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Published: July 19, 2010
When Walmart (NYSE: WMT) first
started trading on the New York stock exchange in 1972,
investors were reasonably impressed with the company's slow and
steady growth trajectory. But that was a lost decade of stocks,
and the Arkansas-based retailer mostly flew under the radar. Ten
years later, though, investors knew that they were looking at a
growth stock with a very long runway. Shares rose nearly +1000%
from 1983 to 1993, by which time the company had become a
household name. Sales didn't grow that fast, but a steady
expansion in the
price-to-earnings ratio (P/E) gave the stock its bright
sheen.
While in search of the next +1000% retail gainer, investors
should also seek out stocks that are somewhere along the
continuum of that growth trajectory. They may already be
somewhat established, but they also have ample room to further
flesh out their retail concept. One of my favorite potential
high-growth retailers is Citi Trends (Nasdaq: CTRN),
which sells urban-focused apparel and footwear.
Citi Trends' roots go back to Savannah in 1946. And for five
decades, it was a fairly slow-growing enterprise. As recently as
2002, annual sales never topped $100 million. But since then,
management has sought to put the company on a faster path to
growth, opening new stores at a measured clip and adjusting the
sales mix to boost revenues. Sales went on to grow at least +20%
in every year through 2007. But in the last three years, a
slowing economy pushed annual sales growth down into the +10% to
+15% range. Not bad, but enough to push out the high-growth
crowd of investors, which sent shares down from nearly $60 in
2006 to below $10 during the financial crisis.
Since then, shares have rebounded, but still trade for about
half of that 2006 peak. More important, sales growth has begun
to re-accelerate. In the fiscal first quarter ended April, sales
rose an impressive +27%, thanks to a combination of 19 new
stores and a +9.6% gain in stores that had been opened for at
least a year. That performance came at a time when consumer
spending remains very depressed. Just ask Walmart, whose
quarterly same-store sales figures have been trending just above
or below the 0% mark.
Results in the next few quarters should range between decent and
spectacular. They'll only be decent if same-store sales cool,
offset by the fact that the company's retail footprint is
expanding by +15% this year. They'll be spectacular if same
store sales stay above 5% for the remainder of the current
fiscal year. Right now, analysts are expecting Citi Trends
to boost sales at least +20% in the current quarter that ends in
a few weeks, and per-share profits should be handily above last
year's break-even results.
Then again, analysts have underestimated
the company's earnings strength for a number of quarters. That's
because Citi Trends, with more than 400 stores, has hit the
retail sweet spot. Sales have reached a
critical mass whereby the company's merchandisers can secure
better deals, bringing in more gross profits for the company.
Gross margins have risen from 36.3% in fiscal (January) 2008 to
38.6% in fiscal 2010. In the most recent quarter, they were just
shy of 40%. Rising margins are a big factor behind management's
prediction that per-share profits can hit $1.80 this year, an
impressive +32% above last year's results. In contrast,
Walmart's profits are expected to rise around +10% both this
year and next.
Future years may not be as robust, but you can get a sense of
where the numbers are headed. Modest improvements in same-store
sales, coupled with a steady expansion in the number of stores,
yielding better purchasing power, should keep the
bottom line growing at a +15% or even +20% clip. Meanwhile
shares are trading for less than 15 times next year's profits.
Action to Take --> Once
investors begin to appreciate the recurring growth built into
this
business model, shares should start to trade at or above the
earnings growth rate. And once the consumer picks up steam,
investors will really warm to retail stocks like this. Could a
trip back to $60 be in the cards in a few years for this name?
-- David Sterman
Staff Writer
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