A Citi Trends storefront.

The battle for proxies — and shareholder votes — has begun in the Citi Trends Inc. activist fight.

Citi Trends has mailed out its blue proxy to shareholders urging them to vote for the company’s slate, a day after the firm announced an expansion of its capital return program and the sending out of its own white proxy by activist investor Macellum Capital Management. The annual shareholders’ meeting is scheduled for May 24, 2017. Macellum owns about a 3.9 percent stake in the specialty chain.

The retailer’s letter to shareholders by Citi Trends touched upon the company’s “successful turnaround against the backdrop of a challenging retail environment,” as well as the current initiatives that are being implemented to drive sustained growth and profitability. The letter also touted how Citi Trends has generated a “total stockholder return of 50.3 percent over the past five years, a period during which many of our small-cap, specialty retail peers experienced significant declines in financial restructurings.”

Citi Trends also said that as part of its expanded capital return program, the company expects to return about “$30 million to its stockholders over the next 12 months.” That program includes a 33.3 percent increase in its quarterly dividend to 8 cents from 6 cents; a new share repurchase program of up to $25 million; maintaining a minimum cash balance of $80 million and a promise to return excess cash to stockholders through additional dividends and share buybacks. Citi Trends also reminded shareholders that the expansion of the capital return program was the “next logical step” to the board’s proactive institution of a regular quarterly dividend and a $15 million repurchase program in 2015.

Activists sometimes like to take credit for some of the changes that a board initiates following discussions with the activist investor over a period of time. In the Citi Trends battle for proxies, Macellum only began acquiring the company’s stock in November, according to the retailer.

The company said in its letter that it offered different settlement offers to Macellum to avoid a proxy contest, but was rebuffed each time by the activist.

The company also reminded shareholders that the management team in 2012 began putting into place a turnaround plan to shift the retailer’s merchandising strategy due to the shift in consumer fashion preferences.

More specifically, Citi Trends said that urban apparel brands that grew to multimillion-dollar enterprises imploded as consumer tastes changed, and because these brands made up the core of the retailer’s offerings — nearly 50 percent of its merchandise — a strategic change was required. That change meant moving to off-price, private-label apparel, as well as broadening the merchandise categories to include accessories, footwear and home goods, the company said.

The retailer also spoke about its board’s corporate governance track record, and how all but one of the directors is “independent.” It also noted that the company is currently searching for a permanent chief executive officer to replace Jason Mazzola, who left earlier this year.

And as the battle for proxy votes escalated, so too did Citi Trends’ attack on Macellum. The retailer noted the track records of Macellum’s two nominees, and whether or not they had the sufficient experience compared with the incumbents that they are seeking to replace. The retailer emphasized that one nominee has been on the boards of firms that have filed for bankruptcy, while the other doesn’t have any public company board experience.

And Citi Trends cited a rationale that is common thinking from retailers that are the subject of an activist target: “Macellum’s proposed strategy for Citi Trends indicates an unsophisticated understanding of our business.”

Steven Balet, managing director and co-lead at FTI Consulting’s Activism and M&A Solutions practice, observed, “Apparel is hard for activists to succeed, and the results have not been great. For activist investors, the retail story on the surface can appear fairly simple. But digging down, it can be a fairly difficult industry to succeed in. There are a lot of macro and trend factors [in retail] that one doesn’t get in the industrial, tech or health-care sectors.”

For more on activism, see:

Shareholder Activism Expected to Pick Up in 2017

Dealing With Activists: Boards Now Think Listening Better Than Fighting

Activist Investors: Still the Big Bad Wolves

Think Tank: The Perils of Activism

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