Craig-Hallum adjusted its outlook for Citi Trends (NASDAQ:CTRN), slashing the retailer's price target to $14 from the previous $25, while retaining a Hold rating on the stock. The firm's decision followed Citi Trends' second-quarter performance, which fell short of expectations, with both sales and same-store sales (SSS) not meeting targets.
The quarter also saw a significant miss on Adjusted EBITDA, primarily due to gross margin (GM) pressures from inventory markdowns and increased inventory shrinkage.
The company has taken a $9 million inventory write-down, which it deems essential for a strategic overhaul, as aging stock has become unsuitable for the current sales season. Management has recognized the need for a refreshed product assortment and improved price-to-value ratio to enhance same-store sales.
Despite efforts made earlier in the year to address inventory shrinkage, the problem persists, prompting further measures to stabilize it in the second half of 2024.
Citi Trends reported low single-digit growth in comparable sales for the third quarter to date, with customer traffic remaining positive. However, the company's performance has lagged behind that of its off-price retail peers for the past two years, with product assortment and pricing not aligning with consumer preferences.
The retailer's balance sheet remains robust, with no debt and an end-of-year cash position projected between $60 million and $70 million. Nonetheless, this forecast represents a roughly 45% reduction from initial expectations at the start of the year.
Craig-Hallum expressed heightened concern for the company's profitability, suggesting that fiscal year 2025 could see flat or negative EBITDA if sales levels do not improve. The firm reiterated its Hold rating but expressed caution with the lowered price target, reflecting the challenges faced by Citi Trends.
Citi Trends has been the focus of notable developments. DA Davidson has lowered the retailer's price target from $33 to $20 while maintaining a Buy rating, acknowledging the company's initiatives to revitalize its business under interim CEO Ken Seipel.
Despite a 10% drop in store sales and modest EBITDA margins, the firm points to Citi Trends' strong balance sheet and significant shareholder support as key factors that afford the company time to implement its recovery strategy.
Citi Trends reported a 1.7% increase in total sales for the second quarter of 2024, despite a comparable decrease in store sales. The company has also incurred $9.4 million in markdowns due to an inventory reset and $4 million in unexpected shrink expenses.
However, with no debt and plans to improve shrink management, the company anticipates positive EBITDA in the second half of the fiscal year.
The company's efforts to refresh its product assortment and improve shrink management are expected to contribute to its future performance. Despite the challenges faced, Citi Trends is taking proactive steps to position itself for sustainable growth.
InvestingPro Insights
As Citi Trends (NASDAQ:CTRN) navigates through its current challenges, insights from InvestingPro can provide a clearer picture of the retailer's financial health and market position. Notably, Citi Trends operates with a significant debt burden and may have trouble making interest payments on its debt, as highlighted by InvestingPro Tips. This could be a contributing factor to the company's strategic overhaul efforts and inventory write-downs.
Examining real-time data, Citi Trends holds a market capitalization of $126.25 million, and with a negative P/E ratio over the last twelve months as of Q1 2023, the company's profitability concerns are evident. The retailer's revenue has slightly declined by 1.56% over the same period, which aligns with the underwhelming sales performance mentioned in the article. Despite these hurdles, Citi Trends has managed to maintain a gross profit margin of 38.58%, indicating some resilience in its operational efficiency.
Investors should also consider that the stock price has been volatile, with a significant 18.76% drop over the last month and a 35.97% decline over the last three months. The current trading price is near its 52-week low, which may signal a potential buying opportunity for value investors. However, with analysts not anticipating profitability this year and a forecast of a net income drop, caution is warranted. For those seeking more in-depth analysis, InvestingPro offers additional tips to help navigate the complexities of Citi Trends' financial landscape.
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