What happened
Shares of retail clothier Citi Trends (NASDAQ: CTRN) plummeted in early trading Wednesday, and as of 12:45 p.m. ET remains down 17.8% after the company missed earnings badly this morning.
Analysts had predicted Citi Trends would earn $0.09 per share on nearly $200 million in sales in the second quarter of 2022, but in fact, Citi Trends lost money for the quarter -- $0.31 per share -- and its sales fell short at only $185 million.
So what
Sales for the second quarter plummeted 22% year over year, with same-store sales falling 24.9%. Gross profit margins on those sales contracted by 270 basis points, to just 38.1%. Perhaps most disappointing was the fact that earnings -- which were already expected to be down significantly from last year's $1.36-per-share quarterly profit -- didn't just fall but actually flipped from black to red ink with the $0.31 per share loss.
Recapping the results, CEO David Makuen in a statement admitted that the quarter was "challenging," and blamed "extraordinary pressure from widespread inflation" for decreased foot traffic in Citi Trends' stores, and decreased spending by those shoppers who did show up.
Now what
Warning, "it's difficult to predict when this slower demand cycle will abate," Makuen cut guidance for the rest of this year, saying that full-year sales could be as low as $783 million (analysts want to see $864 million), and gross margins probably won't improve much, either. (Makuen thinks the high-30% range to the low-40% range is likely.)
The good news is that Citi Trends could still earn a profit this year. With the CEO guesstimating that operating profits will be similar to the second half of 2019 -- $9.7 million, according to data from S&P Global Market Intelligence. This implies a second-half net profit of perhaps $8.3 million. Added to the $27.7 million in profit earned so far in the first half, that should work out to $36 million in profit for the year.
The bad news is that almost all of this profit still comes from just one event -- the $34.9 million gain on the first-quarter sale-and-leaseback of the company's Darlington, South Carolina, distribution center for $46 million. But for that sale, Citi Trends stock would be just as it looks right now: deeply unprofitable, not just for the quarter, but for the year as well.
That being the case, I can't recommend buying the stock.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
