Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
One)
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x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended August 2, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 000-51315
CITI
TRENDS, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
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52-2150697
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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104 Coleman Boulevard
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Savannah, Georgia
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31408
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(Address
of principal executive offices)
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(Zip
Code)
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Registrants
telephone number, including area code (
912)
236-1561
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
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Accelerated Filer
x
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Non-Accelerated Filer
o
(Do not check if a smaller reporting
company)
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Smaller Reporting Company
o
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
Indicate the number of
shares outstanding of each of the registrants classes of common stock, as of
the latest practicable date.
Class
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Outstanding at August 15, 2008
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Common
Stock, $.01 par value
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14,309,870
shares
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Table
of Contents
Item 1.
Financial Statements.
Citi Trends, Inc.
Condensed Balance Sheets
August 2, 2008 and February 2, 2008
(Unaudited)
(in thousands, except share data)
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August 2,
2008
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February 2,
2008
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Assets
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Current assets:
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Cash and cash equivalents
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$
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7,191
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$
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6,203
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Investment securities
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56,165
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Inventory
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85,330
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82,420
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Prepaid and other current assets
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8,058
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5,888
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Deferred tax asset
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3,316
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2,838
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Total current assets
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103,895
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153,514
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Property and equipment, net
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57,165
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52,207
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Investment securities
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50,936
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Goodwill
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1,371
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1,371
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Deferred tax asset
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4,939
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2,756
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Other assets
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369
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329
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Total assets
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$
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218,675
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$
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210,177
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Liabilities
and Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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43,521
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$
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43,566
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Accrued expenses
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10,690
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11,864
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Accrued compensation
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6,771
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5,225
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Current portion of capital lease
obligations
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1,636
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1,580
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Income tax payable
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790
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1,155
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Layaway deposits
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1,617
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635
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Total current liabilities
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65,025
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64,025
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Capital lease obligations, less current
portion
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562
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1,403
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Other long-term liabilities
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6,921
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6,602
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Total liabilities
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72,508
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72,030
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Stockholders equity:
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Common stock, $0.01 par value. Authorized
32,000,000 shares; 14,475,581 shares issued as of August 2, 2008
and 14,265,471 shares issued as of February 2, 2008; 14,309,831 shares
outstanding as of August 2, 2008 and 14,099,721 outstanding as of
February 2, 2008
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143
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142
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Paid-in-capital
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69,976
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68,276
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Retained earnings
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77,908
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69,894
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Accumulated other comprehensive loss
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(1,695
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)
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Treasury stock, at cost; 165,750 shares as
of August 2, 2008 and February 2, 2008
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(165
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)
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(165
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)
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Total stockholders equity
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146,167
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138,147
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Commitments and contingencies (note 7)
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Total liabilities and stockholders equity
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$
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218,675
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$
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210,177
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See accompanying notes to
the condensed financial statements (unaudited).
3
Table
of Contents
Citi Trends, Inc.
Condensed Statements of Income
Twenty-six Weeks Ended August 2, 2008 and August 4,
2007
(Unaudited)
(in thousands, except per share data)
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August 2,
2008
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August 4,
2007
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Net sales
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$
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236,651
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$
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203,402
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Cost of sales
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144,964
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126,612
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Gross profit
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91,687
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76,790
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Selling, general and administrative
expenses
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73,118
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62,123
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Depreciation and amortization
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7,781
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5,830
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Income from operations
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10,788
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8,837
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Interest income
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1,425
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1,181
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Interest expense
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(162
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)
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(265
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)
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Income before income tax expense
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12,051
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9,753
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Income tax expense
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4,037
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3,404
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Net income
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$
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8,014
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$
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6,349
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Basic net income per common share
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$
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0.57
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$
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0.46
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Diluted net income per common share
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$
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0.56
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$
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0.45
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Weighted average number of shares
outstanding
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Basic
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14,071
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13,865
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Diluted
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14,248
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14,234
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See accompanying notes to
the condensed financial statements (unaudited).
Citi Trends, Inc.
Condensed Statements of Income
Thirteen Weeks Ended August 2, 2008 and August 4,
2007
(Unaudited)
(in thousands, except per share data)
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August 2,
2008
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August 4,
2007
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Net sales
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$
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115,655
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$
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96,826
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Cost of sales
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70,731
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61,734
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Gross profit
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44,924
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35,092
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Selling, general and administrative
expenses
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36,877
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31,548
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Depreciation and amortization
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4,078
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3,009
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Income from operations
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3,969
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535
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Interest income
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557
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536
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Interest expense
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(75
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)
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(121
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)
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Income before income tax expense
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4,451
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950
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Income tax expense
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1,605
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323
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Net income
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$
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2,846
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$
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627
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Basic net income per common share
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$
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0.20
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$
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0.05
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Diluted net income per common share
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$
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0.20
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$
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0.04
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Weighted average number of shares
outstanding
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Basic
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14,095
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13,922
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Diluted
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14,279
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14,249
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See accompanying notes to
the condensed financial statements (unaudited).
4
Table
of Contents
Citi Trends, Inc.
Condensed Statements of Cash Flows
Twenty-six Weeks Ended August 2, 2008 and August 4,
2007
(Unaudited)
(in thousands)
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August 2,
2008
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August 4,
2007
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Operating activities:
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Net income
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$
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8,014
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$
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6,349
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Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
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Depreciation and amortization
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7,781
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5,830
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Loss on disposal of property and equipment
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8
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7
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Deferred income taxes
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(1,568
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)
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(1,814
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)
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Noncash stock-based compensation expense
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973
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709
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Excess tax benefits from stock-based
payment arrangements
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(465
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)
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(3,059
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)
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Changes in assets and liabilities:
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Inventory
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(2,910
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)
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(20,549
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)
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Prepaid and other current assets
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(1,504
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)
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(873
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)
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Other assets
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(40
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)
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(14
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)
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Accounts payable
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(45
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)
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(1,475
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)
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Accrued expenses and other long-term
liabilities
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(855
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)
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983
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Accrued compensation
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1,546
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(926
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)
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Income tax payable
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100
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1,212
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Layaway deposits
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982
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843
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Net cash provided by (used in) operating
activities
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12,017
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(12,777
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)
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Investing activities:
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Purchases of investment securities
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(4,000
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)
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(4,629
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)
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Sales of investment securities
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5,775
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24,149
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Purchases of property and equipment
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(12,747
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)
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(11,238
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)
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Net cash (used in) provided by investing
activities
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(10,972
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)
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8,282
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Financing activities:
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Repayments on long-term debt and capital
lease obligations
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(785
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)
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(994
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)
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Excess tax benefits from stock-based
payment arrangements
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465
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3,059
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Proceeds from the exercise of stock options
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333
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348
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Cash used to settle equity instruments
granted under stock-based payment arrangements
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(70
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)
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Net cash used in financing activities
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(57
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)
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2,413
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Net decrease in cash and cash equivalents
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|
988
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|
(2,082
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)
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Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
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|
6,203
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|
7,707
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End of period
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$
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7,191
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|
$
|
5,625
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|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
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|
|
|
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Cash paid for interest
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|
$
|
151
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|
$
|
292
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|
Cash paid for income taxes
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|
$
|
5,505
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|
$
|
3,257
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|
Supplemental disclosures of noncash
financing and investing activities:
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|
|
|
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|
Cumulative effect of adoption of FIN 48
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$
|
|
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$
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301
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|
See accompanying notes to
the condensed financial statements (unaudited).
5
Table
of Contents
Citi Trends, Inc.
Notes to the Condensed Financial Statements (unaudited)
August 2,
2008
1.
Basis of Presentation
The condensed balance sheet
as of August 2, 2008, the condensed statements of income for the
twenty-six and thirteen-week periods ended August 2, 2008 and August 4,
2007, and the condensed statements of cash flows for the twenty-six week
periods ended August 2, 2008 and August 4, 2007 have been prepared by
Citi Trends, Inc. (the Company), without audit. The condensed balance
sheet as of February 2, 2008 has been derived from the audited financial
statements as of that date, but does not include all required year end
disclosures. In the opinion of management, such statements include all
adjustments considered necessary to present fairly the Companys financial
position as of August 2, 2008 and February 2, 2008, and its results
of operations and cash flows for all periods presented. It is suggested that
these condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Companys latest Annual Report
on Form 10-K for the year ended February 2, 2008.
The accompanying unaudited
condensed financial statements are also prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
Operating results for the interim periods ended August 2, 2008 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 31, 2009.
The following contains
references to years 2008 and 2007, which represent fiscal years ending or ended
on January 31, 2009 (fiscal 2008) and February 2, 2008 (fiscal 2007),
respectively. Fiscal 2008 and fiscal 2007 both have 52-week accounting periods.
2.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3.
Earnings per Share
Basic earnings per common
share amounts are calculated using the weighted average number of common shares
outstanding for the period. Diluted earnings per common share amounts are
calculated using the weighted average number of common shares outstanding plus
the additional dilution for all potentially dilutive securities such as
nonvested restricted stock and stock options. During loss periods, diluted
earnings per share amounts are based on the weighted average number of common
shares outstanding.
The following table provides
a reconciliation of the average number of common shares outstanding used to
calculate basic earnings per share to the number of common shares and common
stock equivalents outstanding used in calculating diluted earnings per share
for the thirteen weeks and twenty-six weeks ended August 2, 2008 and August 4,
2007:
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|
Twenty-six Weeks Ended
|
|
|
|
August 2, 2008
|
|
August 4, 2007
|
|
Average number of common shares outstanding
|
|
14,071,488
|
|
13,864,632
|
|
Incremental shares from assumed exercises
of stock options
|
|
176,295
|
|
369,313
|
|
Average number of common shares and common
stock equivalents outstanding
|
|
14,247,783
|
|
14,233,945
|
|
|
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Thirteen Weeks Ended
|
|
|
|
August 2, 2008
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|
August 4, 2007
|
|
Average number of common shares outstanding
|
|
14,095,135
|
|
13,922,130
|
|
Incremental shares from assumed exercises
of stock options
|
|
183,850
|
|
327,125
|
|
Average number of common shares and common
stock equivalents outstanding
|
|
14,278,985
|
|
14,249,255
|
|
In accordance with the
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 128,
Earnings
per Share
, the Company calculates the dilutive effect of stock-based
compensation arrangements using the treasury stock method. This method
assumes that the proceeds the Company receives from the exercise of stock
options are used to repurchase common shares in the market. In accordance
with SFAS No. 123R,
Share-Based Payment,
the Company includes as assumed proceeds the amount of compensation
6
Table
of Contents
cost attributed to future
services and not yet recognized, and the amount of tax benefits, if any, that
would be credited to additional paid-in capital assuming exercise of
outstanding options and vesting of nonvested restricted stock. For the
twenty-six weeks ended August 2, 2008 and August 4, 2007, there were
approximately 79,000 and 70,000 options outstanding, respectively, to purchase
shares of common stock excluded from the calculation of diluted earnings per
share because of antidilution. For the twenty-six weeks ended August 2,
2008 and August 4, 2007, there were no shares of nonvested restricted
stock included in the calculation of diluted earnings per share because of
antidilution.
4.
Fair Value Measurement
Effective February 3,
2008, the Company adopted the methods of fair value as described in SFAS No. 157,
Fair Value Measurements,
to value
its financial assets and liabilities. SFAS No. 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the
principal or most advantageous market at the measurement date. This statement
also establishes a fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which
are described below:
Level 1: Unadjusted quoted prices in active markets
that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level
2: Observable prices that are based on
inputs not quoted on active markets, but corroborated by market data.
Level
3: Unobservable inputs are used when
little or no market data is available. Level 3 inputs are given the lowest
priority in the fair value hierarchy.
The following table provides
a summary of changes in fair value of the Companys financial assets for the
twenty-six weeks ended August 2, 2008 (in thousands):
|
|
Level 2
|
|
Level 3
|
|
Balance as of February 2, 2008
|
|
$
|
56,165
|
|
$
|
|
|
Transfer from Level 2 to Level 3
|
|
(56,665
|
)
|
56,665
|
|
Unrealized loss included in other
comprehensive loss
|
|
|
|
(2,788
|
)
|
Sales/redemptions of auction rate
securities
|
|
(3,500
|
)
|
(2,275
|
)
|
Purchases of auction rate securities
|
|
4,000
|
|
|
|
Reclassification of interest receivable to other
current assets
|
|
|
|
(666
|
)
|
Balance as of August 2, 2008
|
|
$
|
|
|
$
|
50,936
|
|
Investment securities on the
condensed balance sheets consist exclusively of municipal auction rate
securities (ARS) issued by student loan funding organizations. These securities
are high-grade (at least AA-rated with one or more rating agencies) and
approximately 83% are either guaranteed by the Department of Education under
the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (37%) or MBIA Insurance Corporation
(9%). Historically, liquidity for investors in ARS was provided via an auction
process that reset the interest rate every 35 days, allowing investors to
either roll over their investments or sell them at par. Beginning in February 2008,
there was insufficient demand for these types of investments during the
auctions and, as a result, these securities are not currently liquid. The
Company may not be able to access cash by selling these securities without
incurring a loss of principal until either, liquidity returns to the auction
process, a secondary market emerges, they are redeemed by the issuer, or they
mature in years ranging from 2010 to 2040.
After the auctions began failing, certain issuers did redeem, at par
value, $2,275,000 of the ARS held by the Company. However, it is not currently
possible to determine whether other issuers of the ARS held by the Company will
redeem their securities. Subsequent to the end of the second quarter, the
Companys primary investment bank for ARS investments announced publicly that
they have committed to provide liquidity solutions to institutional investors,
such as Citi Trends, and will agree to purchase from their institutional
investors all or any ARS that remain outstanding in June 2010. Approximately 93% of the Companys ARS are
held at its primary investment bank that announced the commitment.
The Company classifies its
ARS as available-for-sale and, therefore, they are carried at estimated fair
value. As of August 2, 2008, there was insufficient observable market
information available to determine the fair value of the Companys ARS.
Accordingly, the Company estimated Level 3 fair values for these securities
based on assumptions that market participants would use in their estimates of
fair value. These assumptions included, among other things, discounted cash
flow projections, the timing of expected future successful auctions or
redemptions, collateralization of the underlying securities and the
creditworthiness of the issuer. Through February 2,
2008, the ARS were valued at par value due to the frequent resets that
historically occurred through the auction process.
Based on the Level 3
valuation, the Company has recorded an unrealized loss of $1,695,000 (net of
tax) to accumulated other comprehensive loss in the condensed balance sheet as
of August 2, 2008, reflecting declines in fair value of the Companys ARS.
Since the commitment by the Companys investment bank to purchase the ARS in June 2010
did not occur until after quarter end, it did not affect the valuation as of August 2,
2008.
7
Table of Contents
Factors considered in determining whether the
unrealized loss is temporary included the length of time and extent to which
fair value has been less than cost, recent redemptions of certain ARS at par
value, the financial condition and near-term prospects of the issuers, and our
current intent and ability to retain our investments for a period of time
sufficient to allow for any anticipated recovery in fair value. If it is later
determined that the fair value of these securities is other-than-temporarily
impaired, the Company will record a loss in the statement of income. Due to the
Companys belief that the market for these investments may take in excess of
twelve months to fully recover, the Company has classified them as noncurrent
assets on the accompanying condensed balance sheet as of August 2, 2008.
5.
Comprehensive Income
The components of comprehensive income for all periods
presented are as follows (in thousands):
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
August 2,
2008
|
|
August 4,
2007
|
|
August 2,
2008
|
|
August 4,
2007
|
|
Net income, as reported
|
|
$
|
2,846
|
|
$
|
627
|
|
$
|
8,014
|
|
$
|
6,349
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities,
net of tax of $209 and $1,093 in the 13 weeks and 26 weeks ended
August 2, 2008, respectively
|
|
(324
|
)
|
|
|
(1,695
|
)
|
|
|
Comprehensive income
|
|
$
|
2,522
|
|
$
|
627
|
|
$
|
6,319
|
|
$
|
6,349
|
|
6.
Revolving Line of Credit
In March 2008, the Company obtained a $35 million
unsecured revolving credit facility with Bank of America, replacing a $3
million facility that had been scheduled to expire on June 30, 2008. The $35 million facility has a term of 364
days, has an unused commitment fee equal to 0.15%, and has one restrictive
financial covenant (adjusted leverage ratio).
Loans under the facility bear interest at either (a) a rate equal
to the higher of (i) the Federal Funds Rate plus 0.50% and (ii) Bank
of Americas prime rate, plus an applicable margin; or (b) a rate equal to
LIBOR plus an applicable margin. The applicable margin is dependent on the
Companys adjusted leverage ratio and ranges from 1.00% to 1.50% for
LIBOR-based loans, and from 0.00% to 0.50% for prime rate-based loans. The Company
has had no borrowings under this facility.
7.
Commitments and Contingencies
The Company from time to time is involved in various
legal proceedings incidental to the conduct of its business, including claims
by customers, employees or former employees. While litigation is subject
to uncertainties and the outcome of any litigated matter is not predictable,
the Company is not aware of any legal proceedings pending or threatened against
it that it expects to have a material adverse effect on its financial
condition, results of operations or liquidity.
8.
Recent Accounting Pronouncements
Effective February 3, 2008, the Company adopted
SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and requires additional
disclosures about fair value measurements. SFAS No. 157 applies to fair
value measurements that are already required or permitted by other accounting
standards, except for measurements of share-based payments and measurements that
are similar to, but not intended to be, fair value and does not change existing
guidance as to whether or not an instrument is carried at fair value. In February 2008,
the FASB issued FASB Staff Position No. 157-2,
Partial
Deferral of the Effective Date of Statement No. 157,
which
provides a one year deferral of the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company has adopted the provisions of SFAS No. 157
with respect to its financial assets and financial liabilities only. The
adoption of this statement did not have a material impact on the Companys
financial statements. See related disclosures in Note 4.
Effective February 3, 2008, the Company adopted
SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
. SFAS No. 159 permits entities to choose
to measure specified financial assets and financial liabilities at fair
value. Election of the fair value option is irrevocable and is applied on
a contract-by-contract basis. The Company has elected not to apply the fair
value option to the specified financial assets and financial liabilities, and
accordingly, the adoption of SFAS No. 159 had no financial statement
impact.
9.
Reclassifications
Certain prior year amounts have been reclassified to
conform to current year presentation.
The decrease of cash and accounts payable through a reclassification of
outstanding checks for all prior periods caused net cash used in operating
activities shown in the statements of cash flows to increase by $1,540,000 from
that previously reported for the twenty-six weeks ended August 4, 2007.
8
Table of Contents
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Except for specific historical information, many of
the matters discussed in this Form 10-Q may express or imply projections
of revenues or expenditures, statements of plans and objectives for future
operations, growth or initiatives, statements of future economic performance, or
statements regarding the outcome or impact of pending or threatened litigation.
These, and similar statements, are forward-looking statements concerning
matters that involve risks, uncertainties and other factors that may cause the
actual performance of the Company to differ materially from those expressed or
implied by these statements. All forward-looking information should be
evaluated in the context of these risks, uncertainties and other factors. The
words believe, anticipate, project, plan, expect, estimate,
objective, forecast, goal, intend, will likely result, or will
continue and similar words and expressions generally identify forward-looking
statements. The Company believes the assumptions underlying these forward-looking
statements are reasonable; however, any of the assumptions could be inaccurate,
and therefore, actual results may differ materially from those projected in the
forward-looking statements.
The factors that may result in actual results
differing from such forward-looking information include, but are not limited
to: transportation and distribution delays or interruptions; changes in freight
rates; the Companys ability to negotiate effectively the cost and purchase of
merchandise; inventory risks due to shifts in market demand; the Companys
ability to gauge fashion trends and changing consumer preferences; changes in
consumer spending on apparel; changes in product mix; interruptions in
suppliers businesses; interest rate fluctuations; a deterioration in general
economic conditions caused by acts of war or terrorism or other factors;
temporary changes in demand due to weather patterns; seasonality of the
Companys business; delays associated with building, opening and operating new
stores; delays associated with building, opening, expanding or converting new
or existing distribution centers; and other factors described in the section
titled Item 1A. Risk Factors and elsewhere in the Companys Annual Report on Form 10-K
for the fiscal year ended February 2, 2008 and in Part II, Item 1A.
Risk Factors and elsewhere in the Companys Quarterly Reports on Form 10-Q
and in the other documents the Company files with the Securities and Exchange
Commission (SEC), including other reports on Form 8-K and 10-Q, and any
amendments thereto.
Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Form 10-Q.
Except as may be required by law, the Company undertakes no obligation to
update or revise publicly any forward-looking statements contained herein to
reflect events or circumstances occurring after the date of this Form 10-Q
or to reflect the occurrence of unanticipated events. Readers are advised,
however, to read any further disclosures the Company may make on related
subjects in its public disclosures or documents filed with the SEC.
Overview
We are a rapidly growing, value-priced retailer of
urban fashion apparel and accessories for the entire family. Our merchandise
offerings are designed to appeal to the preferences of fashion conscious
consumers, particularly African-Americans. Originally our stores were located
in the Southeast, and in recent years we expanded into the Mid-Atlantic and
Midwest regions and Texas. We operated 335 stores in both urban and rural
markets in 21 states as of August 2, 2008.
We measure performance using key operating statistics.
One of the main performance measures we use is comparable store sales growth.
We define a comparable store as a store that has been opened for an entire
fiscal year. Therefore, a store will not be considered a comparable store until
its 13th month of operation at the earliest or until its 24th month at the
latest. As an example, stores opened in fiscal 2007 and fiscal 2008 are not
considered comparable stores in fiscal 2008. Relocated and expanded stores are
included in the comparable store sales results. We also use other operating
statistics, most notably average sales per store, to measure our performance.
As we typically occupy existing space in established shopping centers rather
than sites built specifically for our stores, store square footage (and
therefore sales per square foot) varies by store. We focus on overall store
sales volume as the critical driver of profitability. The average sales per
store has increased over the years, as we have increased comparable store sales
and opened new stores that are generally larger than our historical store base.
Average sales per store increased from $0.8 million in fiscal 2000 to $1.5
million in fiscal 2007. In addition to sales, we measure gross profit as a
percentage of sales and store operating expenses, with a particular focus on
labor, as a percentage of sales. These results translate into store level
contribution, which we use to evaluate overall performance of each individual
store. Finally, we monitor corporate expenses against budgeted amounts.
Accounting Periods
The following discussion contains references to fiscal
years 2008 and 2007, which represent fiscal years ending or ended on January 31,
2009 (fiscal 2008) and February 2, 2008 (fiscal 2007), respectively.
Fiscal 2008 and fiscal 2007 both have 52-week accounting periods. This
discussion and analysis should be read with the condensed financial statements
and the notes thereto.
Results of Operations
The following discussion of the Companys financial
performance is based on the condensed financial statements set forth herein.
The nature of the Companys business is seasonal. Historically, sales in the
first and fourth quarters have been higher than sales achieved in the second
and
9
Table of Contents
third quarters of the fiscal year. Expenses and, to a
greater extent, operating income vary by quarter. Results of a period shorter
than a full year may not be indicative of results expected for the entire year.
Furthermore, the seasonal nature of the Companys business may affect
comparisons between periods.
Twenty-six Weeks Ended August 2,
2008 and August 4, 2007
Net Sales.
Net sales increased $33.3 million, or
16.3%, to $236.7 million in the twenty-six weeks ended August 2, 2008 from
$203.4 million in the twenty-six weeks ended August 4, 2007. The
increase in net sales was due primarily to 35 new stores opened since last
years second quarter, 23 new stores opened in the first half of 2007 for which
there was not a full twenty-six weeks of sales in 2007s first half, and a 3.2%
increase in comparable store sales. Comparable stores include locations that
have been relocated or expanded. There were 6 stores relocated or expanded in
the first half of 2008 and 12 stores relocated or expanded in fiscal 2007, all
of which impacted comparable store sales. Sales in comparable relocated and
expanded stores increased 16.3% in the first half of 2008, while sales in all
other comparable stores increased 2.1%. The 3.2% increase in comparable store
sales consisted of a 1.7% increase in the average customer purchase and a 1.5%
increase in the number of customer transactions. Comparable store sales changes
by major merchandise class were as follows in the first half of 2008: Childrens +11%; Home +5%; Womens +1%; Mens
+1%; Accessories -2%.
The new stores opened in 2007 and 2008, which are not
yet included in comparable store sales, accounted for $27.1 million of the
total increase in sales, while the 3.2% sales increase in the 277 comparable
stores contributed $6.2 million.
Gross Profit.
Gross profit increased $14.9 million, or
19.4%, to $91.7 million in the first half of 2008 from $76.8 million last
year. The increase in gross profit is a result of the increase in sales,
together with an improvement in the gross margin from 37.8% in last years
first half to 38.7% this year. Approximately half of this increase in
gross margin was due to lower inventory shrinkage, with the other half being
due to lower merchandise markdowns as a percentage of sales. We believe that
steps taken to improve the hiring, training and retention of quality store
management, a reduction in the span of control given to our district managers
in order to improve the focus on individual stores, and the addition of
sophisticated surveillance systems in high shrinkage stores have been the keys
to reducing theft in our stores. Markdowns were lower due to better management
of inventory levels and improved sales results in 2008.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $11.0 million, or 17.7%, to $73.1 million in the first half
of 2008 from $62.1 million in last years first half. The increase in
these expenses was due primarily to additional store level, distribution and
corporate costs arising from the opening of 35 new stores since the end of last
years second quarter. As a percentage of sales, selling, general and
administrative expenses increased in the first half to 30.9% from 30.5% last
year, due to higher bonus accruals resulting from improved performance in the
first half of 2008 and increased store supervision costs associated with a
reduction in the span of control given to our district managers, partially
offset by improved management of store payroll and the benefit in this years
comparison of approximately $550,000 of expenses related to a secondary stock
offering in last years first half.
Depreciation and Amortization.
Depreciation and amortization expense increased $2.0
million, or 33.5%, to $7.8 million in the first half of 2008 from $5.8 million
in the first half of 2007, as the result of capital expenditures incurred for
new and relocated/expanded stores and the expansion of the Darlington
distribution center.
Interest Income.
Interest income increased to $1.4
million from $1.2 million in the first half of 2007 due primarily to higher
contractual interest rates being earned on our investments in auction rate
securities once the auctions of such securities began to fail in February 2008.
See the discussion of auction rate securities below under Cash Requirements
for more information.
Interest Expense.
Interest expense decreased to $162,000
in the first half of 2008 from $265,000 last year due to the normal decline in
the interest portion of payments on our capital lease obligations as the
principal portion of such obligations is reduced.
Income Tax Expense.
The provision for income taxes increased
18.6% to $4.0 million in this years first half from $3.4 million in the first
half of 2007 due to higher earnings, partially offset by a decrease in the
effective income tax rate to 33.5% compared to 34.9% last year. The
effective rate reflects the benefit of tax-exempt interest income and various
income tax credits.
Net Income.
Net income increased 26.2% to $8.0
million in the first half of 2008 from $6.3 million in last years first half
due to the factors discussed above.
Thirteen Weeks Ended August 2,
2008 and August 4, 2007
Net Sales.
Net sales increased $18.9 million, or
19.4%, to $115.7 million in the thirteen weeks ended August 2, 2008 from
$96.8 million in the thirteen weeks ended August 4, 2007. The
increase in net sales was due primarily to 35 new stores opened since last
years second quarter, together with a 6.5% increase in comparable store sales.
Comparable stores include locations that have been relocated or expanded. There
were 6 stores relocated or expanded in the first half of 2008 and 12 stores
relocated or expanded in fiscal 2007, all of which impacted comparable store
sales. Sales in comparable relocated and expanded stores increased 18.9% in the
second quarter of 2008, while sales in all other comparable stores increased
5.5%. The 6.5% increase in comparable store sales consisted of a 3.6% increase
in the number of customer
10
Table of Contents
transactions and a 2.9% increase in the average
customer purchase. Comparable store sales changes by major merchandise class
were as follows in the second quarter of 2008:
Childrens +18%; Home +11%; Mens +4%; Womens +2%; Accessories 0%.
The new stores opened in 2007 and 2008, which are not
yet included in comparable store sales, accounted for $13.0 million of the
total increase in sales, while the 6.5% sales increase in the 277 comparable
stores contributed $5.9 million.
Gross Profit.
Gross profit increased $9.8 million, or
28.0%, to $44.9 million in the second quarter of 2008 from $35.1 million last
year. The increase in gross profit is a result of the increase in sales,
together with an improvement in the gross margin from 36.2% in last years
second quarter to 38.8% this year. This increase in gross margin was due
primarily to markdowns being approximately 160 basis points lower as a
percentage of sales in the second quarter of 2008 as a result of better
management of inventory levels and improved sales results. In addition, gross
margin benefited from inventory shrinkage being approximately 80 basis points
lower in the second quarter of 2008 compared to the second quarter of 2007 due
to our efforts to improve the hiring, training and retention of quality store
management, a reduction in the span of control given to our district managers
in order to improve the focus on individual stores, and the addition of
sophisticated surveillance systems in high shrinkage stores.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $5.4 million, or 16.9%, to $36.9 million in the second
quarter of 2008 from $31.5 million in last years second quarter. The
increase in these expenses was due primarily to additional store level,
distribution and corporate costs arising from the opening of 35 new stores
since last years second quarter. As a percentage of sales, selling,
general and administrative expenses decreased in the second quarter to 31.9%
from 32.6% last year, due primarily to the leveraging effect that occurs on
expenses as a percentage of sales when comparable store sales increase at a
rate, 6.5%, that is higher than the rate of inflation on expenses. In addition,
the expense percentage decreased due to improved management of store payroll
and because this years expense comparison benefited from $450,000 of expenses
related to a secondary stock offering in last years second quarter. The improvements in expenses as a percentage
of sales were partially offset by higher bonus accruals resulting from improved
performance in the second quarter of 2008 and increased store supervision costs
associated with a reduction in the span of control given to our district
managers.
Depreciation and Amortization.
Depreciation and amortization expense increased $1.1
million, or 35.5%, to $4.1 million in the second quarter of 2008 from $3.0
million in the second quarter of 2007, as the result of capital expenditures
incurred for new and relocated/expanded stores and the expansion of the
Darlington distribution center.
Interest Income.
Interest income increased slightly to
$557,000 in the second quarter of 2008 from $536,000 last year. Most interest
income is earned on auction rate securities, which are discussed further below
in the Cash Requirements section.
Interest Expense.
Interest expense decreased to $75,000 in
the second quarter of 2008 from $121,000 last year due to the normal decline in
the interest portion of payments on our capital lease obligations as the
principal portion of such obligations is reduced.
Income Tax Expense.
The provision for income taxes increased
396.9% to $1.6 million in this years second quarter from $323,000 in the second
quarter of 2007 due to higher earnings, together with an increase in the second
quarter effective income tax rate to 36.1% compared to 34.0% last year. The
effective rate reflects the benefit of tax-exempt interest income and various
income tax credits.
Net Income.
Net income increased 353.9% to $2.8
million in the second quarter of 2008 from $627,000 in last years second
quarter due to the factors discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital,
expansion of our distribution infrastructure, construction of new stores,
remodeling of our existing stores and the improvement of our information
systems. Historically, we have met these cash requirements from cash flow from
operations, short-term trade credit, borrowings under our revolving lines of
credit, long-term debt and capital leases, and cash proceeds from our initial
public offering. We expect to be able to meet future cash requirements
with cash flow from operations, short-term trade credit, existing cash balances
and borrowings under our revolving credit facility.
Current Financial Condition.
As of August 2, 2008, we had total
cash and cash equivalents of $7.2 million compared with total cash and cash
equivalents of $6.2 million as of February 2, 2008. Inventory
represented 39.0% of our total assets as of August 2, 2008. Managements
ability to manage our inventory can have a significant impact on our cash flows
from operations during a given interim period or fiscal year. In addition,
inventory purchases can be seasonal in nature, such as the purchase of
warm-weather or Christmas-related merchandise.
Total inventories at the end of the second quarter of 2008 were down
$8.6 million, or 9.1%, compared to the second quarter of fiscal 2007, while
inventory in comparable stores was 18% lower, due to our efforts to
conservatively control inventory in what had been a slow sales environment
heading into the second quarter.
Cash Flows From Operating Activities
. Net cash provided by operating activities
was $12.0 million in the twenty-six weeks ended August 2, 2008
compared to cash used in operating activities of $12.8 million in the
twenty-six weeks ended August 4, 2007. Overall efforts to improve our
inventory productivity resulted in $17.6 million of the increase in cash flows
from operating activities. The main sources of cash provided
11
Table of Contents
during the first half of this year were net income
adjusted for depreciation and amortization, deferred income taxes and noncash
stock-based compensation expense, totaling $15.2 million (compared to
$11.1 million in last years first half), and an increase in accrued compensation
of $1.5 million, due primarily to higher bonus accruals resulting from
improved performance in the first half of 2008. Significant uses of cash
consisted of a $2.9 million increase in inventory since the beginning of 2008
due to new stores, and a $1.5 million increase in prepaid and other current
assets.
Cash Flows From Investing
Activities.
Cash
used in investing activities was $11.0 million in the twenty-six weeks
ended August 2, 2008 compared to cash provided by investing activities of
$8.3 million in the twenty-six weeks ended August 4, 2007. Purchases
of property and equipment included in cash flows from investing activities
totaled $12.7 million and $11.2 million in the first half of fiscal 2008 and
2007, respectively. The increase during the first half of fiscal 2008 was due
primarily to construction work related to the expansion of the Darlington
distribution center. Capital expenditures in the first half of both years also
included routine amounts for new stores, relocated and expanded stores and
other general corporate purposes. Net sales of municipal auction rate
securities provided cash of $1.8 million and $19.5 million in the first half of
fiscal 2008 and 2007, respectively.
Cash Flows From Financing
Activities.
Cash
flows from financing activities were insignificant in the first half of 2008.
In the first half of 2007, such cash flows totaled $2.4 million, primarily
related to excess tax benefits from stock option exercises.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash
and cash equivalents (which equaled $7.2 million as of August 2,
2008); (ii) short-term trade credit; (iii) cash generated from
operations on an ongoing basis as we sell our merchandise inventory; and (iv) a
$35 million revolving credit facility. Short-term trade credit, which arises
from customary payment terms and trade practices with our vendors, represents a
significant source of financing for inventory purchases. Historically, our
principal liquidity requirements have been for working capital and capital
expenditure needs.
As of August 2, 2008, the Company had $50.9
million, net, of investments in municipal auction rate securities (ARS)
issued by student loan funding organizations. These securities are high-grade
(at least AA-rated with one or more rating agencies) and approximately 83% are
either guaranteed by the Department of Education under the Federal Family
Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance
Corporation (37%) or MBIA Insurance Corporation (9%). Historically, liquidity
for investors in ARS was provided via an auction process that reset the
interest rate every 35 days, allowing investors to either roll over their
investments or sell them at par. Beginning in February 2008, there was
insufficient demand for these types of investments during the auctions and, as
a result, these securities are not currently liquid. The Company may not be
able to access cash by selling these securities without incurring a loss of
principal until either, liquidity returns to the auction process, a secondary
market emerges, they are redeemed by the issuer, or they mature in years
ranging from 2010 to 2040. After the auctions began failing, certain issuers
did redeem, at par value, $2,275,000 of the ARS held by us. However, it is not
currently possible to determine whether other issuers of the ARS held by us
will redeem their securities. Subsequent to the end of the second quarter, the
Companys primary investment bank for ARS investments announced publicly that
they have committed to provide liquidity solutions to institutional investors,
such as Citi Trends, and will agree to purchase from their institutional
investors all or any ARS that remain outstanding in June 2010. Approximately 93% of the Companys ARS are
held at its primary investment bank that announced the commitment.
We believe that our existing sources of liquidity will
be sufficient to fund our operations and anticipated capital expenditures for
at least the next 24 months.
Critical Accounting Policies
The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. There have been no material changes to the
Critical Accounting Policies outlined in the Companys Annual Report on Form 10-K
for fiscal 2007 except as described below.
Investments
As of August 2, 2008, the Company had $50.9
million, net, of investments in municipal auction rate securities (ARS)
issued by student loan funding organizations. We account for our investments in
accordance with the provisions of SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
. SFAS No. 115
addresses the accounting and reporting for investments in fixed maturity
securities and for equity securities with readily determinable fair values.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Currently, all ARS held by the Company are classified as
available-for-sale and are classified as long-term investments.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of stockholders
equity. Interest earned on securities classified as available-for-sale is
included in interest income.
12
Table of Contents
Estimating the fair value of investments in ARS
requires numerous assumptions such as expected cash flows, the timing of
expected future successful auctions or redemptions, collateralization of the
underlying securities and the creditworthiness of the issuer. These assumptions
are subject to uncertainties, are difficult to predict and require significant
judgment. The use of different assumptions and changes in future market
conditions could result in significantly different estimates of fair value.
There is no assurance as to when the market for ARS will stabilize. The fair
value of our ARS could change significantly based on market conditions and
continued uncertainties in the credit markets. If these uncertainties continue
or if these securities experience credit rating downgrades or changes in the
rates of default on the underlying assets, we may incur additional impairment
on our ARS portfolio. We continue to monitor the fair value of our ARS and
relevant market conditions and will record additional impairment if future
circumstances warrant such charges.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to financial market risks related to
changes in interest rates connected with our revolving line of credit, which
bears interest at variable rates. We cannot predict market fluctuations in
interest rates. As a result, future results may differ materially from
estimated results due to adverse changes in interest rates or debt
availability. A hypothetical 100 basis point increase in prevailing market
interest rates would not have materially impacted our financial position,
results of operations or cash flows for the twenty-six weeks ended August 2,
2008, because we did not borrow during this period of time. We do not
engage in financial transactions for trading or speculative purposes and have
not entered into any interest rate hedging contracts.
We source all of our product from apparel markets in
the United States in U.S. Dollars and, therefore, are not directly subject to
fluctuations in foreign currency exchange rates. However, fluctuations in
foreign currency exchange rates could affect our purchasing power with vendors
that import merchandise to sell to us. We have not entered into forward contracts
to hedge against fluctuations in foreign currency prices.
As of August 2, 2008, the Company had $50.9
million, net, of investments in municipal auction rate securities (ARS)
issued by student loan funding organizations. These securities are high-grade
(at least AA-rated with one or more rating agencies) and approximately 83% are
either guaranteed by the Department of Education under the Federal Family
Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance
Corporation (37%) or MBIA Insurance Corporation (9%). Historically, liquidity
for investors in ARS was provided via an auction process that reset the
interest rate every 35 days, allowing investors to either roll over their
investments or sell them at par. Beginning in February 2008, there was
insufficient demand for these types of investments during the auctions and, as
a result, these securities are not currently liquid. The Company may not be
able to access cash by selling these securities without incurring a loss of
principal until either, liquidity returns to the auction process, a secondary
market emerges, they are redeemed by the issuer, or they mature in years
ranging from 2010 to 2040. After the auctions began failing, certain issuers
did redeem, at par value, $2,275,000 of the ARS held by us. However, it is not
currently possible to determine whether other issuers of the ARS held by us
will redeem their securities. Subsequent to the end of the second quarter, the
Companys primary investment bank for ARS investments announced publicly that
they have committed to provide liquidity solutions to institutional investors,
such as Citi Trends, and will agree to purchase from their institutional
investors all or any ARS that remain outstanding in June 2010. Approximately 93% of the Companys ARS are
held at its primary investment bank that announced the commitment.
Item 4. Controls and Procedures.
We have carried out an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of August 2,
2008 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
each concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms,
and that such information has been accumulated and communicated to our
management, including the officers who certify our financial reports, as
appropriate, to allow timely decisions regarding the required disclosures.
There were no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended August 2, 2008 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
13
Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time involved in various legal
proceedings incidental to the conduct of our business, including claims by
customers, employees or former employees. While litigation is subject to
uncertainties and the outcome of any litigated matter is not predictable, we
are not aware of any legal proceedings pending or threatened against us that we
expect to have a material adverse effect on our financial condition, results of
operations or liquidity.
Item 1A. Risk Factors.
There are no material changes to the Risk Factors
described under the section ITEM 1A. RISK FACTORS in the Companys Annual
Report on Form 10-K for the fiscal year ended February 2, 2008.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior
Securities.
Not applicable.
Item 4. Submission of Matters to a
Vote of Security Holders.
The annual meeting of our shareholders was held on May 28,
2008. The following proposals were
submitted to a vote:
1) The election
of three directors, one to hold office until our annual meeting of shareholders
in 2010 and until his successor is duly elected and qualified and two to hold
office until our annual meeting of shareholders in 2011 and until their
respective successors are duly elected and qualified. This proposal received the following number
of votes:
|
|
Affirmative
|
|
Withheld
|
|
|
|
|
|
|
|
Brian P. Carney (term expiring 2010)
|
|
10,788,448
|
|
38,350
|
|
|
|
|
|
|
|
R. Edward Anderson (term expiring 2011)
|
|
10,786,119
|
|
40,679
|
|
|
|
|
|
|
|
Lawrence E. Hyatt (term expiring 2011)
|
|
10,788,466
|
|
38,332
|
|
The other members of our board of directors whose
terms of office continued after the meeting are John S. Lupo and Patricia M.
Luzier.
2) The
ratification of the appointment of KPMG LLP as our independent auditors for
fiscal year 2008. This proposal was
approved with 10,814,309 shares voting for approval, 12,132 shares voting
against approval, and 356 shares abstaining.
Item 5. Other Information.
Not applicable.
14
Table of Contents
Item 6. Exhibits.
|
10.1
|
|
Citi Trends, Inc. Amended and Restated 2005
Long-Term Incentive Plan*
|
|
|
|
|
|
10.2
|
|
Form of Restricted Stock Award Agreement for
Employees*
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
|
*
Filed
herewith.
Pursuant to Securities and Exchange Commission
Release No. 33-8238, this certification will be treated as accompanying
this Quarterly Report on Form 10-Q and not filed as part of such report
for purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of Section 18 of the Securities
Exchange Act of 1934 and this certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act 1934, except to the extent that the registrant
specifically incorporates it by reference.
15
Table of Contents
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, and the undersigned also has signed this report in his
capacity as the Registrants Chief Financial Officer (Principal Financial
Officer).
|
CITI TRENDS, INC.
|
|
|
|
Date: September 2, 2008
|
|
|
|
|
|
|
By:
|
/s/ Bruce D. Smith
|
|
Name:
|
Bruce D. Smith
|
|
Title:
|
Senior Vice President, Chief Financial Officer and
Secretary
|
16
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