We're adding CTRN to our Long Bias list. Stock has been on an absolute tear, but for good reason. The story here is very interesting and we think going to look better over the next 6-12 months. Company is led by a new CEO that started in March after nearly 10 years at Five Below. CTRN at a high level could be characterized as “urban off price”. It provides value offerings in apparel and home for the urban consumer. The majority of its customers are African American and Hispanic. This customer is low income with nearly 90% having household income of $50k or less and an average of $38k. This consumer is also generally of the Democratic party, which we think is a consumer segment likely to see a ramp in sentiment in the coming months and has already started to inflect (chart below).
Management at ICR laid out a 3 year target to include at least 100 new stores (MSD growth), 3% comps, 20%+ EBIT growth and 25%+ EPS growth. We think 2021 could look more like 20% Rev growth and 50%+ earnings growth. We see $3-$4 in NTM earnings power here (with very little stock buyback), given the longer term algorithm the company has laid out, no reason this shouldn’t trade at 25x-30x, and in this market why not higher? OLLI is at 35x the street, BURL at 40x, while CTRN arguably has much more long term margin upside. There is no sell side coverage, so we can’t even say how we compare to the street, but as the stock rises we will likely see more coverage coming driving interest and incremental bids for the stock. The company just announced holiday sales up 10%, and guided to low DD comps for 4Q (ending end of Jan). We suspect sales are ramping in January given stimulus checks hitting accounts/mailboxes, so we expect a 4Q beat. The company has easy compares in 1Q lapping down 43% sales during the pandemic. If we see enhanced stimulus in the coming months we could be looking at huge sales growth in 2021 as bigger checks mean big discretionary income changes for this consumer and our $3-$4 EPS may be too low.
We’d put fair value on this around $80-$90, upside to $120. If you like pairs we'd look at OLLI short side.
