CTRN: NASDAQ

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

CTRN: NASDAQ

Citi Trends is a value-priced retailer focused on fashion apparel, accessories, and home goods. [1] The company’s offerings are designed to appeal to the fashion preferences of value-conscious consumers.[2]

Investment Thesis

CTRN brought in new management which we believe should help store unit economics, planning, merchandising, and buying for the retailer. In our view, the company has underinvested in growth, and should begin to be focused more on growing store count, and technology. Finally, we believe the company’s strategy to fix top line growth and increase profitability closer to peers is achievable. We believe the company is underfollowed, and should generate strong free cash flow even with their new focus on growth.

Confirmation through Research

The company brought in a new CEO from Five Below in March 2020, [3] as well as a new CMO (chief merchandising officer) who spend 20 years with TJX.[4] Both Five Below and TJX have industry leading store economics and merchandising.[5] We believe the expertise they bring from these companies will help turn around the store unit economics and merchandising. The company has focused on the balance sheet over growth, leading to net cash of over $100 million. [6] CTRN has come out with a new plan focused on growing units at 30 to 40 a year, and remodeling 50 units a year.[7] We believe this; along with store-enhancements made by new management should lead to more consistent low single digits growth.[8] CTRN has operating margins far below peers such as TJX, ROSS, and BURL.[9] However, with the experience of the new management they should be able to bring margins closer to that of their peers. CTRN should continue to generate strong free cash flow, as new units only cost $400,000 to make, and remodeling is in our guess $20 to $30 million a year in cost.[10] The company is underfollowed, with no analyst coverage but we believe additional coverage could lead to a higher valuation.

Variant Perception

In our opinion, CTRN is currently undervalued, selling at a deep discount on EBITDA and P/E to peers such as TJX, ROSS, and BURL. We believe the company’s new management will lead to store growth, better top line, and margin expansion. Finally, we believe the multiples the company sells for should begin to go up closer to peer levels as the company gets sell side coverage, and as the company begins to have consistent execution in top line growth, as well as margin expansion.