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Why Investors Should Avoid Citi Trends (CTRN) Stock for Now

Zacks Equity Research

Citi Trends, Inc. CTRN has been losing sheen of late. Further, the company carries a Zacks Rank #4 (Sell). Let’s explore why.

What’s Hurting the Stock?

Citi Trends had posted an average negative earnings surprise of 58% in the trailing four quarters. In fact, considering price-to-earnings (P/E) ratio, the company looks overvalued when compared with the industry. The stock has a trailing 12-month P/E ratio of 18.69, which is still below its median level of 20.30 and high level of 28.04 scaled in the past year. On the contrary, the trailing 12-month P/E ratio for the industry is 13.45.

Citi Trends, Inc. Price and Consensus

Citi Trends, Inc. Price and Consensus | Citi Trends, Inc. Quote

While the company reported better-than-expected top and bottom line results in the most recent quarter, we believe a delay in disbursement by the Internal Revenue Service is likely to hurt the company's tax refund related sales. This may in turn weigh on its first-quarter fiscal 2017 performance.

Owing to minimal tax refund distributions in the first 24 days of the first quarter, comparable store sales (comps) declined 40%. For the first quarter, as of Mar 9, 2017, comps decreased 7%.

We note that Citi Trends’ business is seasonal in nature and typically generates stronger sales during the first and fourth quarters. As a result, the company is exposed to significant risks if these seasons fail to deliver expected operating performance.

Additionally, risks of changing fashion trends, along with macroeconomic headwinds and stiff competition, are likely to weigh upon the company’s performance.

However, going forward, management expects to deliver positive comps in fiscal 2017 on the back of balanced assortment of basics, fashion basics and fashion. In addition, Citi Trends' strategies such as better utilization of floor area, improvisation of merchandise margins and efficient inventory management bode well.

The Zacks Consensus Estimate, which has been stable over the past seven days, is currently pegged at 61 cents and $1.07 for the first quarter and fiscal 2017, respectively. Further, Citi Trends has outperformed the Zacks categorized Retail – Apparel/Shoe industry in the past year. While the stock decreased 1.9%, the industry fell 28.5%.

Only time will tell if these strategic endeavors are likely to spark a turnaround in the company’s performance. Also, the stock boasts a VGM Score of ‘A,’ which boosts confidence.

Key Picks

Better-ranked stocks in the same industry include The Children's Place, Inc. PLCE, Kate Spade & Company KATE and Foot Locker, Inc. FL.

The Children's Place, with a long-term earnings growth rate of 8% has surged nearly 49.8% in the past six months. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kate Spade & Company, a Zacks Rank #1 stock, has jumped 59.8% in the past three months. Moreover, it has an impressive long-term earnings growth rate of 28.3%.

Foot Locker, which carries a Zacks Rank #2 (Buy) has increased 11.3% in the past one year. Further, it has a long-term earnings growth rate of 9.7%.

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Foot Locker, Inc. (FL): Free Stock Analysis Report
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