The Secrets to Inner-City Success

Retailer Citi Trends has succeeded in the kind of urban markets that have frustrated mainstream clothing stores

The locations would send many mainstream retailers recoiling in horror: sites on a low-rent shopping strip, close to crowded and noisy bus stops, next to a pawn shop and check-cashing store. They're definitely not the kind of locales to attract the free-spending teens and upscale boomers many retailers covet.

They are, however, the kind of locations that, for one sharply focused fashion retailer, help generate sales that make struggling companies like Gap (GPS), Sears (SHLD), and Pacific Sunwear (PSUN) green with envy. And this chain does so not just by trumpeting discount prices but by providing a low-income, 70% African American clientele with popular brands in stores that have an ambience more like a specialty store than a sterile, off-price retailer.

Citi Trends (CTRN) is unique in the retail world. Until the chain rolled out in 1999, "there hadn't been an apparel [chain] selling specifically to this ethnic customer," says Shaun Smolarz, analyst at Sidoti & Co. At a time when many larger companies, from Wal-Mart Stores (WMT) to Whole Foods Market (WFMI), are eyeing stores in poorer areas, the store's success suggests that lower-middle-class consumers respond to more than just cut-rate prices.

A Specialty Retail Leader

In 2005, the 260-store chain's strategy of catering to customers with annual household incomes of just $20,000 to $40,000 led to a 16.7% rise in sales at stores open at least a year. The rate for specialty retailers as a whole was 2%. In 2005, Citi Trends' net income grew 96% to $14.2 million, as sales increased 42.5%, to $289.8 million. That performance was largely fueled by Hurricane Katrina, which caused clothes buying to spike in the Southeast, where most of Citi Trends' stores are located.

While 2005 was a standout year for Citi Trends, it wasn't a blip. For the five years ended 2005, the chain's compounded annual growth in net income was a hefty 63.9%. Since Citi Trends went public in May, 2005, at $15.70 a share, its investors have experienced a thrill ride. The stock rocketed up to $56.45 this past May but drifted down to about $30 on Aug. 22. Shares have recovered since then and have risen 20% to about $38 since Aug. 31, when the chain announced an August same-store sales increase of 14%, exceeding almost all other specialty retailers.

Citi Trends is the brainchild of New York private-equity firm Hampshire Equity Partners. In 1999, Hampshire purchased 85 Allied Fashions for Less stores with an eye toward transforming the bland seller of moderately priced mainstream apparel into an edgy specialty store for urban African American shoppers. Stores play hip-hop music (sanitized versions with four-letter words deleted) over the sound system. The music is "part of the atmosphere," says Chief Executive R. Edward Anderson. "It's consistent with the environment we try to deliver." Citi Trends does almost no advertising, but stores occasionally cross-market with local urban-music stations, inviting local DJs to broadcast from the store.

Select Merchandise

The hip-hop theme carries over into the clothes. Current hits include Phat Farm and Baby Phat, created by hip-hop impresario Russell Simmons, and Apple Bottoms, promoted by rapper Nelly. Typical of current offerings for women are a $30 strapless top and $14.50 Bermuda shorts from popular brand Rocawear. National brands like those make up 40% of Citi Trends' merchandise selection.

That's a higher percentage than at competitors, including the A.J. Wright unit of The TJX Cos. (TJX) and Ross Stores (ROST), which offer more private-label and regional-brand merchandise.Citi Trends organizes goods by brand and style, instead of by price and size as is typical of other urban stores. "They present merchandise well instead of emphasizing price, price, and price," says Dorothy Lakner, analyst at CIBC World Markets.

While many Citi Trends customers don't own cars and aren't directly squeezed by high retail fuel prices, they may cut back on clothing purchases as other costs rise. And the company is stretching to sustain its hurricane-fueled momentum. Post-Katrina, it logged monthly same-store sales increases of as much as 37%. Against those year-ago sales levels, Citi Trends on Aug. 16 lowered its earnings estimates for fiscal 2006 by about 4.1%. But analysts estimate that Citi Trends, which plans to open 40 to 43 new stores this year, has room to operate as many as 800 locations. With strategies that attract even the hippest shoppers, "it has a very loyal customer," says Smolarz.

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