Fashion focus on rap-inspired urban fashion

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INVESTOR'S BUSINESS

Plenty of retailers sell urban apparel. But not many of them are like Citi Trends, which puts almost all of its fashion focus on rap-inspired urban fashion for the entire family.

And it targets the type of customer that started the whole trend — African-Americans.

About half of Citi Trends'  fashion mix consists of brand name hip-hop influenced fashion labels such as RocaWear, Phat Farm, Baby Phat and Sean Jean.

What's more, they're at prices 20% to 60% below retail. Stores also carry private-label merchandise in the same genre.

"It's very differentiated, and that's very important in retail," said Patrick McKeever, an analyst with Avondale Partners.

But it's also part of an urban fashion boom that's becoming more mainstream. Citi Trends positions itself as a value-priced family chain. Women's apparel makes up 40% of sales, followed by kids at 25% and men's at 22%. Accessories and home decor make up the rest.

Niche retailers are among the fastest growing areas of retail, and urban fashion is one of the fastest growing niches in niche retail.

"The customer feels more attachment to the (niche) retailer than some of the bigger box retailers," said Shaun Smolarz, an analyst with Sidoti & Co.

It shows. Citi Trends' same-store sales often show double-digit growth, as does profit. Total sales have grown nearly 40% annually over the last two years.

The company can offer deep discounts by buying in season rather than ahead of or early in the season, as do department or specialty stores. So it can wrangle discounts on manufacturer overruns or canceled orders.

While it competes on the value front with discount chains such as Wal-Mart, (WMT) TJX Cos. (TJX) and Ross Stores, (ROST) it has little direct and like-kind competition.

"They have the feel of a mall-based specialty store," McKeever said of the 9,000-square-foot carpeted stores. Music pulses through the aisles filled with racks of clothing.

Chain stores' nearest like-kind rivals come from TJX's A.J. Wright concept and Ross' dd's Discounts concept. But those stores are mostly in different markets, and TJX has been closing some A.J. Wright stores.

Mostly In The Southeast

Citi Trends, which boasts 270 stores in 16 states, is boosting its unit count at 20% a year. Stores are mostly in the Southeast. Its top markets are in North Carolina, South Carolina and Georgia.

It's been branching out into adjoining states, such as Texas, Ohio and Maryland. And it plans to move into northern urban markets such as Chicago and Detroit next year.

Stores take in $1.3 million a year on average. New stores typically return 100% of opening-cost investments in the first year.

Management keeps opening costs low — about $300,000 — by picking "recycled" storefronts in second or third-tier locations rather than prime sites.

"They fund store growth with internally generated cash flow, which is very unusual for a company in this early stage of its growth," Mc-Keever said. At the end of October, Citi Trends had nearly $56 million in cash and short-term securities.

Analysts expected same-store sales to drop in late summer and fall from last year's high levels.

Store sales soared last year during those months as customers in hurricane-ravaged neighborhoods sought to replenish lost or waterlogged wardrobes.

In October 2005, for example, same-store sales leaped 37% over the year before.

Fall In Sales

Same-store sales did fall in October from 2005's high level, but the 4% drop wasn't as much as analysts expected, and the stock rose 17% after the announcement.

For the third fiscal quarter ended Oct. 28, same-store sales rose 6.2% against a 25% rise in the same quarter last year. In November, same-store sales rose 1.8% over a 2005 November that saw a 26% uptick.

Third-quarter earnings rose 11% to 20 cents a share. Analysts polled by First Call estimate earnings for the full fiscal year ending in January will increase 32% to $1.47 a share. They see earnings going up 20% next year.

"Citi Trends remains among the most compelling growth stories in retail," wrote Elizabeth Montgomery in a recent note for Cowen & Co.

While the concept is hip, it's another story behind the scenes.

Citi Trends' predecessor company started out selling women's hosiery in 1946 and evolved into a chain of family apparel stores, Allied Department Stores.

Seasoned Veteran

In 1999, private equity firm Hampshire Equity Partners of New York bought the floundering company and began repositioning it for growth. The store count doubled from 2000 to 2005.

Seasoned retail executive Ed Anderson, who declined to comment, came aboard as chief executive in 2001. Anderson previously worked as the chief financial officer at Variety Wholesalers and as CEO of Rose's Stores.

"There's not an African-American at the top, but they do have African-Americans in management positions and African-American buyers," McKeever said. "They're in touch with what's going on in the African-American community and trends unique to blacks."

Hampshire Equity still owns nearly half the outstanding shares. The firm and principal partner Gregory Flynn made tens of millions from stock sales since Citi Trends went public in May 2005.

Earlier this year Hampshire Equity said it would sell all or part of its remaining holdings, but it's unclear when that will occur. Flynn, who stepped down as Citi Trends' chairman in May, did not return calls.

Hampshire Equity's large stake has been an overhang on the stock, analysts say. "If they would sell, that would double the float and increase trading volume," Smolarz said.

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