AI Enabled Expansion Into Neighborhood Stores Will Drive Long Term Upside

Catalysts

About Citi Trends

Citi Trends is a value-focused off price specialty retailer serving African American families through neighborhood based stores offering trend right apparel, footwear and home goods.

What are the underlying business or industry changes driving this perspective?

• Expansion of neighborhood based stores in proven demographic markets, with plans to reach roughly 650 locations by 2027, is expected to build on recent double digit traffic and support revenue growth and higher EBITDA.
• Growing focus on culturally relevant assortments for African American trendsetting consumers and expansion of young Men's, plus size and family footwear offerings are likely to support share gains, lifting comparable sales and gross profit dollars.
• Rapid build out of extreme value branded deals from a low single digit mix toward a targeted 10% of sales can attract new customers and increase basket size while supporting merchandise margins and the overall gross margin rate.
• Ongoing rollout of AI enabled allocation, planning and shrink mitigation tools, combined with supply chain speed improvements, is intended to enhance inventory turns and reduce loss, supporting gross margin expansion and net margin improvement.
• A new CRM and loyalty platform launching in 2026, designed to create an Insider's Club around early access to deals and digital conveniences, is intended to deepen customer engagement and frequency, supporting top line growth and earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Citi Trends's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.0% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $23.1 million (and earnings per share of $2.91) by about December 2028, up from $-16.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $27.5 million in earnings, and the most bearish expecting $16.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from -21.8x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 4.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Citi Trends is concentrating heavily on the African American customer and neighborhood locations, which is a key advantage today but could become a vulnerability if demographic shifts, gentrification or competitive copycats erode that local dominance over time. This could pressure long term traffic growth and revenue.
• The long range plan relies on sustained high single digit to double digit comparable store sales growth and rapid store expansion to roughly 650 locations by 2027. Any cyclical downturn in low to mid income consumer spending or prolonged pressure on discretionary apparel demand could derail the sales trajectory and limit operating leverage, weighing on EBITDA growth and net margins.
• The strategy depends on robust off price deal flow and increasing extreme value branded product from a low single digit mix toward 10% of sales. If brand owners tighten supply to discounters or macro disruptions ease and reduce closeout availability, the company may face higher product costs or weaker branded assortments, which could constrain gross margin expansion and earnings.
• Plans to reduce shrink through AI enabled cameras, upgraded loss prevention talent and process changes assume measurable savings. If organized retail crime or theft trends worsen faster than mitigation efforts scale, shrink could remain elevated or rise, limiting gross margin improvement and keeping EBITDA below targets.
• Execution risk around multiple technology initiatives, including AI based allocation and planning tools and the new CRM and loyalty platform, is significant. Delays, cost overruns or poor customer adoption could mean the expected gains in inventory turns, SG&A leverage and customer frequency fail to materialize, reducing operating efficiency and long term earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $55.5 for Citi Trends based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $959.5 million, earnings will come to $23.1 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $44.87, the analyst price target of $55.5 is 19.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.