$CTRN's Perfectly Good Balance Sheet...

...does not necessarily translate into a company with a happening Income Statement.  Apple is the epitome of a company: reporting down and later blowing analysts out of the water, as in yesterday's quarterly report.  Citi Trends, while well positioned in a niche industry segment and targeting growth with 50+ new stores, seems to be at the other end of the spectrum.  I've run into this before: find a company with a fairly stellar balance sheet, and what seems to be a good business model, but then stumble into near term earnings misses.  This occurred ten years ago with a company now called Woodstock Financial Group (originally Raike Financial Group).  I still hold shares in the severely-underperforming member of the independent brokerage industry--perhaps they'll poke their head above water at some point this century.

Now it's happened again, but with a company that trades more than once a week, and in fact has decent daily volume: Citi Trends, an urban clothing store.  A stellar balance sheet--cash which has grown to $80M over the past 8 quarters, no debt--and a YoY improving income statement...but near term misses and new forecasts that point even lower is deep-sixing any recent investments in the company.  The following shows the dangers in buying calls in such a company... fortunately the calls have expiration dates far enough out that the value could come back (Nassim Taleb's warnings about such thought processes nag in my mind...).

-CTRN 111119 C17.5	CALL (CTRN) CITI TRENDS INC NOV 19 11 $17.5 (100 SHS)	30	$1.05	$0.05	$3,150.00	$150.00	-$3,000.00	-95.24%
-CTRN 111119 C20	CALL (CTRN) CITI TRENDS INC NOV 19 11 $20 (100 SHS)	90	$0.45	$0.45	$4,050.00	$4,050.00	$0.00	0.00%
-CTRN 120218 C17.5	CALL (CTRN) CITI TRENDS INC FEB 18 12 $17.5 (100 SHS)	25	$1.60	$0.35	$4,000.00	$875.00	-$3,125.00	-78.13%

The only reason to get out now is to retain some capital, and the only reason to stay in is to see how the August and November earnings reports for Citi Trends affects the pricing of the underlying and these calls.  Will the underlying price come back up enough to make these phenomenal investments?  Probably not (phenomenal in my mind is 300-500% return, which is attainable with call options), but probably will come back up to break even.  While fundamentally sound, the performance of this company could be something of a clarion call for investors to be wary of lower-income-targeted clothing store industry... while the run-up from 2009 to 2011 may have helped, the recent languid performance of the US economy is reflected here.

A note about sell or trading rules:  Taleb talks in "Fooled by Randomness" about the star traders who crash their accounts by hubristically shunning stop-losses and other sell rules, "knowing" that their chosen direction will win, and then it doesn't.  I've developed just two loss-limiting rules: I sell only when I have another direction to go in which needs funding, and I only buy and sell with limits; too often a retail investor gets caught up in making "market" buys or sells...with the likes of AAPL or CITI it's a no-brainer, but then the investor accidentally does that on weak volume, and gets an atrocious price.

..TS.

Citi Trends: A Great Idea Does Not Necessarily Lead to Orbital Growth

[guest post by TS]

I was traveling home yesterday from downtown Pittsburgh, taking a circuitous route through neighborhoods that allowed me bypass taking the eastbound highway, and saw a storefront I had not seen before, in a place that used to be part of a Builders Square storefront: Citi Trends.  I had no idea what Citi Trends was, just that something so seemingly incongruous (a new storefront in a has-been strip mall) had to be researched.  :-)

Upon reaching the castle, I fired up FireFox, tripped over to Yahoo! Finance, and found Citi Trends' symbol: CTRN.  Then, recent news, then their May 18th 1st Qtr '11 earnings report.  Then their profile.  This clothing & accessories retail company has been servicing America's African-American audience since 1946. Whoa!

After seeing that the companies retail target is African-American, that location of the store made total sense: the location of the shopping mall (Braddock Hills Shopping Center) is fairly close to Pittsburgh's Braddock & Braddock Hills neighborhoods: Braddock is a depressed area, site of USX' Edgar A. Thompson steel mill, and one of the recently renovated Carnegie Libraries.  Interested in this location, I went to Citi Trends' homepage to see where other stores are located.  Of the 460+ retail locations, Pittsburgh's two are in this location and in the City of Duquesne's Duquesne Plaza. Duquesne is even further depressed, having transitioned further from steel mills, to somewhat renovated "brown fields".

Back to that 1st Qtr earnings report:  the results appear to be somewhat underwhelming, especially given the host of other more rosy retail reports from around the nation (slowdown of the recovery notwithstanding).  Citi Trends reported a 4.3% increase in sales to $189M, but a decrease in earnings, YOY.  Perhaps one could suggest that while America's inner cities are spending more than a year ago, their spending is not quite  matching the increase further out in the 'burbs.

Because of this slow, steady increase in sales, CTRN sports a market cap that's roughly 1/2 of it's annual sales, and the company has $76M cash, with no long-term debt.  This healthy balance sheet leads Brian Pacampara of Fool.com to observe that "Citi Trends currently sports a cheapish price-to-book ratio of 1.1. That represents a clear discount to giant competitors Target (2.2), TJX (6.6), and Wal-Mart (2.9)".  While profits may be trending downward, this clear value play's revenues are ramping quite healthily year over year. Will you play along?

One interesting note: Citi Trends customers are enjoying the stores - check out this YouTube walkthrough. And a second customer's video (in three parts).

..TS.