board leadership and the subsequent resignation of its chief executive officer in June 2019. Macellum had argued that long-tenured board members, ineffective management, merchandising miscues, and outdated IT systems led to years of underperformance.

Peter Sachse, one of the first directors to join after this campaign, was later named interim CEO and is currently executive chairman of the board. In our view, he has been instrumental in developing and implementing the turnaround strategy. Sachse is a 34-year veteran of Macy’s ( M ), having served in a variety of senior roles, including most recently as Chief Growth Officer after Chief Stores Officer, Chief Marketing Officer, and chairman and CEO of the macys.com division.

David Makuen became CEO in March 2020, having been recruited from Five Below ( FIVE ) where he had been Executive Vice President, Marketing & E-commerce. Given his 8 years at FIVE, we think Makuen was an up-and-coming leader in the industry, especially the value retail niche.

Pamela Edwards has served as CFO since January 2021. Her prior experience includes various CFO positions at L Brands during 15 years, including its Mast Global, Victoria’s Secret, and Express divisions. We think Edwards provides CTRN with solid financial management capabilities, given her blue-chip experience with major retail brands.

Lisa Powell, chief merchandising officer, joined CTRN in September 2019, soon after the activist campaign settled. Powell previously served in senior merchandising roles at other off-price apparel stores, including Century 21 Department Stores, Saks Off Fifth, and The TJX Companies ( TJX ). We think Powell brought merchandising management discipline and best practices to Citi Trends.

We believe that assessing management credibility is an underrated part of the investment research process by most investors. Therefore, we have chosen to highlight this much improved leadership team. Source: Citi Trends investor presentation (April 2021) Compelling Competitive Advantages

In addition to disciplined and credible leadership, we find core competitive advantages compelling for the Citi Trends concept. In our view, these competitive advantages provide the foundation for management to execute its growth strategy.

Similar to Shoe Carnival ( SCVL ), a retailer on which we recently wrote an extensive article titled ” A Cinderella Reopening Play With 25% Upside ,” Citi Trends serves an underserved customer base and benefits from strong loyalty. CTRN primarily serves African-American families and secondarily Hispanic families, which collectively comprise 84% of customers. The average household income for customers is $38,000, and 88% of customers have household incomes below $50,000. Further, 55% of customers are between 25 and 40 years-old.

Source: Citi Trends investor presentation (April 2021)

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