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CITI TRENDS GIVES URBANITES WHAT DISCOUNTERS CAN’T: STYLE

By Maura K. Ammenheuser

Citi Trends has grown rich by outdiscounting discounters, and with the latest fashions, no less.

This Savannah, Ga.-based family apparel, accessories and home decor chain relies heavily on trendy fashion to keep shoppers coming back for more clothes, the mainstay of its business. But perhaps more important, Citi Trends caters to a population few major apparel chains court: black and ethnic shoppers in cities and densely populated suburbs.

Citi Trends’ sharp focus has helped revenues go from strong to skyrocketing. Sales in the first half of fiscal 2005 reached $123 million, a 35 percent increase over the $91.1 million of the year-ago period. Meanwhile, comps rose 9 percent, versus 2 percent for first-half 2004.

Net sales for August were $24.8 million, 49.2 percent higher than the $16.6 million for the comparable month a year ago. August comps were up 20.3 percent from the year-ago month, versus 6.7 percent in August of last year.

With 221 stores in the Southeast, the mid-Atlantic and Texas, Citi Trends carries such popular hip-hop-influenced brands as Rocawear (created by hip-hop performer Jay-Z), Apple Bottoms, Phat, Baby Phat and more, without the celebrity prices.

“You can get them at Macy’s, or you get them at Citi Trends at a 20 percent to 60 percent discount,” said Alina Matas, research director at Miami Beach, Fla.-based Terranova Corp., in a report she prepared for the company. Terranova does not have a Citi Trends in its shopping center portfolio but is clearly watching this retailer carefully.

Citi Trends’ prices are some 30 percent below Old Navy’s, says Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm.

Citi Trends typically occupies 10,000 square feet and operates in low-rent neighborhood centers, those typically charging about $8 per square foot, because “malls are too expensive,” said Davidowitz. “The kind of locations they have, they’re paying 15 percent of what they’d pay in the mall.”

Citi Trends’ financial reports note that the company also serves some middle-market areas. “A key part of their strategy is low cost of real estate and low cost of investment in their store,” Davidowitz said. Citi Trends typically spends about $110,000 to get a store ready, according to company reports. That is a mere fraction of the roughly $800,000 that Gap Inc. will put into a new Old Navy store, Davidowitz says.

Though Citi Trends will not be found sharing a center with, say, Bed Bath & Beyond, Davidowitz says, it would do well on an outparcel near a Wal-Mart Supercenter. The chain favors proximity to pharmacies and supermarkets.

Citi Trends’ neighbors might be ordinary, but its fashions are not. “I don’t know if it would work on Main and Main,” said Faith Hope Consolo, chairwoman of the retail leasing and sales division of New York City-based Prudential Douglas Elliman. She says Citi Trends reminds her of the apparel stores lining New York City’s 34th Street, for example.

The chain relies heavily upon national brands. Fashions marketed to affluent white youth are steering away from baggy “street” styles and toward more-tailored lines, à la J. Crew, but the former continues to sell well in ethnic urban markets. “There’ll always be the hip-hop world,” Consolo said. American Eagle, Old Navy and others try to “be all things to all people,” she said. “But each [ethnic] group wants their own fashion.”

Citi Trends is “totally focused like a laser beam” on price, Davidowitz said. “They are not trying to sell to everybody.” Citi Trends is increasing the proportion of brand-name fashion it carries, executives said in August.

“We are encouraged by this trend, as it likely points to Citi Trends as a destination for branded apparel,” writes Jeffrey Klinefelter, senior research analyst at Piper Jaffray, in a report on the retailer. He adds that this will drive market-share gains over the short term. Minneapolis-based Piper Jaffray handled Citi Trend’s IPO in May.

“The opportunity for Citi Trends is huge,” Terranova’s Matas says. “The urban-apparel market has been estimated at around $2 billion, and Citi Trends is the only specialty retailer speaking loudly to that market.”

Blacks as a whole will have about $853 billion in spending power by 2007, according to research quoted by Matas. That would account for 62 percent of all ethnic spending power in the U.S., she wrote in her report. Matas cites a University of Georgia study that predicts blacks’ spending power will grow by 170 percent between 1990 and 2017, compared with 112 percent for whites.

“Further, with the increasing popularity of hip-hop culture, this retailer could easily reach beyond its core market,” Matas says.

Retail and business experts cite Burlington Coat Factory, T.J. Maxx and Ross Stores as Citi Trends’ competitors. Certainly, T.J. Maxx and Citi Trends stores are similar in look and merchandising.

Framingham, Mass.-based TJX Cos., and Pleasanton, Calif.-based Ross Stores have divisions that, like Citi Trends, target low-income consumers.

The TJX division, called A.J. Wright, and DD’s Discounts, the Ross concept, are both aimed at households earning less than $40,000 a year. They offer prices 20 percent to 60 percent below those of even such discounters as Wal-Mart, and they operate 25,000-square-foot stores mostly in neighborhood centers. A.J. Wright operates 143 stores and expects to have 1,000 eventually. DD’s Discounts, too, plans to expand. Established last year, the chain has 19 stores.

The two are part of the “undermarket” or “deep-discount” category. Citi Trends can be considered part of the category thanks to its prices, but its fashionable clothing sets it apart; this is the rare retailer that does not fear Wal-Mart.

“Wal-Mart sells basic body covering,” said Davidowitz. Citi Trend customers may shop Wal-Mart for food, toiletries and other necessities, “but Wal-Mart can’t make ’em look cool.”

For sure, Macy’s carries some of the same brands that Citi Trends does, says Consolo. “Those department stores and big boxes are the only ones covering that market,” she said, referring to ethnic fashion generally and hip-hop styles specifically. But they do not do it at Citi Trends’ prices.

Citi Trends’ newest stores are faring about 10 percent better than the $1.2 million per unit in sales the company’s executives had expected, they said during the second-quarter conference call.

“They have exceeded what I had hoped for, based on the traffic it brings in,” said Charlie Carver, senior vice president of the Florida region for New York City-based New Plan Excel Realty Trust. New Plan operates Silver Hills Shopping Center, a 108,000-square-foot, grocery-anchored center in Orlando, Fla. Citi Trends opened a 9,100-square-foot store there in September 2003, much to the satisfaction of other tenants, such as a beauty shop that reports better business as a result.

To finance more growth, Citi Trends went public in February. The company opened 21 stores in the first half of the fiscal year, and says it expects to open 19 more by the year’s end.

Some observers say the chain could grow far larger. Klinefelter wrote that it could grow to at least 700 stores. Davidowitz sets the number at about 900, if the company sticks to low-price fashion for low-income customers. “They’re going to get into trouble if they try to move into the middle market,” he said.

In other words, Citi Trends should stick to the hood, whose fashions and customers made it rich in the first place. n

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