Citi Trends Restructuring: When the Going Gets Tough

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Georgia-based discount clothing chain Citi Trends (NAS: CTRN) announced restructuring measures last month to cut costs after the $10 million loss that it reported in the second quarter. The restructuring plans include job cuts and fewer new store openings. Let's look at what's going wrong for this clothing chain retailer.

Depressing figures
Overall sales experienced a meager increase over the past year. Comparable store sales plummeted 11.9%. The store sales declined largely due to a decrease in discretionary spending by U.S. consumers and a higher unemployment rate. Higher input costs heaped misery on the company's gross margin. Clearance markdowns, impairment expenses related to 21 underperforming stores, and selling general and administrative expenses related to the closing of a distribution center also contributed to the negative performance of the company.

Growth plans since last year's second quarter included the opening of 60 new stores. This led to an increase in expenses related to the setting up of new stores, distribution, and corporate costs. Operating expenses such as rent, utilities, and occupancy expenses, which were fixed in nature, also increased as a percentage of sales.

Restructuring measures
Opening fewer stores should bring historic capital expenditure rates and distribution costs and give the company more liquidity. However, I feel that apart from cutting costs, Citi might broaden its horizons and start focusing more heavily on deep-discount items. At this time of low consumer confidence, discretionary spending from the medium-income group is likely to decline. Citi's sales are highly subject to changes in employment and discretionary spending. With the prevailing economic uncertainties, one out of every three households can't afford discretionary spending: 34.5% of households have less than $7,000 to spend on entertainment, education, personal care, clothing, furniture, and more, and just over half have less than $10,000 to spend.

While sales have been mostly flat, Citi Trend's current inventory is at an all-time high at $122.3 million, an increase of 14% over the past year and 8% over last quarter. This is worrying for the company, as it increases the company's liabilities to its suppliers. While its current ratio is 2.1 times, its quick ratio has gone down to 0.6 times. This is largely affected by a reduction in near cash assets from this time last year. If the company wants to reduce inventories, it will likely have to absorb more clearance markdown, bringing in cash but also bringing down gross margins further. Investors will want to keep an eye on the final quarter, as increased foot traffic and sales make the holiday season the most important time of the year for Citi Trends.

The Foolish takeaway
Citi Trends has shown bottom-line growth. The company is currently going through rough waters and poses considerable threat to its investors. Restructuring measures might provide some immediate relief, but I don't think it'll be a silver bullet over the long term. I'm staying away from this stock. But if you'd like to automatically monitor the company's progress and stay up to speed on all the top news and analysis on Citi Trends, click here to add it to your stock Watchlist.

At the time this article was published Abantika Chatterjee doesn't own any shares of the companies mentioned above.The Motley Fool owns shares of Citi Trends. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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