Citi Trends: good quality, very profitable, large repurchases

Citi Trends (CTRN) (filings) is a "specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx families". The company operates about 600 stores in 33 states in the US.

Photo by Clout Africa on Unsplash

At 54.52 USD per share the company is one of the best 50 stocks in my international low EV/EBIT + quality list and one of the best 64% in my international low EV/EBIT list. After creating these lists the share price decreased much, to 43.66 USD today, Friday 11 February 2022. So, now it is even more attractive.

See the annual report over the year ending on 30 January 2021, the proxy/circular for the annual meeting and the recent quarterly report (30 October 2021).

This company has not paid out much dividend in the last 10 years. However, it has spent a lot of money on repurchases. During last 4 reported quarters it spent 124 million USD on repurchases. As a result the share count decreased with 16.2% between 16 November 2020 and 1 December 2021.

The balance sheet is much leveraged with Tangible Assets/Tangible Book above 4. Furthermore, the current ratio is low at 1.0. However, leverage is mostly operational. The company does not have any significant debts. Instead, almost 30% of the liabilities are operating lease liabilities, mostly non-current.

Share repurchases show a lot of confidence. Currently, the company expects about 57 million USD of net earnings over the year ending of 30 January 2022. With the current earnings and cash flows I do not think the company is financially distressed.

Governance

A search on the company name and keyword "fraud" did not reveal any relevant information.

One of the independent directors, Brian P. Carney, is already a director since 2007. Also, he has a busy daytime job as CFO of a grocery retailer. I wonder whether he is still independent enough to be the chairman of the audit committee. I also wonder whether he has enough time to spend on his directorship with Citi Trends.

Another director, Kenneth D. Seipel, probably also has a busy daytime job as CEO of another large company.

I count 7 directors including the CEO. I think it is a good thing to have a small board as is the case here.

Substantial shareholders: Victory Capital Management 8.1%, Dimensional Fund Advisors LP 5.3%, The Vanguard Group 6.0%. BlackRock, AllianceBernstein and Cowbird Capital might have stakes between 5 and 10% as well.

At the beginning of January 2022 director Jonathan Duskin sold most of his position as investment manager of Macellum Management LP. His fund still owns a couple of millions of USD in shares. Five other insiders also own one million USD in shares or more.

Related party transactions: For 2020 the company writes there is nothing that needs to be disclosed.

According to page 33 of the proxy document the company paid 3.7 million USD to the 2 CEO's the company had in 2020. That was almost entirely variable pay (red flag). The next highest paid officer was the Chief Merchandising Officer with 1.4 million USD in total, also mostly variable pay. For 3 other roles the company paid about 800-900k USD per role. Also for these 3 roles variable pay was more than 100% of base salaries. I do not like the huge variable pay and the big gap between the CEO compensation and compensation of the others.

My take

Very cheap American retail company based on EV/EBIT, P/FCF and EV/Revenue with multi-year metrics suggesting good earnings quality and/or asset allocation. I have not found any major governance issues. I do not like the volatile stock price. But I think this is a good stock for a small position.