Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
|
For
the quarterly period ended October 31, 2009
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File Number 000-51315
CITI
TRENDS, INC.
(Exact name of registrant
as specified in its charter)
DELAWARE
|
|
52-2150697
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification No.)
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|
|
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104
Coleman Boulevard
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|
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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)
|
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 has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o
Yes
o
No
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
|
|
Accelerated Filer
x
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|
|
|
Non-Accelerated Filer
o
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|
Smaller Reporting
Company
o
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(Do not check if a
smaller reporting company)
|
|
|
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
|
|
Outstanding
at November 10, 2009
|
Common Stock,
$.01 par value
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|
14,692,699
shares
|
Table of
Contents
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
Citi
Trends, Inc.
Condensed Consolidated Balance Sheets
October 31,
2009 and January 31, 2009
(Unaudited)
(in
thousands, except share data)
|
|
October 31,
|
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January 31,
|
|
|
|
2009
|
|
2009
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,487
|
|
$
|
33,516
|
|
Short-term
investment securities
|
|
42,225
|
|
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Inventory
|
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105,314
|
|
86,259
|
|
Prepaid
and other current assets
|
|
9,432
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|
10,625
|
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Income
tax receivable
|
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2,623
|
|
|
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Deferred
tax asset
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4,365
|
|
3,447
|
|
Total
current assets
|
|
196,446
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|
133,847
|
|
Property
and equipment, net
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|
62,422
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58,861
|
|
Long-term
investment securities
|
|
|
|
43,825
|
|
Goodwill
|
|
1,371
|
|
1,371
|
|
Deferred
tax asset
|
|
2,409
|
|
2,480
|
|
Other
assets
|
|
502
|
|
405
|
|
Total
assets
|
|
$
|
263,150
|
|
$
|
240,789
|
|
Liabilities and Stockholders
Equity
|
|
|
|
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|
Current
liabilities:
|
|
|
|
|
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Accounts
payable
|
|
$
|
60,762
|
|
$
|
52,295
|
|
Accrued
expenses
|
|
12,506
|
|
11,478
|
|
Accrued
compensation
|
|
7,757
|
|
7,514
|
|
Current
portion of capital lease obligations
|
|
123
|
|
1,403
|
|
Income
tax payable
|
|
|
|
682
|
|
Layaway
deposits
|
|
3,381
|
|
564
|
|
Total
current liabilities
|
|
84,529
|
|
73,936
|
|
Other
long-term liabilities
|
|
9,719
|
|
8,646
|
|
Total
liabilities
|
|
94,248
|
|
82,582
|
|
Stockholders
equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized 32,000,000 shares;
14,858,625 shares issued as of
October 31, 2009 and 14,698,852 shares
issued as of January 31, 2009; 14,692,875 shares outstanding as of
October 31, 2009 and 14,533,102 outstanding as of January 31, 2009
|
|
146
|
|
145
|
|
Paid-in-capital
|
|
73,178
|
|
70,950
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|
Retained
earnings
|
|
95,743
|
|
87,277
|
|
Treasury
stock, at cost; 165,750 shares as of October 31, 2009 and
January 31, 2009
|
|
(165
|
)
|
(165
|
)
|
Total
stockholders equity
|
|
168,902
|
|
158,207
|
|
Commitments
and contingencies (note 7)
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
263,150
|
|
$
|
240,789
|
|
See accompanying notes to the condensed consolidated
financial statements (unaudited).
3
Table of Contents
Citi Trends, Inc.
Condensed
Consolidated Statements of Operations
Thirty-nine Weeks Ended October 31, 2009 and November 1,
2008
(Unaudited)
(in thousands, except per share data)
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 31,
|
|
November 1,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
382,058
|
|
$
|
341,599
|
|
Cost of sales
|
|
234,640
|
|
211,172
|
|
Gross profit
|
|
147,418
|
|
130,427
|
|
Selling, general and administrative expenses
|
|
121,116
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|
109,600
|
|
Depreciation and amortization
|
|
13,679
|
|
11,915
|
|
Income from operations
|
|
12,623
|
|
8,912
|
|
Interest income
|
|
329
|
|
2,215
|
|
Interest expense
|
|
(86
|
)
|
(256
|
)
|
Income before income tax expense
|
|
12,866
|
|
10,871
|
|
Income tax expense
|
|
4,400
|
|
3,544
|
|
Net income
|
|
$
|
8,466
|
|
$
|
7,327
|
|
Basic net income per common share
|
|
$
|
0.58
|
|
$
|
0.51
|
|
Diluted net income per common share
|
|
$
|
0.58
|
|
$
|
0.51
|
|
Net income attributable to common shares
|
|
|
|
|
|
Basic
|
|
$
|
8,289
|
|
$
|
7,239
|
|
Diluted
|
|
$
|
8,289
|
|
$
|
7,240
|
|
Weighted average number of shares outstanding
|
|
|
|
|
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Basic
|
|
14,351
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|
14,095
|
|
Diluted
|
|
14,383
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|
14,262
|
|
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
Thirteen
Weeks Ended O
ctober 31, 2009 and November 1,
2008
(Unaudited)
(in thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
|
October 31,
|
|
November 1,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
127,356
|
|
$
|
104,948
|
|
Cost of sales
|
|
79,720
|
|
66,208
|
|
Gross profit
|
|
47,636
|
|
38,740
|
|
Selling, general and administrative expenses
|
|
41,989
|
|
36,482
|
|
Depreciation and amortization
|
|
4,851
|
|
4,134
|
|
Income (loss) from operations
|
|
796
|
|
(1,876
|
)
|
Interest income
|
|
85
|
|
790
|
|
Interest expense
|
|
(17
|
)
|
(94
|
)
|
Unrealized gain on investment securities
|
|
57
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
921
|
|
(1,180
|
)
|
Income tax expense (benefit)
|
|
315
|
|
(493
|
)
|
Net income (loss)
|
|
$
|
606
|
|
$
|
(687
|
)
|
Basic net income (loss) per common share
|
|
$
|
0.04
|
|
$
|
(0.05
|
)
|
Diluted net income (loss) per common share
|
|
$
|
0.04
|
|
$
|
(0.05
|
)
|
Net income (loss) attributable to common shares
|
|
|
|
|
|
Basic
|
|
$
|
593
|
|
$
|
(687
|
)
|
Diluted
|
|
$
|
593
|
|
$
|
(687
|
)
|
Weighted average number of shares outstanding
|
|
|
|
|
|
Basic
|
|
14,370
|
|
14,141
|
|
Diluted
|
|
14,409
|
|
14,141
|
|
See accompanying notes to the condensed consolidated
financial statements (unaudited).
4
Table of Contents
Citi
Trends, Inc.
Condensed Consolidated Statements of
Cash Flows
Thirty-nine
Weeks Ended October 31, 2009 and November 1, 2008
(Unaudited)
(in
thousands)
|
|
October 31,
|
|
November 1,
|
|
|
|
2009
|
|
2008
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
8,466
|
|
$
|
7,327
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
13,679
|
|
11,915
|
|
Loss
on disposal of property and equipment
|
|
257
|
|
110
|
|
Deferred
income taxes
|
|
(847
|
)
|
(2,333
|
)
|
Noncash
stock-based compensation expense
|
|
1,601
|
|
1,500
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
(709
|
)
|
(863
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
Inventory
|
|
(19,055
|
)
|
(7,402
|
)
|
Prepaid
and other current assets
|
|
1,193
|
|
(1,476
|
)
|
Other
assets
|
|
(97
|
)
|
(43
|
)
|
Accounts
payable
|
|
8,467
|
|
2,800
|
|
Accrued
expenses and other long-term liabilities
|
|
2,101
|
|
740
|
|
Accrued
compensation
|
|
243
|
|
635
|
|
Income
tax receivable/payable
|
|
(2,596
|
)
|
(1,441
|
)
|
Layaway
deposits
|
|
2,817
|
|
1,963
|
|
Net
cash provided by operating activities
|
|
15,520
|
|
13,432
|
|
Investing
activities:
|
|
|
|
|
|
Purchases
of investment securities
|
|
|
|
(4,000
|
)
|
Sales/redemptions
of investment securities
|
|
1,600
|
|
15,175
|
|
Purchases
of property and equipment
|
|
(17,497
|
)
|
(18,477
|
)
|
Net
cash used in investing activities
|
|
(15,897
|
)
|
(7,302
|
)
|
Financing
activities:
|
|
|
|
|
|
Repayments
on capital lease obligations
|
|
(1,280
|
)
|
(1,177
|
)
|
Excess
tax benefits from stock-based payment arrangements
|
|
709
|
|
863
|
|
Proceeds
from the exercise of stock options
|
|
289
|
|
469
|
|
Cash
used to settle equity instruments granted under stock-based payment
arrangements
|
|
(370
|
)
|
(73
|
)
|
Net
cash (used in) provided by financing activities
|
|
(652
|
)
|
82
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
(1,029
|
)
|
6,212
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
Beginning
of period
|
|
33,516
|
|
6,203
|
|
End
of period
|
|
$
|
32,487
|
|
$
|
12,415
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
71
|
|
$
|
239
|
|
Cash
paid for income taxes
|
|
$
|
7,843
|
|
$
|
7,272
|
|
See accompanying notes to the condensed consolidated
financial statements (unaudited).
5
Table of Contents
Citi
Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
October 31, 2009
1.
Basis of
Presentation
Citi Trends, Inc. and its subsidiary (the Company)
operate as a rapidly growing, value-priced retailer of urban fashion apparel
and accessories for the entire family.
As of October 31, 2009, the Company operated 392 stores in 24
states.
The condensed consolidated balance sheet as of October 31,
2009, the condensed consolidated statements of operations for the thirty-nine
and thirteen-week periods ended October 31, 2009 and November 1,
2008, and the condensed consolidated statements of cash flows for the
thirty-nine week periods ended October 31, 2009 and November 1, 2008
have been prepared by the Company without audit. The condensed consolidated
balance sheet as of January 31, 2009 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 October 31, 2009 and January 31, 2009, and its results
of operations and cash flows for all periods presented. It is suggested that these condensed
consolidated 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 January 31, 2009.
The accompanying unaudited condensed consolidated
financial statements are 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. Operating results for the interim periods ended October 31,
2009 are not necessarily indicative of the results that may be expected for the
fiscal year ending January 30, 2010.
The following contains references to years 2009 and
2008, which represent fiscal years ending or ended on January 30, 2010
(fiscal 2009) and January 31, 2009 (fiscal 2008), respectively. Fiscal
2009 and fiscal 2008 both have 52-week accounting periods.
In preparing these financial statements, the Company
evaluated the events and transactions through the time of filing these
financial statements with the Securities and Exchange Commission (SEC) on December 7,
2009.
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 use 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.
The most significant estimates made by management
include those made in the valuation of inventory, investment securities,
stock-based compensation, property and equipment, and income taxes. Management
periodically evaluates estimates used in the preparation of the financial
statements for continued reasonableness. Appropriate adjustments, if any, to
the estimates used are made prospectively based on such periodic evaluations.
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 stock options and nonvested
restricted stock. During loss periods,
diluted earnings per share amounts are based on the weighted average number of
common shares outstanding.
The dilutive effect of stock-based compensation arrangements
are accounted for 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. The Company includes as
assumed proceeds the amount of compensation 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 thirteen weeks ended October 31,
2009 and November 1, 2008, there were 62,000 and 149,000 options
outstanding, respectively, to purchase shares of common stock excluded from the
calculation of diluted earnings per share because of antidilution. For
the thirty-nine weeks ended October 31, 2009 and November 1, 2008,
there were 66,000 and 77,000 options outstanding, respectively, to purchase
shares of common stock excluded from the calculation of diluted earnings per
share because of antidilution.
On February 1, 2009, the Company changed its
method of computing earnings per share as required by the newly issued FASB
Staff Position Emerging Issues Task Force (EITF) 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
(FSP EITF 03-6-1). This EITF was subsequently codified under the
FASB Accounting Standards Codification, as issued in June 2009, into FASB
ASC Topic 260-10,
Earnings Per Share.
This pronouncement addresses
determinations as to whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need
to be included in the
6
Table
of Contents
earnings allocation in computing earnings per share
under the required two-class method.
Nonvested restricted stock awards granted to employees and non-employee
directors contained nonforfeitable dividend rights prior to October 31,
2009, when amendments agreed to between the Company and its associates became
effective. Such amendments resulted in
the dividend rights being forfeitable in the event an associate leaves the
employ of the Company prior to the vesting of the restricted stock awards. Accordingly, such awards were considered
participating securities through the third quarter of 2009; however, they will
not be treated as participating securities after October 31, 2009. We have prepared our current and prior period
earnings per share computations to exclude net income allocated to nonvested
share awards containing nonforfeitable dividend rights.
7
Table of Contents
The following table sets forth the computation of
basic and diluted net income (loss) per share (in thousands, except per share
amounts):
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October 31,
2009
|
|
November 1,
2008
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
8,466
|
|
$
|
7,327
|
|
Net income allocated to participating securities
|
|
(177
|
)
|
(88
|
)
|
Net income attributable to common
stockholders-basic
|
|
$
|
8,289
|
|
$
|
7,239
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares
|
|
14,351
|
|
14,095
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-basic
|
|
$
|
0.58
|
|
$
|
0.51
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
8,466
|
|
$
|
7,327
|
|
Net income allocated to participating securities
|
|
(177
|
)
|
(87
|
)
|
Net income attributable to common
stockholders-diluted
|
|
$
|
8,289
|
|
$
|
7,240
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic calculation
|
|
14,351
|
|
14,095
|
|
Effect of dilutive securities stock options
|
|
32
|
|
167
|
|
Denominator for diluted calculation
|
|
14,383
|
|
14,262
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-diluted
|
|
$
|
0.58
|
|
$
|
0.51
|
|
|
|
Thirteen
Weeks Ended
|
|
|
|
October 31,
2009
|
|
November 1,
2008
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income (loss)
|
|
$
|
606
|
|
$
|
(687
|
)
|
Net income allocated to participating securities
|
|
(13
|
)
|
|
|
Net income (loss) attributable to common
stockholders-basic
|
|
$
|
593
|
|
$
|
(687
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares
|
|
14,370
|
|
14,141
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
stockholders per share-basic
|
|
$
|
0.04
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income (loss)
|
|
$
|
606
|
|
$
|
(687
|
)
|
Net income allocated to participating securities
|
|
(13
|
)
|
|
|
Net income (loss) attributable to common
stockholders-diluted
|
|
$
|
593
|
|
$
|
(687
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic calculation
|
|
14,370
|
|
14,141
|
|
Effect of dilutive securities stock options
|
|
39
|
|
|
|
Denominator for diluted calculation
|
|
14,409
|
|
14,141
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
stockholders per share-diluted
|
|
$
|
0.04
|
|
$
|
(0.05
|
)
|
8
Table of Contents
4.
Fair Value Measurement
Fair value is defined 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. Fair value is established according to a
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.
As of October 31, 2009, the Company had $37.8
million ($42.2 million at par value) of investments in municipal auction rate
securities (ARS) issued by student loan funding organizations. The ARS are
classified as trading securities and are reflected at estimated fair value.
These securities are high-grade (at least AA-rated with one or more rating
agencies) and approximately 79% are either guaranteed by the Department of Education under the
Federal Family Education Loan Program (35%) or backed by insurance companies,
AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation (12%).
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 value. Beginning in February 2008,
there was insufficient demand for these types of investments during the
auctions and, as a result, these securities became illiquid. Although the
auctions for the securities have failed, the Company has not experienced any
defaults and continues to earn and receive interest on all of the investments
still owned by the Company.
There was insufficient observable market information
available as of October 31, 2009 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 issuers and insurance companies. Based on this Level 3 valuation, the ARS investments
were valued at $37.8 million as of October 31, 2009, representing a $4.4
million decline from par value.
In November 2008, the Company accepted an offer
(the Right) from UBS AG (UBS) allowing the Company to sell at par value the
remaining ARS to UBS at anytime during a two-year period from June 30,
2010 through July 2, 2012. In
accepting the Right, the Company granted UBS the authority to sell or auction
the ARS at par value at any time up until the expiration date of the Right and
released UBS from any claims relating to the marketing and sale of ARS. The ARS will continue to earn interest until
they are liquidated. The obligations of
UBS under the Right are not secured by its assets and do not require UBS to
obtain any financing to purchase the ARS.
UBS has disclaimed any assurance that it will have sufficient financial
resources to satisfy its obligations under the Right. If UBS does not have sufficient funding to
buy back the ARS and no alternative buyers are located either through the
auction process, issuer redemptions or other means, then the Company may not be
able to access cash by selling these securities without incurring a loss of
principal.
The
Right represents a put option and is recognized as an instrument separate from
the ARS. The Company elected to account
for this Right at fair value
. The Right was valued at $4.4
million as of October 31, 2009 using a discounted cash flow approach that
includes estimates of interest rates and the credit risk associated with
UBS. This valuation is based on
unobservable inputs, therefore, represents a Level 3 fair value. Prior to the acceptance of the Right, the ARS
were classified as available-for-sale.
Upon acceptance of the Right, the ARS were reclassified to trading
securities. The ARS and the Right
included in the October 31, 2009 condensed consolidated balance sheet are
classified as current assets due to the expectation that liquidity will occur
during the next twelve months through the Companys exercise of the Right.
The following table provides a summary of activity for
the Companys assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the thirty-nine weeks ended October 31,
2009 (in thousands):
|
|
Put
Option Related to ARS
|
|
Auction
Rate Securities
|
|
Balance as of January 31, 2009
|
|
$
|
4,901
|
|
$
|
38,924
|
|
Unrealized (loss) gain on investment securities
included in earnings
|
|
(376
|
)
|
376
|
|
Sales/redemptions of investment securities
|
|
(147
|
)
|
(1,453
|
)
|
Balance as of October 31, 2009
|
|
$
|
4,378
|
|
$
|
37,847
|
|
9
Table of Contents
5.
Comprehensive Income (Loss)
The components of comprehensive income (loss) for all
periods presented are as follows (in thousands):
|
|
Thirty-nine Weeks Ended
|
|
Thirteen Weeks Ended
|
|
|
|
October 31,
2009
|
|
November 1,
2008
|
|
October 31,
2009
|
|
November 1,
2008
|
|
Net income (loss), as reported
|
|
$
|
8,466
|
|
$
|
7,327
|
|
$
|
606
|
|
$
|
(687
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities,
net of tax benefit of $1,182 and $89 in the 39 and 13 weeks ended
November 1, 2008, respectively
|
|
|
|
(1,832
|
)
|
|
|
(137
|
)
|
Reclassification of realized gains for redeemed
securities, net of tax provision of $187 in the 39 and 13 weeks ended
November 1, 2008
|
|
|
|
288
|
|
|
|
288
|
|
Comprehensive income (loss)
|
|
$
|
8,466
|
|
$
|
5,783
|
|
$
|
606
|
|
$
|
(536
|
)
|
6.
Revolving Line of Credit
On March 25, 2009,
the Companys $35 million unsecured
revolving credit facility with Bank of
America was amended to extend the expiration date to March 24, 2010 and to
lower the commitment to $20 million, reflecting the Companys cash position and
the fact that there had been no borrowings under the facility. In addition, changes were made to the pricing
of the facility, including an increase in the unused commitment fee from 0.15%
to 0.25% and an amendment of the interest rates. Loans under the facility now bear interest at
either (a) a rate equal to the highest of (i) the Federal Funds Rate
plus 0.50%, (ii) LIBOR plus 1.0% and (iii) Bank of Americas prime
rate, plus an applicable margin; or (b) a rate equal to LIBOR plus an
applicable margin. The applicable
margin, which increased 0.75% under the amendment, is dependent on the Companys
consolidated leverage ratio and ranges from 0.75% to 1.25% for loans bearing
interest at the rate described under (a) above and from 1.75% to 2.25% for
loans bearing interest at the rate described under (b) above. 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
In June 2009, the
FASB Accounting Standards Codification (the Codification) was approved as the
single source of authoritative nongovernmental GAAP. All existing accounting
standard documents, such as FASB, American Institute of Certified Public
Accountants, Emerging Issues Task Force and other related literature, excluding
guidance from the Securities and Exchange Commission (SEC), have been
superseded by the Codification. All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become nonauthoritative. The
Codification did not change GAAP, but instead introduced a new structure that
combines all authoritative standards into a comprehensive, topically organized
online database. The Codification is effective for interim or annual periods
ending after September 15, 2009 and impacts the Companys financial
statements as all future references to authoritative accounting literature will
be referenced in accordance with the Codification. There have been no changes
to the content of the Companys financial statements as a result of
implementing the Codification during the quarter ended October 31, 2009.
As a result of the Companys implementation of the
Codification, previous references to new accounting standards and literature
are no longer applicable. In the current quarter financial statements, the
Company has provided reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal
year but prior to the Codification.
The Company adopted the methods of fair value as
described in SFAS No. 157,
Fair Value
Measurements,
for financial
assets and liabilities on February 3, 2008 and for non-financial assets
and liabilities on February 1, 2009 and has incorporated the related staff
positions and interpretations, including FSP SFAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly,
which was issued in April 2009
.
As of June 2009, this guidance became part of FASB ASC Topic 820,
Fair Value Measurements and Disclosures,
which defines fair
value, establishes a framework for
10
Table
of Contents
measuring fair value, and requires additional
disclosures about fair value measurements.
The adoption of the standard did not have a material impact on the
Companys financial statements.
As discussed in Note 3, the Company adopted FSP EITF
03-6-1 (now part of FASB ASC Topic 260,
Earnings Per Share
)
on February 1, 2009. Implementation
of FSP EITF 03-6-1 has changed the way the Company calculates earnings per
share and is expected to reduce basic and diluted earnings per share allocated
to common shareholders for the fiscal year ending January 30, 2010 by
approximately $0.01. All prior period
earnings per share information must be adjusted retrospectively. Previously reported basic and diluted
earnings per share allocated to common shareholders for the year ended January 31,
2009 will decrease by $0.02.
In April 2009, the FASB issued FSP SFAS 107-1 and
Accounting Principles Board (APB) Opinion No. 28-1,
Interim
Disclosures about Fair Value of Financial Instruments,
which amends
SFAS No. 107,
Disclosures about Fair
Value of Financial Instruments,
and APB Opinion No. 28,
Interim Financial Reporting,
to require an entity to provide interim
disclosures about the fair value of all financial instruments within the scope
of SFAS No. 107 and to include disclosures related to the methods and
significant assumptions used in estimating those instruments. This FSP is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
it during the second quarter of 2009.
Adoption of this FSP had no material impact on the Companys financial
statements. See Note 4 for these
disclosures. As of June 2009, this
guidance became part of FASB ASC Topic 825,
Financial Instruments.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events
, which establishes
general standards for accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. SFAS No. 165 requires the
disclosure of the date through which an
entity has evaluated subsequent events and the rationale for why that date was
selected. This statement is effective for interim and annual periods ending
after June 15, 2009, and accordingly, the Company adopted it during the
second quarter of 2009. As of June 2009,
this guidance became part of FASB ASC Topic 855,
Subsequent
Events.
11
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; the future liquidity of auction rate securities;
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 January 31, 2009 and in Part II, Item 1A. Risk Factors, and
elsewhere in the Companys Quarterly Reports on Form 10-Q and any amendments thereto and in the other
documents the Company files with the Securities and Exchange Commission (SEC),
including reports on Form 8-K.
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 the states of Texas and California. We operated 392 stores
in both urban and rural markets in 24 states as of October 31, 2009.
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 2008 and fiscal 2009 are not
considered comparable stores in fiscal 2009. 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 $1.4
million in fiscal 2008. 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 2009 and 2008, which represent fiscal years ending or ended on January 30,
2010 (fiscal 2009) and January 31, 2009 (fiscal 2008), respectively.
Fiscal 2009 and fiscal 2008 both have 52-week accounting periods. This
discussion and analysis should be read with the condensed consolidated
financial statements and the notes thereto.
Results of Operations
The following discussion of the Companys financial
performance is based on the condensed consolidated 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
12
Table of Contents
second and 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.
Thirteen Weeks Ended October 31,
2009 and November 1, 2008
Net Sales.
Net sales increased $22.5 million, or
21.4%, to $127.4 million in the thirteen weeks ended October 31, 2009 from
$104.9 million in the thirteen weeks ended November 1, 2008. The
increase in net sales was due primarily to 54 new stores opened since last years
third quarter and a 6.3% increase in comparable store sales, partially offset
by the effect of closing three stores since last years third quarter.
Comparable store sales benefited from a strong back-to-school season and a
favorable comparison to last years third quarter which was impacted by less
discretionary spending by consumers on
apparel due to high gasoline and food prices.
Also, approximately $1 million of sales are
estimated to have shifted from the second quarter to
the first week of the third quarter this year due to later back-to-school sales
tax holidays in
eight of the states in which we operate. Comparable stores include locations that have
been relocated or expanded. There were ten stores
relocated or expanded in the first three quarters of
2009 and nine stores relocated or expanded in fiscal 2008, all of which
impacted comparable store sales in the third quarter of 2009. Sales in comparable relocated and expanded
stores increased 14.4% in this years third quarter, while sales in all other
comparable stores increased 5.7%. The 6.3% increase in overall comparable store
sales was driven by an increase in the number of customer transactions,
partially offset by a 0.2% decrease in the average customer purchase.
Comparable store sales changes by major merchandise class were as follows in
the third quarter of 2009: Accessories
+19%; Mens +7%; Womens +6%; Home +4%; Childrens +4%.
The new stores opened in 2008 and 2009, net of the
closed stores, accounted for a $16.0 million increase in total sales, while the
6.3% sales increase in the 315 comparable stores totaled $6.5 million.
Gross Profit.
Gross profit increased $8.9 million, or
23.0%, to $47.6 million in the third quarter of 2009 from $38.7 million in last
years third quarter. The increase in gross profit is a result of the
increase in sales, together with an improvement in the gross margin to 37.4% in
this years third quarter from 36.9% last year. The higher gross margin
was the result of a 50 basis point reduction in inventory shrinkage as a
percentage of sales due to steps taken to better control shrinkage, including a
greater focus on problem stores by the store operations and loss prevention
departments, the addition of sophisticated surveillance systems in high
shrinkage stores, and lower inventory levels. In addition, there was a 30 basis point
improvement in merchandise markdowns in this years third quarter which was
offset by slightly higher freight costs and lower initial merchandise markup.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $5.5 million, or 15.1%, to $42.0 million in the third
quarter of 2009 from $36.5 million in last years third quarter. The
increase in these expenses was due primarily to additional store level,
distribution and corporate costs arising from the opening of 54 new stores, net
of the effect of closing three stores, since last years third quarter. As a percentage of sales, selling, general
and administrative expenses decreased to 33.0% in the third quarter of 2009 from
34.8% in the third quarter of 2008, due primarily to the leveraging effect that
occurs on expenses as a percentage of sales when comparable store sales
increase at a rate as high as 6.3% while operating expenses are increasing only
at a normal rate of inflation.
Depreciation and Amortization.
Depreciation and amortization expense increased $0.8
million, or 17.3%, to $4.9 million in the third quarter of 2009 from $4.1
million in the third quarter of 2008, as the result of capital expenditures
incurred for new and relocated/expanded stores.
Interest Income.
Interest income decreased to $85,000 in
the third quarter of 2009 from $790,000 in last years third quarter due to a
declining interest rate environment which affected our returns on auction rate
securities as well as cash and cash equivalents.
Interest Expense.
Interest expense decreased to $17,000 in
the third quarter of 2009 from $94,000 in the third quarter of 2008 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.
Unrealized Gain on Investment
Securities.
A $57,000
unrealized gain on our investments in auction rate securities and a related put
option is reflected in the third quarter of fiscal 2009, reversing a $57,000
impairment loss recorded in the first half of 2009.
Income Tax Expense (Benefit).
Due to a
profitable third quarter in 2009, income tax expense of $315,000 was recorded,
whereas, the third quarter of 2008 included an income tax benefit of $493,000
due to a pretax loss.
Net Income (Loss).
Net income of
$606,000 was recognized in the third quarter of 2009, compared to a net loss of
$687,000 in last years third quarter
due to the factors discussed above.
Thirty-nine Weeks Ended October 31,
2009 and November 1, 2008
Net Sales.
Net sales increased $40.5 million, or
11.8%, to $382.1 million in the thirty-nine weeks ended October 31, 2009
from $341.6 million in the thirty-nine weeks ended November 1, 2008.
The increase in net sales was due primarily to 54 new stores opened since last
years third quarter and 23 new stores opened in the first thirty-nine weeks of
2008 for which there was not a full thirty-nine weeks of sales in 2008s first
three quarters, together with a 0.4% increase in comparable store sales,
partially offset by the effect of closing three stores since last years third
quarter. Comparable stores include
locations that have been relocated or expanded. There were ten stores relocated
or expanded in the first thirty-nine weeks of 2009 and nine stores relocated or
expanded in fiscal 2008, all of which impacted comparable store sales. Sales in
comparable relocated and expanded stores increased 9.5% in the first
thirty-nine weeks of 2009, while sales in all other comparable stores
13
Table of Contents
decreased 0.3%. The 0.4% increase in overall
comparable store sales consisted of an approximate 1% increase in the average
customer purchase, partially offset by a slight decrease in the number of
customer transactions. Comparable store sales changes by major merchandise
class were as follows in the first thirty-nine weeks of 2009: Accessories +7%; Childrens +2%; Home +2%;
Womens -1%; Mens -1%.
The new stores opened in 2008 and 2009, net of the
closed stores, accounted for a $39.0 million increase in total sales, while the
0.4% sales increase in the 315 comparable stores totaled $1.5 million.
Gross Profit.
Gross profit increased $17.0 million, or
13.0%, to $147.4 million in the first thirty-nine weeks of 2009 from $130.4
million last year. The increase in gross profit is a result of the
increase in sales, together with an improvement in the gross margin to 38.6% in
this years first thirty-nine weeks from 38.2% last year. The higher
gross margin was the result of a 50 basis point reduction in inventory
shrinkage as a percentage of sales due to steps taken to better control
shrinkage, including a greater focus on problem stores by the store operations
and loss prevention departments, the addition of sophisticated surveillance
systems in high shrinkage stores, and lower inventory levels. This improvement in shrinkage, together with
a slight reduction in freight costs and a slight increase in the initial markup
on merchandise, more than offset a 30 basis point increase in markdowns in
response to comparable store sales increases that have been just slightly
positive. Inventories in comparable stores
have been lower than at the same time of the previous year throughout the first
three quarters of 2009, underscoring our commitment to take the markdowns
needed to move merchandise in a slow sales environment and maintain appropriate
inventory levels.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $11.5 million, or 10.5%, to $121.1 million in the first
thirty-nine weeks of 2009 from $109.6 million in last years first thirty-nine
weeks. The increase in these expenses was due primarily to additional
store level, distribution and corporate costs arising from the opening of 54
new stores, net of the effect of closing three stores, since the end of last
years third quarter. As a percentage of sales, selling, general and
administrative expenses decreased in the first thirty-nine weeks of 2009 to
31.7% from 32.1% last year, despite the deleveraging effect that occurs on
expenses as a percentage of sales when comparable store sales increase at a
rate as low as 0.4% while operating expenses are increasing at a normal rate of
inflation. Expenses were managed well, increasing only 10.5% despite a 14.7%
average increase in store selling square footage during the first three
quarters of 2009 compared to the same time period in 2008.
Depreciation and Amortization.
Depreciation and amortization expense increased $1.8
million, or 14.8%, to $13.7 million in the first thirty-nine weeks of 2009 from
$11.9 million in the first thirty-nine weeks of 2008, as the result of capital
expenditures incurred for new and relocated/expanded stores and the expansion
of the Darlington distribution center in early 2008.
Interest Income.
Interest income decreased to $0.3
million from $2.2 million in the first thirty-nine weeks of 2008 due to a
declining interest rate environment which affected our returns on auction rate
securities as well as cash and cash equivalents.
Interest Expense.
Interest expense decreased to $86,000 in
the first thirty-nine weeks of 2009 from $256,000 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
24.2% to $4.4 million in this years first thirty-nine weeks from $3.5 million
in the first thirty-nine weeks of 2008 due to higher pretax income, together
with an increase in the effective income tax rate to 34.2% compared to 32.6%
last year. The increase in the effective rate is due primarily to having
less tax-exempt interest income this year, as discussed above.
Net Income.
Net income increased 15.5% to $8.5
million in the first thirty-nine weeks of 2009 from $7.3 million in last years
first thirty-nine weeks 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, 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, if necessary, borrowings under our revolving credit
facility.
Current Financial Condition.
As of October 31, 2009, we had total
cash and cash equivalents of $32.5 million compared with total cash and cash
equivalents of $33.5 million as of January 31, 2009. Inventory
represented 40.0% of our total assets as of October 31, 2009. 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 third quarter of 2009 were up $15.5 million, or 17.2%, compared to
the third quarter of fiscal 2008, consistent with the increase in store selling
square footage. Inventory in comparable
stores was 0.2% lower than at the end of the third quarter of fiscal 2008,
after being down 14.7% last year in relation to the end of fiscal 2007s third
quarter.
Cash Flows From Operating Activities
. Net cash provided by operating
activities was $15.5 million in the first thirty-nine weeks of fiscal 2009
compared to $13.4 million in the first thirty-nine weeks of fiscal 2008. The main source of cash provided during the
first thirty-nine weeks of this year was net income adjusted for noncash
expenses such as depreciation and amortization, loss on disposal of property
and equipment, deferred income taxes and stock-based compensation expense,
totaling $23.2 million (compared to $18.5 million in last years first
thirty-nine
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weeks). Other
significant sources of cash in the first thirty-nine weeks of fiscal 2009 were (1) an
$8.5 million increase in accounts payable (compared to $2.8 million in the
first thirty-nine weeks of 2008), due to an increase in inventory and an
improvement in inventory turnover this year which results in more of our
inventory still being in accounts payable at quarter end; (2) a $2.8
million increase in layaway deposits (compared to $2.0 million in last years
first thirty-nine weeks) due to the seasonality of layaway transactions which
are low at the end of our fiscal year, because all balances have to be redeemed
by customers or they are cancelled by the middle of December each year; (3) a
$2.1 million increase in accrued expenses and other long-term liabilities
(compared to $0.7 million in the first thirty-nine weeks of 2008), which
represents a 10.4% increase, consistent with the Companys growth during the
past twelve months; (4) a $1.2 million decrease in prepaid and other
current assets (compared to a $1.5 million increase in the first thirty-nine
weeks of fiscal 2008) due primarily to the timing of collecting receivables
from landlords for tenant improvement reimbursements. Significant uses of cash included (1) a
$19.1 million increase in inventory (compared to $7.4 million in the first
thirty-nine weeks of 2008), due to the opening of 38 new stores and the
relocation/expansion of ten other stores, partially offset by the closing of
three stores, in the first thirty-nine weeks of 2009, together with the normal
seasonal build leading up to the Christmas season; and (2) a $2.6 million
change in the income tax receivable/payable (compared to $1.4 million in the
first thirty-nine weeks of 2008) due to the seasonality of our earnings
(highest earnings in the fourth quarter) and timing of estimated tax payments.
Cash Flows From Investing
Activities.
Cash
used in investing activities was $15.9 million in the first thirty-nine weeks
of fiscal 2009 compared to $7.3 million in the first thirty-nine weeks of
fiscal 2008. Purchases of property and
equipment included in cash flows used in investing activities totaled $17.5
million and $18.5 million in the first thirty-nine weeks of fiscal 2009 and
2008, respectively, with the decrease being a result of capital expenditures
early in 2008 related to the expansion of the Darlington distribution center.
Such capital expenditures in both years included routine amounts for new
stores, relocated and expanded stores and other general corporate purposes.
Sales of municipal auction rate securities, net of purchases, provided cash of
$1.6 million and $11.2 million in the first thirty-nine weeks of fiscal 2009
and 2008, respectively.
Cash Flows From Financing Activities.
Cash flows from financing activities
were insignificant in the first thirty-nine weeks of fiscal 2009 and 2008.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash
and cash equivalents (which equaled $32.5 million as of October 31,
2009); (ii) short-term trade credit; (iii) cash generated from
operations on an ongoing basis as we sell our merchandise inventory; and (iv) a
$20 million revolving credit facility. Trade credit represents a significant
source of financing for inventory purchases and arises from customary payment
terms and trade practices with our vendors. Historically, our principal
liquidity requirements have been for working capital and capital expenditure
needs.
As of October 31, 2009, we had $37.8 million
($42.2 million at par value) 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 79% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (35%) or backed by insurance
companies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation
(12%). 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 value. Beginning in February 2008,
there was insufficient demand for these types of investments during the
auctions and, as a result, these securities became illiquid. Although the
auctions for the securities have failed, we have not experienced any defaults
and continue to earn and receive interest on all of the investments that we
still own.
In November 2008, we accepted an offer (the Right)
from UBS AG (UBS) allowing us to sell at par value our remaining ARS to UBS
at anytime during a two-year period from June 30, 2010 through July 2,
2012. In accepting the Right, we granted
UBS the authority to sell or auction the ARS at par value at any time up until
the expiration date of the Right and released UBS from any claims relating to
the marketing and sale of ARS. We will
continue to earn interest on the ARS until they are liquidated. The obligations of UBS under the Right are
not secured by its assets and do not require UBS to obtain any financing to
purchase the ARS. UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its
obligations under the Right. If UBS does
not have sufficient funding to buy back the ARS and no alternative buyers are
located either through the auction process, issuer redemptions or other means,
then we may not be able to access cash by selling these securities without
incurring a loss of principal. The Right
was valued at $4.4 million as of October 31, 2009.
We believe that our existing sources of liquidity will
be sufficient to fund our operations and anticipated capital expenditures for
at least the next 12 months.
Critical
Accounting Policies
The preparation of our condensed consolidated
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 2008.
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Item
3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk
during the nine months ended October 31, 2009 compared to the disclosures
in Part II, Item 7A of our Annual Report on Form 10-K for the year
ended January 31, 2009.
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 October 31,
2009 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 October 31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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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 January 31, 2009.
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.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
10.1
|
Form of
Restricted Stock Award Agreement for Employees*
|
|
|
10.2
|
Form of
Restricted Stock Award Agreement for Directors*
|
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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 of 1934, except to the extent that the registrant specifically incorporates
it by reference.
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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.
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|
|
|
Date:
December 7, 2009
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|
|
|
|
|
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By:
|
/s/ Bruce D.
Smith
|
|
Name:
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Bruce D. Smith
|
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Title:
|
Senior Vice
President, Chief Financial Officer and Secretary
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18
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