Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x
|
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
|
|
|
For the fiscal year ended January 30, 2010
|
|
|
|
Or
|
|
|
|
o
|
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
For the transition period
from to
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 Identification No.)
|
incorporation
or organization)
|
|
|
|
|
|
104 Coleman Boulevard, Savannah, Georgia
|
|
31408
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrants
telephone number, including area code
(912) 236-1561
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
|
Name of each exchange
on which registered
|
Common
Stock, $.01 Par Value
|
|
NASDAQ
Stock Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
o
No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
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
Website, 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). Yes
o
No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
x
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
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(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
State the aggregate market
value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the registrants most recently completed second fiscal quarter:
$419,524,090 at July 31, 2009.
Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the
latest practicable date: Common Stock, par value $.01 per share, 14,856,268
shares outstanding as of March 23, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates
information from the registrants definitive proxy statement, to be filed with
the Securities and Exchange Commission within 120 days after the close of the
registrants fiscal year covered by this Annual Report on Form 10-K, with
respect to the Annual Meeting of Stockholders to be held on May 26, 2010.
Table of
Contents
PART I
Some statements in, or incorporated
by reference into, this Annual Report on Form 10-K (this Report) of
Citi Trends, Inc. (we, us, or the Company) may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). All statements other than historical facts contained
in this Report, including statements regarding our future financial position,
business policy and plans and objectives and expectations of management for
future operations, are forward-looking statements. The words believe, may, could,
estimate, continue, anticipate, intend, expect, plan, project and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events,
including, among other things: implementation of our growth strategy; our
ability to anticipate and respond to fashion trends; competition in our
markets; consumer spending patterns; actions of our competitors or anchor tenants
in the strip shopping centers where our stores are located; and anticipated
fluctuations in our operating results.
These forward-looking statements are
subject to a number of risks, uncertainties and assumptions, including those
described in Item 1A. Risk Factors and elsewhere in this Report and the other
documents we file with the Securities and Exchange Commission (SEC),
including our reports on Form 8-K and Form 10-Q, and any amendments
thereto. Because forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, you should not
rely upon forward-looking statements as predictions of future events. The
events and circumstances reflected in the forward-looking statements may not be
achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. These forward-looking statements
speak only as of the date of such statements. Except as required by applicable
law, including the securities laws of the United States and the rules and
regulations of the SEC, we do not plan to publicly update or revise any
forward-looking statements contained in this Report, whether as a result of any
new information, future events or otherwise.
Information is provided herein with
respect to our operations related to our fiscal years ended on January 30,
2010 (fiscal 2009), January 31, 2009 (fiscal 2008) and February 2,
2008 (fiscal 2007)
.
ITEM
1.
BUSINESS
Overview and History
We are a rapidly growing, value-priced retailer of
urban fashion apparel and accessories for the entire family. We offer quality,
branded apparel from nationally recognized brands, as well as private label
apparel and a limited assortment of home décor items. Our merchandise offerings
are designed to appeal to the preferences of fashion conscious consumers,
particularly African-Americans. We believe that we provide merchandise at
compelling values. Our goal is to provide nationally recognized branded
merchandise at 30% to 70% discounts to department and specialty stores regular
prices. Our stores average approximately 10,400 square feet of selling space
and are typically located in neighborhood shopping centers that are convenient
to low- to moderate-income customers. Originally our stores were located in the
Southeast, and in recent years were expanded into the Mid-Atlantic and Midwest
regions as well as the states of Texas and California. In fiscal 2009, we
opened 49 new stores and closed three stores. As of January 30,
2010, we operated 403 stores in both urban and rural markets in 24 states.
Our predecessor, Allied Department Stores, was founded
in 1946 and grew into a chain of family apparel stores operating in the
Southeast. In 1999, the Company, then consisting of 85 stores, was acquired by
Hampshire Equity Partners II, L.P., a private equity firm. Following the
acquisition by Hampshire Equity Partners II, L.P., management implemented
several strategies to focus on the growing urban market and improve our
operating and financial performance. After the successful implementation of
these strategies and the successful growth of our chain from 85 stores to 212
stores, we completed an initial public offering of our common stock on May 18,
2005.
Our executive offices are located at 104 Coleman
Boulevard, Savannah, Georgia 31408 and our telephone number is (912) 236-1561.
Our Internet address is
http://www.cititrends.com
.
The reference to our web site address in this Report does not constitute the
incorporation by reference of the information contained at the web site in this
Report. We make available, free of charge through publication on our web site,
copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, as soon as
reasonably practicable after we have filed such materials with, or furnished
such materials to, the SEC. In addition, you may read and copy any
materials we file with the SEC at the SECs Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549 or on the SECs web site at
http://www.sec.gov
, and you
may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
3
Table of Contents
Company Strengths and Strategies
Our goal is to be the leading value-priced retailer of
urban fashion apparel and accessories. We believe the following business
strengths differentiate us from our competitors and are important to our
success:
Focus on Urban Fashion Mix.
We focus our merchandise on urban
fashions, which we believe appeal to our core customers. We do not attempt to
dictate trends, but rather devote considerable effort to identifying emerging
trends and ensuring that our apparel assortment is considered timely and
fashionable in the urban market. Our merchandising staff tests new emerging
merchandise trends before reordering and actively manages the mix of brands and
fashion products in the stores to keep our offering fresh and minimize
markdowns.
Superior Value Proposition.
As a value-priced retailer, we seek to
offer top quality, fashionable merchandise at compelling prices. We seek to
provide nationally recognized brands at 30% to 70% discounts to department and
specialty stores regular prices. We also offer products under our proprietary
brands such as Diva Blue, Red Ape, Vintage Harlem, and Lil Ms Hollywood.
These private brands enable us to expand our product selection, offer fashion
merchandise at lower prices and enhance our product offerings.
Merchandise Mix that Appeals to the
Entire Family.
We
merchandise our stores to create a destination environment capable of meeting
the fashion needs of the entire value-conscious family. Each store offers a
wide variety of products for men and women, as well as children. Our stores
feature sportswear, dresses, outerwear, footwear, intimate apparel and
accessories, as well as a limited assortment of home décor items. We believe
that the breadth of our merchandise distinguishes our stores from many
competitors that offer urban apparel primarily for women, and reduces our
exposure to fashion trends and demand cycles in any single category.
Strong and Flexible Sourcing Relationships.
We maintain strong sourcing
relationships with a large group of suppliers. We have purchased merchandise
from approximately 1,100 vendors in the past 12 months. Purchasing is
controlled by a 25-plus member buying team located at our Savannah, Georgia
headquarters and our buying office in New York, New York. We purchase
merchandise through planned programs with vendors at reduced prices and
opportunistically through close-outs, with the majority of our merchandise
purchased for the current season and a limited quantity held for sale in future
seasons. To foster vendor relationships, we pay vendors promptly and do not ask
for typical retail concessions such as promotional and markdown allowances.
Attractive Fashion Presentation and
Store Environment.
We seek to provide a fashion-focused shopping environment that is similar to a
specialty apparel retailer, rather than a typical off-price store. Products
from nationally recognized brands are prominently displayed by brand, rather
than by size, on dedicated, four-way fixtures featuring multiple sizes and
styles. The remaining merchandise is arranged on hanging racks. The stores are
carpeted and well-lit, with most featuring a sound system that plays urban
adult and urban contemporary music throughout the store. Nearly all of our
stores have either been opened or remodeled in the past eight years.
Highly Profitable Store Model.
We operate a proven and efficient store
model that delivers strong cash flow and store level return on investment. We
locate stores in high traffic strip shopping centers that are convenient to
low- and moderate-income neighborhoods. We generally utilize previously
occupied store sites which enables us to obtain attractive rents for our store
sites. Similarly, advertising expenses are low as we do not rely on
promotion-driven sales but rather seek to build our reputation for value
through everyday low prices. At the same time, from an investment perspective,
we seek to design stores that are inviting and easy to shop, while limiting
startup and fixturing costs. As a result, our stores have generated rapid
payback of investments, typically within 12 to 14 months.
Product Merchandising and Pricing
Products.
Our merchandising strategy is to offer
high quality, branded products at attractive prices for the entire
value-conscious family. We seek to maintain a diverse assortment of first
quality, in-season merchandise that appeals to the distinctive tastes and
preferences of our core customers. Approximately 47% of our net sales are represented
by nationally recognized brands. We also offer a wide variety of products from
less recognized brands and a lesser amount representing private label products
under our proprietary brands such as Diva Blue, Red Ape, Vintage Harlem,
and Lil Ms Hollywood. Our private brand products enable us to expand product
selection, offer merchandise at lower prices and enhance our product offerings.
Our merchandise includes apparel, accessories and home
décor. Within apparel, we offer fashion sportswear for men, women and children,
including offerings for newborns, infants, toddlers, boys and girls. We also
offer accessories, which includes handbags, jewelry, footwear, belts, intimate
apparel and sleepwear, as well as a limited assortment of home décor.
4
Table of Contents
The following table sets forth the merchandise
assortment by classification as a percentage of net sales for fiscal
2009, 2008 and 2007.
|
|
Percentage of Net Sales
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Womens
|
|
34
|
%
|
35
|
%
|
35
|
%
|
Childrens
|
|
29
|
%
|
29
|
%
|
27
|
%
|
Mens
|
|
21
|
%
|
22
|
%
|
22
|
%
|
Accessories
|
|
14
|
%
|
12
|
%
|
14
|
%
|
Home décor
|
|
2
|
%
|
2
|
%
|
2
|
%
|
Pricing.
We purchase our merchandise at
attractive prices and mark prices up less than department or specialty stores.
We seek to provide nationally recognized brands at prices 30% to 70% below
regular retail prices available in department stores and specialty stores, and
to provide a product offering that validates both our value and fashion
positioning to our consumers. We also consider the price-to-value relationships
of our non-branded products to be strong. Our basic pricing strategy is
everyday low prices. The discount from the suggested retail price is usually
reflected on the price tag. We review each department in our stores at least
monthly for possible markdowns based on sales rates and fashion seasons to
promote faster turnover of inventory and to accelerate the flow of current
merchandise.
Sourcing and Allocation
The merchandising department oversees the sourcing,
planning and allocation of merchandise to our stores, which allows us to
utilize volume purchase discounts and maintain control over our inventory. We
source our merchandise from approximately 1,100 vendors, consisting of domestic
manufacturers and importers. Our Chief Merchandising Officer supervises a
planning and allocation team consisting of nearly 30 associates, as well as a
buying team, which is comprised of more than 25 merchandise managers, buyers
and assistant buyers.
Our buyers have on average more than 20 years of
experience in the retail business and have developed long-standing
relationships with many of our vendors, including those controlling the
distribution of branded apparel. Our buyers, who are based in Savannah and New
York, travel regularly to the major United States apparel markets, visiting
major manufacturers and attending national and regional apparel trade shows,
including urban-focused trade shows.
Our buyers purchase merchandise in styles, sizes and
quantities to meet inventory levels developed by the planning staff. The buying
staff utilizes several purchasing techniques that enable us to offer to
consumers branded and non-branded fashion merchandise at everyday low prices.
The majority of the nationally recognized branded products we sell are
purchased in-season and represent vendors excess inventories resulting from
over-production or retailer order cancellations. We generally purchase later in
the merchandising buying cycle than department and specialty stores. This
allows us to take advantage of imbalances between retailers demands for
specific merchandise and manufacturers supply of that merchandise. We also
purchase merchandise from some vendors in advance of the selling season at
reduced prices and purchase merchandise on an opportunistic basis near the end
of the selling season, which we then store for sale three to nine months later.
Where possible, we seek to purchase items based on style or color in limited
quantities on a test basis with the right to reorder as needed. Finally, we
purchase private brand merchandise that we source to our specifications.
We allocate merchandise across our store base
according to store-level demand. The merchandising staff utilizes a centralized
management system to monitor merchandise purchasing, planning and allocation in
order to maximize inventory turnover, identify and respond to changing product
demands and determine the timing of markdowns to our merchandise. The buyers
also regularly review the age and condition of the merchandise and manage both
the reordering and clearance processes. In addition, the merchandising team
communicates with regional, district and store managers to ascertain regional
and store-level conditions and to better ensure that our product mix meets our
consumers demands in terms of quality, fashion, price and availability.
We accept payment from our customers for merchandise
at time of sale. Payments are made to us by cash, check, Visa or Mastercard.
We do not extend credit terms to our customers; however, we do offer a layaway
service.
5
Table of Contents
Seasonality
The nature of our business is seasonal. Historically,
sales in the first and fourth quarters have been higher than sales achieved in
the 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 our business may affect comparisons
between periods.
Store Operations
Store Format.
The average selling space of our
existing 403 stores is approximately 10,400 square feet, which allows us the
space and flexibility to departmentalize our stores and provide directed
traffic patterns. We arrange our stores in a racetrack format with womens
sportswear, our most attractive and fashion current merchandise, in the center
of each store and complementary categories adjacent to those items. Mens and
boys apparel is displayed on one side of the store, while dresses, footwear
and accessories are displayed on the other side. Merchandise for infants,
toddlers and girls is displayed along the back of the store. Impulse items,
such as jewelry and sunglasses, are featured near the checkout area. Products
from nationally recognized brands are prominently displayed on four-way racks
at the front of each department. The remaining merchandise is displayed on
hanging racks and occasionally on table displays. Large hanging signs identify
each category location. The unobstructed floor plan allows the customer to see
virtually all of the different product areas from the store entrance and
provides us the flexibility to easily expand and contract departments in
response to consumer demand, seasonality and merchandise availability.
Virtually all of our inventory is displayed on the selling floor. Prices are
clearly marked and often have the comparative retail-selling price noted on the
price tag.
Store Management.
Store operations are managed by our
Senior Vice President of Store Operations, six regional managers and 45
district managers, each of whom typically manages five to twelve stores. The
typical store is staffed with a store manager, two or three assistant managers
and seven to eight part-time sales associates, all of whom rotate work days on
a shift basis. Store managers and assistant store managers participate in a
bonus program based on achieving predetermined levels of sales and inventory
shrinkage. District managers participate in bonus programs based on achieving
targeted levels of sales, profits, inventory shrinkage and payroll costs.
Regional managers participate in a bonus program based partly on a rollup of
the district managers bonuses and partly on the Companys profit performance
in relation to budget. Sales associates are compensated on an hourly basis with
incentives. Moreover, we recognize individual performance through internal
promotions and provide extensive opportunities for advancement, particularly
given our rapid growth.
We place significant emphasis on loss prevention in
order to control inventory shrinkage. Initiatives include electronic tags on
most of our products, training and education of store personnel on loss
prevention issues, digital video camera systems, alarm systems and motion
detectors in the stores. In certain stores, we use an outside service to
visually monitor the stores throughout the day using sophisticated camera
systems. We also capture extensive point-of-sale data and maintain systems that
monitor returns, voids and employee sales, and produce trend and exception
reports to assist in identifying shrinkage issues. We have a centralized loss
prevention team that focuses exclusively on implementation of these initiatives
and specifically on stores that have experienced above average levels of
shrinkage. We also maintain an independent, third party administered, toll-free
line for reporting shrinkage concerns and any other employee concerns.
Employee Training.
Our employees are critical to achieving
our goals, and we strive to hire employees with high energy levels and
motivation. We have well-established store operating policies and procedures
and an extensive 90-day in-store training program for new store managers and
assistant managers. Sales associates also participate in a 30-day customer
service and store procedures training program, which is designed to enable them
to assist customers in a friendly, helpful manner.
Layaway Program.
We offer a layaway program that allows
customers to purchase merchandise by initially paying a 20% deposit and a $2.00
service charge. The customer then makes additional payments every two weeks and
has 60 days within which to complete the purchase. If the purchase is not
completed, the customer receives a merchandise credit for amounts paid less a
re-stocking fee and service charge.
Site Selection.
Cost-effective store locations are an
important part of our profitability model. Accordingly, we look for second
and third use store locations that offer attractive rents, but also meet our
demographic and economic criteria. We have a dedicated real estate
management team responsible for new store site selection. In selecting a
location, we target both urban and rural markets. Demographic criteria used in
site selection include concentrations of our core consumers. In addition, we
require convenient site accessibility, as well as strong co-tenants, such as
food stores, dollar stores, rent-to-own stores and other apparel stores.
Shortly after we sign a new store lease and complete
the necessary leasehold improvements to the building, we prepare the store over
a three to four week period by installing fixtures, signs, dressing rooms,
checkout counters and cash register systems and merchandising the initial
inventory.
6
Table of Contents
Advertising and Marketing
Our advertising goal is to build the Citi Trends
brand and promote consumers association of the Citi Trends brand with value,
quality, fashion and everyday low prices. We generally focus our advertising
efforts during the Easter, back-to-school and Christmas seasons through the use
of commercials played on local television and hip-hop radio stations. In
addition, in the fall of 2009, we began our first national television
commercials on the BET cable channel. We also do in-store advertising that
includes window signs designated for special purposes, such as seasonal events
and clearance periods, and taped audio advertisements commingled with in-store
music programs. Signs change in color, quantity and theme every six to nine
weeks. For store grand openings and significant remodels, we typically seek to
create community awareness and consumer excitement through radio advertising
preceding and during the grand opening and by creating an on-site event with
local radio personalities broadcasting from the new location. We also
distribute promotional items such as gift certificates and shopping sprees in
connection with our grand openings and significant remodels.
Our marketing efforts center on promoting our everyday
low prices and on demonstrating the strong price-to-value relationship of our
products to our consumers. We do not utilize promotional advertising.
Merchandise is priced so that our competition rarely has lower prices. In the
limited situations where the competition offers the same merchandise at a lower
price, we will match the price.
Distribution
All merchandise sold in our stores is shipped directly
from our distribution centers in Savannah, Georgia and Darlington, South
Carolina. We generally ship merchandise from our distribution centers to our
stores daily, utilizing United Parcel Service, Inc. and FedEx Corporation.
In addition to the distribution center in Savannah, we have a small merchandise
storage facility that is attached to our corporate office. The Savannah facilities have a combined
square footage of approximately 240,000, including 55,000 square feet of
office space. To support our continued growth, we completed an expansion of the
Darlington distribution center in 2008 which increased the size of the facility
from 286,000 square feet to 550,000 square feet. We expect to open another
distribution center in the southwestern United States in late 2010 or early
2011 to support our growth plans.
Information Technology and Systems
We have information systems in place to support each
of our business functions, using an IBM i Series as the computer platform.
We purchased our enterprise software from Island Pacific, a primary software
provider to the retail industry. This
software supports the following business functions: purchasing, purchase order
management, price and markdown management, merchandise allocation, general
ledger, accounts payable and sales audit. Our distribution center in Darlington
is supported by software from Manhattan Associates which was installed in early
2009.
Our stores use point-of-sale software from
DataVantage, a division of MICROS Systems, Inc., to run the stores cash
registers. The system uses bar code scanners at checkout to capture item sales.
It also supports end-of-day processing and automatically transmits sales and
transaction data to Savannah soon after the close of business. Additionally,
the software supports store time clock functions. To facilitate the marking
down and re-ticketing of merchandise, employees in the stores use hand-held
scanners that read the item UPC barcode and prepare new price tickets for
merchandise. DataVantage software also enables us to sort, review and analyze
store transaction data to assist in loss prevention.
We believe that our information systems, with upgrades
and updates over time, are adequate to support our operations for the foreseeable
future.
Growth Strategy
Our growth strategy is to open stores in new and
existing markets, as well as to increase sales in existing stores. Adding
stores in the markets we currently serve often enables us to benefit from
enhanced name recognition and achieves advertising and operating synergies. In
fiscal 2007, we opened 42 new stores and entered the Tulsa, Oklahoma; Detroit,
Michigan; Chicago, Illinois; and Milwaukee, Wisconsin markets. In fiscal 2008,
we opened 39 new stores and entered the Philadelphia, Pennsylvania and Kansas
City, Kansas markets. In fiscal 2009, we opened 49 new stores and entered the
California and western Michigan markets.
We expect to open approximately 55 new stores in fiscal 2010. Approximately
90% of the new stores we intend to open in fiscal 2010 will be located in
states in which we are currently located.
7
Table of Contents
Competition
The markets we serve are highly competitive. The
principal methods of competition in the retail business are fashion,
assortment, pricing and presentation. We believe we have a competitive
advantage in our offering of fashionable brands at everyday low prices. We compete
against a diverse group of retailers, including national off-price retailers,
mass merchants, smaller specialty retailers and dollar stores. The off-price
retail companies with which we compete include TJX Companies, Inc. (TJX
Companies), Ross Stores, Inc. (Ross Stores), The Cato Corporation (Cato),
and Burlington Coat Factory Warehouse Corp. (Burlington Coat Factory). In particular, TJX Companies A.J. Wright
stores, Ross Stores dds DISCOUNTS stores, and Catos Its Fashion Metro
stores target lower to moderate income consumers. We believe our strategy of
appealing to African-American consumers and offering urban apparel products
allows us to compete successfully with these retailers. We also believe we
offer a more inviting store format than the off-price retailers, including our
use of carpeted floors and more prominently displayed brands. We also compete
with a group of smaller specialty retailers that only sell womens products,
such as Rainbow, Dots, Fashion Cents, Its Fashion! and Simply Fashions. Our
mass merchant competitors include Wal-Mart, Target and Kmart. These chains do
not focus on fashion apparel and, within their apparel offering, lack the urban
focus that we believe differentiates our offering and appeals to our core customers.
Similarly, while some of the dollar store chains offer apparel, they typically
offer a more limited selection focused on basic apparel needs. As a result, we
believe there is significant demand for a value retailer that addresses the
market of low- to moderate-income consumers generally and, particularly,
African-American and other minority consumers who seek value-priced, urban
fashion apparel and accessories. See Item 1A. Risk Factors in this Report for
additional information.
Intellectual Property
We regard our trademarks and service marks as having
significant value and as being important to our marketing efforts. We have
registered the Citi Trends trademark with the U.S. Patent and Trademark
Office on the Principal Register as both a trademark for retail department
store services and as a trademark for clothing. We have also registered the
following trademarks with the U.S. Patent and Trademark Office on the Principal
Register: Citi Club, Citi Steps, Citi Trends Fashion for Less, Diva
Blue, Lil Citi Man, Lil Ms Hollywood, Urban Sophistication, Red
Ape, Satin in The Hood, Citi Scrubs, and Vintage Harlem. Our policy is
to pursue registration of our marks and to oppose vigorously infringement of
our marks.
Employees
As of January 30, 2010, we had approximately
2,100 full-time and approximately 2,500 part-time employees. Of these
employees, approximately 4,000 are employed in our stores and the remainder are
employed in our distribution centers and corporate office. We are not a party
to any collective bargaining agreements, and none of our employees is
represented by a labor union. We believe our relations with our employees are
good.
8
Table of Contents
ITEM
1A.
RISK FACTORS
You should carefully consider the
following risk factors, together with the other information contained or
incorporated by reference into this Report. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we deem to be currently
immaterial also may impair our business operations. The occurrence of any of
the following risks could have a material adverse effect on our business,
financial condition and results of operations.
Our success depends on our ability to
anticipate, identify and respond rapidly to changes in consumers fashion
tastes, and our failure to adequately evaluate fashion trends could have an
adverse effect on our business, financial condition and results of operations.
The apparel industry in general and our core customer
market in particular are subject to rapidly evolving fashion trends and
shifting consumer demands. Accordingly, our success is heavily dependent on our
ability to anticipate, identify and capitalize on emerging fashion trends,
including products, styles and materials that will appeal to our target
consumers. Our failure to anticipate, identify or react appropriately and
timely to changes in styles, trends, brand preferences or desired image
preferences is likely to lead to lower demand for our merchandise, which could
cause, among other things, sales declines, excess inventories and higher
markdowns.
If we are unsuccessful
in
competing with our retail apparel competitors, our market share could decline
or our growth could be impaired and, as a result, our financial results could
suffer.
The retail apparel market is highly competitive with
few barriers to entry. We compete against a diverse group of retailers,
including national off-price apparel chains such as TJX Companies, Ross Stores,
Cato, and Burlington Coat Factory; mass merchants such as Wal-Mart, Target and
Kmart; smaller discount retail chains that only sell womens products, such as
Rainbow, Dots, Fashion Cents, Its Fashion!, and Simply Fashions; and general
merchandise discount stores and dollar stores, which offer a variety of
products, including apparel, for the value-conscious consumer. We also compete
against local off-price and specialty retail stores, regional retail chains,
traditional department stores, web-based retail stores and other direct
retailers.
The level of competition we face from these retailers
varies depending on the product segment, as many of our competitors do not
offer apparel for the entire family. Our greatest competition is generally in
womens apparel. Many of our competitors are larger than us and have
substantially greater resources than us and, as a result, may be able to adapt
better to changing market conditions, exploit new opportunities and exert
greater pricing pressures on suppliers than us. Many of these retailers have
better name recognition among consumers than us and purchase significantly more
merchandise from vendors. These retailers may be able to purchase branded
merchandise that we cannot purchase because of their name recognition and
relationships with suppliers, or they may be able to purchase branded
merchandise with better pricing concessions than us. Our local and regional
competitors have extensive knowledge of the consumer base and may be able to
garner more loyalty from customers than us. If the consumer base we serve is
satisfied with the selection, quality and price of our competitors products,
consumers may decide not to shop in our stores. Additionally, if our existing
competitors or other retailers decide to focus more on our core customers,
particularly African-American consumers, we may have greater difficulty in
competing effectively, our business and results of operations could be
adversely affected, and the market price of our common stock could suffer.
The retail industry periodically has experienced
consolidation and other ownership changes. In the future, other United States
or foreign retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations. Any of these developments could
result in our competitors increasing their buying power or market visibility.
These developments may cause us to lose market share and could have an adverse
effect on our sales and results of operations.
We could experience a reduction in
sales and cash flows if we are unable to fulfill our current and future
merchandising needs.
We depend on our
suppliers for the continued availability and satisfactory quality of our
merchandise. Most of our suppliers could discontinue selling to us at any time.
Additionally, if the manufacturers or other owners of brands or trademarks
terminate the license agreements under which some of our suppliers sell our
products, we may be unable to obtain replacement merchandise of comparable
fashion appeal or quality, in the same quantities or at the same prices. In
addition, a number of our suppliers are smaller, less capitalized companies and
are more likely to be impacted by unfavorable general economic and market
conditions than larger and better capitalized companies. These smaller
suppliers may not have sufficient liquidity during economic downturns to
properly fund their businesses, and their ability to supply their products to
us could be negatively impacted. If we lose the services of one or more of our
significant suppliers or one or more of them fail to meet our merchandising
needs, we may be unable to obtain replacement merchandise in a timely manner.
If our existing suppliers cannot meet our increased needs and we cannot locate
alternative supply sources, we may be unable to obtain sufficient quantities of
the most popular items of the nationally recognized brands at attractive
prices, which could negatively impact our sales and results of operations.
9
Table of Contents
As an apparel retailer, we rely on
numerous third parties in the supply chain to produce and deliver the products
that we sell, and our business may be negatively impacted by their failure to
comply with applicable law.
We rely on numerous third parties to supply the
products that we sell. Violations of law by our importers, manufacturers or
distributors could result in delays in shipments and receipt of goods or damage
our reputation, thus causing our revenues to decline. In addition, merchandise
we sell in our stores is subject to regulatory standards set by various
governmental authorities with respect to quality and safety. Regulations and
standards in this area may change from time to time, and substantial additional
regulations and standards have been proposed. Issues with the quality and safety
of merchandise we sell in our stores, regardless of our fault, or customer
concerns about such issues, could result in damage to our reputation, lost
sales, uninsured product liability claims or losses, merchandise recalls and
increased costs, which could have an adverse effect on our results of
operations. Further, we are susceptible to the receipt of counterfeit brands or
unlicensed goods. We could incur liability with manufacturers or other owners
of the brands or trademarked products if we inadvertently receive and sell
counterfeit brands or unlicensed goods and, therefore, it is important that we
establish relationships with reputable vendors to prevent the possibility that
we inadvertently receive counterfeit brands or unlicensed goods. Although we have
a quality assurance team to check merchandise in an effort to assure that we
purchase only authentic brands and licensed goods and are careful in selecting
our vendors, we may receive products that we are prohibited from selling or
incur liability for selling counterfeit brands or unlicensed goods, which could
adversely impact our results of operations.
If our growth strategy is
unsuccessful,
our financial condition and results of operations could suffer and the market
price of our common stock could decline.
Our ability to continue to increase our net sales and
earnings depends, in large part, on opening new stores and operating the new
and existing stores profitably. We opened 49, 39, and 42 new stores in fiscal
2009, 2008 and 2007, respectively. We expect to open approximately 55 new
stores in fiscal 2010. If we are unable to open all of these stores or operate
them profitably, we may not achieve our forecasted sales and earnings growth
targets. The success of our growth strategy is dependent upon, among other
things, the identification of suitable markets and sites for store locations,
the negotiation of acceptable lease terms, the hiring, training and retention
of competent sales personnel, the effective management of inventory to meet the
needs of new and existing stores on a timely basis, the expansion of our
infrastructure to accommodate growth, and generating sufficient operating cash
flows or securing adequate capital on commercially reasonable terms to fund our
expansion plans. Additionally, growth of our store base will place increased
demands on our operating, managerial and administrative resources and may lead
to management and operating inefficiencies, including merchandising, personnel,
distribution and integration problems. These demands and inefficiencies may
cause deterioration in the financial performance of our individual stores and,
therefore, our entire business.
A significant disruption to our
distribution process or southeastern retail locations could have an adverse
effect on our business, financial condition and results of operations.
Our ability to distribute our merchandise to our store
locations in a timely manner is essential to the efficient and profitable
operation of our business. We have distribution centers located in Savannah,
Georgia and Darlington, South Carolina. Any natural disaster or other
disruption to the operation of either of these facilities due to fire,
accidents, weather conditions or any other cause could damage a significant
portion of our inventory and impair our ability to stock our stores adequately.
In addition, the southeastern United States, where our
distribution centers and many of our stores are located, is vulnerable to
significant damage or destruction from hurricanes and tropical storms. Although
we maintain insurance on our stores and other facilities, the economic effects
of a natural disaster that affects our distribution centers and/or a
significant number of our stores could increase our operating expenses, impair
our cash flows and reduce our revenues.
Our sales, inventory levels and
earnings fluctuate on a seasonal basis, which makes our business more
susceptible to adverse events that occur during the first and fourth quarters.
Our sales and earnings are significantly higher during
the first and fourth quarters each year due to the importance of the spring
selling season, which includes Easter, and the fall selling season, which
includes Christmas. Factors negatively affecting us during the first and fourth
quarters, including adverse weather and unfavorable economic conditions, will
have a greater adverse effect on our financial condition than if our business
was less seasonal.
In order to prepare for the spring and fall selling
seasons, we must order and keep in stock significantly more merchandise than
during other parts of the year. This seasonality makes our business more
susceptible to the risk that our inventory will not satisfy actual consumer
demand. In addition, any unanticipated demand imbalances during these peak
shopping seasons could require us to sell excess inventory at a substantial
markdown or fail to satisfy our consumers. In either event, our sales and gross
margins may be lower than historical levels, which could have an adverse effect
on our business, financial condition and results of operations.
10
Table of Contents
We experience fluctuations and
variability in our comparable store sales and quarterly results of operations
and, as a result, the market price of our common stock may fluctuate
substantially.
Our comparable store sales and quarterly results have
fluctuated significantly in the past based on a number of economic, seasonal
and competitive factors, and we expect them to continue to fluctuate in the
future. Since the beginning of fiscal 2005, our quarter-to-quarter comparable
store sales have ranged from a decrease of 12.4% to an increase of 25.0%. The
most significant fluctuations were due to the unusually high sales following
Hurricanes Katrina, Rita and Wilma. In addition, we may be unable to maintain
historical levels of comparable store sales as we execute our growth strategy
and expand our business. This variability could cause our comparable store
sales and quarterly results to fall below the expectations of securities
analysts or investors, which could result in a decline in the market price of
our common stock.
Our sales could decline as a result
of general economic and other factors outside of our control, such as changes
in consumer spending patterns and declines in employment levels.
Downturns, or the expectation of a downturn, in
general economic conditions, including the effects of unemployment levels,
interest rates, levels of consumer debt, inflation in food and energy prices,
taxation, consumer confidence and other macroeconomic factors, could adversely
affect consumer spending patterns, our sales and our results of operations. The
deterioration in global economic conditions that began in 2008 may continue to
adversely affect our business and could have an adverse impact on our major
suppliers and landlords. Consumer confidence may also be affected by domestic
and international political unrest, acts of war or terrorism, natural disasters
or other significant events outside of our control, any of which could lead to
a decrease in spending by consumers. Because apparel generally is a
discretionary purchase, declines in consumer spending patterns may have a more
negative effect on apparel retailers than some other retailers. Therefore, we
may not be able to maintain our historical rate of growth in revenues and
earnings, or remain as profitable, if there is a continued decline in consumer
spending patterns. In addition, since the majority of our stores are located in
the southeastern United States, our operations are more susceptible to regional
factors than the operations of our more geographically diversified competitors.
Therefore, any adverse economic conditions that have a disproportionate effect
on the southeastern United States could have a greater negative effect on our
sales and results of operations than on retailers with a more geographically
diversified store base.
If we fail to protect our trademarks,
there could be a negative effect on our brand image and limitations on our
ability to penetrate new markets.
We believe that our Citi Trends trademark is
integral to our store design and our success in building consumer loyalty to
our brand. We have registered this trademark with the U.S. Patent and Trademark
Office. We have also registered, or applied for registration of, additional
trademarks with the U.S. Patent and Trademark Office that we believe are
important to our business. We cannot assure you that these registrations will
prevent imitation of our name, merchandising concept, store design or private
label merchandise or the infringement of our other intellectual property rights
by others. Imitation of our name, concept, store design or merchandise in a
manner that projects lesser quality or carries a negative connotation of our
brand image could have an adverse effect on our business, financial condition
and results of operations.
In addition, we cannot assure you that others will not
try to block the manufacture or sale of our private label merchandise by
claiming that our merchandise violates their trademarks or other proprietary
rights since other entities may have rights to trademarks that contain the word
Citi or may have rights in similar or competing marks for apparel and/or
accessories. Although we cannot currently estimate the likelihood of success of
any such lawsuit or ultimate resolution of such a conflict, such a controversy
could have an adverse effect on our business, financial condition and results
of operations.
If we fail to implement and maintain
effective internal controls in our business, there could be an adverse effect
on our business, financial condition, results of operations and stock price.
Section 404 of the Sarbanes Oxley Act of 2002
requires annual management assessments of the effectiveness of our internal
controls over financial reporting and an audit of such controls by our
independent registered public accounting firm. If we fail to maintain the
adequacy of our internal controls, we may be unable to conclude on an ongoing
basis that we have effective internal controls over financial reporting.
Moreover, effective internal controls, particularly those related to revenue
recognition and accounting for inventory/cost of sales, are necessary for us to
produce reliable financial reports and are important in our effort to prevent
financial fraud. If we cannot produce reliable financial reports or prevent
fraud, our business, financial condition and results of operations could be harmed,
investors could lose confidence in our reported financial information, the
market price of our stock could decline significantly and we may be unable to
obtain additional financing to operate and expand our business.
11
Table of Contents
Adverse trade restrictions may
disrupt our supply of merchandise. We also face various risks because much of
our merchandise is imported from abroad.
We purchase the products we sell directly from
approximately 1,100 vendors, and a substantial portion of this merchandise is
manufactured outside of the United States and imported by our vendors from
countries such as China and other areas of the Far East. The countries in which
our merchandise currently is manufactured or may be manufactured in the future
could become subject to new trade restrictions imposed by the United States or
other foreign governments. Trade restrictions, including increased customs
restrictions and tariffs or quotas against apparel items, as well as United
States or foreign labor strikes, work stoppages or boycotts, could
increase the cost or reduce the supply of apparel available to us and have an
adverse effect on our business. In addition, our merchandise supply could be
impacted if our vendors imports become subject to existing or future duties
and quotas, or if our vendors face increased competition from other companies
for production facilities, import quota capacity and shipping capacity.
We also face a variety of other risks generally
associated with relying on vendors that do business in foreign markets and
import merchandise from abroad, such as:
·
political instability, natural disasters, or the
threat of terrorism, in particular in countries where our vendors source
merchandise;
·
increases in merchandise costs due to raw material
price inflation or changes in purchasing power caused by fluctuations in
currency exchange rates;
·
enhanced security measures at United States and
foreign ports, which could delay delivery of imports;
·
imposition of new or supplemental duties, taxes, and
other charges on imports;
·
delayed receipt or non-delivery of goods due to the
failure of foreign-source suppliers to comply with import regulations;
·
delayed receipt or non-delivery of goods due to
organized labor strikes or congestion at United States ports; and
·
local business practice and political issues, including
issues relating to compliance with domestic or international labor standards.
The United States may impose new initiatives that
adversely affect the trading status of countries where apparel is manufactured.
These initiatives may include retaliatory duties or other trade sanctions that,
if enacted, would increase the cost of products imported from countries where
our vendors acquire merchandise.
We may continue to experience market conditions
that could adversely affect the valuation and liquidity of our investment
portfolio.
As of January 30, 2010, we had $29.7 million
($33.0 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 76% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation
(7%). 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, $23.0 million of our ARS have been
redeemed at par value by certain issuers and our investment banks since February 2008. In addition, 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. As of January 30, 2010, the
Right was valued at $3.3 million. 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.
12
Table of Contents
Failure to attract, train, assimilate
and retain skilled personnel could have an adverse effect on our growth
strategy and our financial condition.
Like most retailers, we experience significant
employee turnover rates, particularly among store sales associates and
managers, and our continued growth will require us to hire and train even more
new personnel. We therefore must continually attract, hire and train new
personnel to meet our staffing needs. We constantly compete for qualified
personnel with companies in our industry and in other industries. A significant
increase in the turnover rate among our store sales associates and managers
would increase our recruiting and training costs and could cause us to be
unable to service our customers effectively, thus reducing our ability to
continue our growth and to operate our existing stores as profitably as we have
in the past.
In addition, we rely heavily
on the experience and expertise of our senior management team and other key
management associates, and accordingly, the loss of their services could have a
material adverse effect on our business strategy and results of operations.
Changes in government regulations
could have an adverse effect on our business, financial condition and results
of operations.
New legal requirements,
including the recently adopted health care legislation, could result in higher
compliance costs. While the Company is
still evaluating the impact of the healthcare legislation, these new
regulations, as well as any related future changes, could increase expenses for
the Company and have an adverse effect on the Companys financial condition and
results of operations.
Increases in the minimum wage could
have an adverse effect on our business, financial condition and results of
operations.
The Fair Minimum Wage Act of 2007 became law on May 25,
2007. As a result, the federal minimum wage increased to $5.85 per hour in July 2007,
then to $6.55 per hour in July 2008, and to $7.25 per hour in July 2009.
Additionally, from time to time, legislative proposals are made to increase the
minimum wage in certain individual states. Wage rates for many of our employees
are at or slightly above the minimum wage. As federal and/or state minimum wage
rates increase, we may need to increase not only our employees wage rates that
are under the new minimum, but also the wages paid to our other hourly
employees. Any increase in the cost of our labor could have an adverse effect
on our operating costs, financial condition and results of operations.
Any failure of our management
information systems or the inability of third parties to continue to upgrade
and maintain our systems could have an adverse effect on our business,
financial condition and results of operations.
We depend on the accuracy, reliability and proper
functioning of our management information systems, including the systems used
to track our sales and facilitate inventory management. We also rely on our
management information systems for merchandise planning, replenishment and
markdowns, as well as other key business functions. These functions enhance our
ability to optimize sales while limiting markdowns and reducing inventory risk
through properly marking down slow-selling styles, reordering existing styles
and effectively distributing new inventory to our stores. We do not currently
have redundant systems for all functions performed by our management
information systems. Any interruption in these systems could impair our ability
to manage our inventory effectively, which could have an adverse effect on our
business. To support our growth, we will need to expand our management
information systems, and our failure to link and maintain these systems
adequately could have an adverse effect on our business.
We depend on third-party suppliers to maintain and
periodically upgrade our management information systems, including the software
programs supporting our inventory management functions. If any of these
suppliers is unable to continue to maintain and upgrade these software programs
and/or if we are unable to convert to alternate systems in an efficient and
timely manner, it could result in an adverse effect on our business.
Our ability to attract consumers to
our stores depends on the success of the strip shopping centers and downtown
business districts where our stores are located.
We locate our stores in strip shopping centers, street
front locations and downtown business districts where we believe our consumers
and potential consumers shop. The success of an individual store can depend on
favorable placement within a given strip shopping center or business district.
We cannot control the development of alternative shopping destinations near our
existing stores or the availability or cost of real estate within existing or
new shopping destinations. If our store locations fail to attract sufficient
consumer traffic or we are unable to locate replacement locations on terms
acceptable to us, our business could suffer. If one or more of the anchor
tenants located in the strip shopping centers or business districts where our
stores are located close or leave, or if there is significant deterioration of
the surrounding areas in which our stores are located, our business may be
adversely affected.
Our stock price is subject to
volatility.
Our stock price is volatile. From our initial public
offering in May 2005 through January 30, 2010, the trading price of
our common stock has ranged from $7.01 to $57.85 per share. As a result of this
volatility, investors may not be able to sell their common stock at or above
their respective purchase prices. The market price for our common stock may be
influenced by many factors, including:
·
actual or anticipated fluctuations in our operating
results;
·
changes in securities analysts recommendations or
estimates of our financial performance;
·
changes in market valuations or operating performance
of our competitors or companies similar to ours;
13
Table of Contents
·
announcements by us, our competitors or other
retailers;
·
additions and departures of key personnel;
·
changes in accounting principles;
·
the passage of legislation or other developments
affecting us or our industry;
·
the trading volume of our common stock in the public
market;
·
changes in economic or financial market conditions;
·
natural disasters, terrorist acts, acts of war or
periods of civil unrest; and
·
the realization of some or all of the risks described
in this section entitled Risk Factors.
In addition, the stock markets have experienced
significant price and trading volume fluctuations from time to time, and the
market prices of the equity securities of retailers have been extremely
volatile and have recently experienced sharp price and trading volume changes.
These broad market fluctuations may adversely affect the market price of our
common stock.
Securities analysts may not continue
to cover our common stock or they may issue negative reports, and this may have
an adverse impact on the price of our common stock.
The trading market for our common stock relies, in
part, on the research reports that financial analysts publish about our company
or our industry. Public statements by these securities analysts may
affect our stock price. If any of the analysts who cover us downgrades
the rating of our common stock, our common stock price would likely decline.
If any of these analysts ceases coverage of our common stock, we could lose
visibility in the market, which in turn could cause our common stock price to
decline.
We do not currently intend to pay
dividends on our common stock.
We have never declared or paid any cash dividends on
our common stock and do not currently intend to do so for the foreseeable
future. In addition, under the terms of
our revolving credit facility, the payment of cash dividends is prohibited.
Provisions in our certificate of
incorporation and by-laws and Delaware law may delay or prevent our acquisition
by a third party.
Our second amended and restated certificate of
incorporation and our amended and restated by-laws contain several provisions
that may make it more difficult for a third party to acquire control of us
without the approval of our board of directors. These provisions include, among
other things, a classified board of directors, advance notice for raising
business or making nominations at stockholder meetings and blank check
preferred stock. Blank check preferred stock enables our board of directors,
without stockholder approval, to designate and issue additional series of
preferred stock with such dividend, liquidation, conversion, voting or other
rights, including convertible securities with no limitations on conversion, as
our board of directors may determine, including rights to dividends and
proceeds in a liquidation that are senior to the common stock.
We are also subject to several provisions of the Delaware
General Corporation Law that could delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our stockholders receiving a premium over the market price
for their common stock or may otherwise be in the best interests of our
stockholders.
ITEM
1B.
|
|
UNRESOLVED
STAFF COMMENTS
|
None.
14
Table of Contents
Store Locations
As of January 30, 2010, we operated 403 stores
located in 24 states. Our stores average approximately 10,400 square feet of
selling space and are typically located in neighborhood strip shopping centers
and downtown business districts that are convenient to low- to moderate-income
customers. Originally, our stores were located in the Southeast, but in recent
years we expanded into the Mid-Atlantic and Midwest regions and the states of
Texas and California.
We have no franchising relationships, and all of the
stores are company operated. All existing 403 stores, totaling
approximately 5.2 million total square feet and 4.2 million selling square
feet, are leased under operating leases. Additionally, as of March 8,
2010, we have signed leases for 26 new stores to be opened during fiscal 2010
aggregating 289,000 total selling square feet. The typical store lease is for
five years with options to extend the lease term for three additional five-year
periods. Nearly all store leases provide us the right to cancel following an
initial three-year period in the event the store does not meet pre-determined
sales levels. The table below sets forth the number of stores in each of the 24
states in which we operated as of January 30, 2010:
Alabama26
Arkansas7
California5
Delaware1
Florida39
Georgia56
Illinois7
Indiana7
Kansas1
Kentucky3
Louisiana32
Maryland5
Michigan15
Mississippi22
Missouri4
North Carolina37
Ohio15
Oklahoma2
Pennsylvania2
South Carolina41
Tennessee15
Texas42
Virginia17
Wisconsin2
Support Center Facilities
We own an approximately 170,000 square-foot facility
in Savannah, Georgia, which serves as one of our two distribution centers. We
own another facility in Savannah totaling approximately 70,000 square feet,
which serves as our headquarters and, to a lesser extent, as a merchandise
storage facility. We own an approximately 550,000 square-foot facility in
Darlington, South Carolina, which serves as a distribution center. We expect to
open another distribution center in the southwestern United States in late 2010
or early 2011 to support our growth plans. In addition, we currently lease an
1,800 square-foot office in New York City which is used for buyer operations
and meetings with vendors.
15
Table of Contents
ITEM
3.
|
|
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
4.
|
|
(Removed
and Reserved)
|
PART II
ITEM
5.
|
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF
EQUITY SECURITIES
|
Our common stock is traded on The NASDAQ Stock Market
under the symbol CTRN. The following table shows the high and low per share
prices of our common stock for the periods indicated.
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
First Quarter
|
|
22.73
|
|
12.42
|
|
Second Quarter
|
|
28.12
|
|
17.72
|
|
Third Quarter
|
|
25.88
|
|
11.33
|
|
Fourth Quarter
|
|
17.46
|
|
7.01
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
First Quarter
|
|
25.40
|
|
9.40
|
|
Second Quarter
|
|
29.72
|
|
20.92
|
|
Third Quarter
|
|
31.47
|
|
21.30
|
|
Fourth Quarter
|
|
31.77
|
|
25.49
|
|
On March 23, 2010,
the last reported sale price of our common stock on The NASDAQ Stock Market was
$34.63 per share. On March 23, 2010, there were 116 holders of record and
approximately 1,800 beneficial holders of our common stock.
We have never declared or paid any cash dividends on
our common stock and do not intend to pay any cash dividends on our common
stock in the foreseeable future. In addition, under the terms of our revolving
credit facility, the payment of cash dividends is prohibited.
Recent Sales of Unregistered
Securities.
None.
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers.
None.
Equity Compensation Plan Information.
See Item 12 of this Report.
16
Table of Contents
Stock Performance Graph
Set forth below is a line graph comparing the last
fifty-six months percentage change in the cumulative total stockholder return
on shares of our common stock against (i) the cumulative total return of
companies listed on The NASDAQ Stock Market and (ii) the cumulative total
return of the NASDAQ Retail Trade Index. The period compared commences May 18,
2005, the date on which our common stock began trading on The NASDAQ Stock
Market, and ends January 30, 2010. This graph assumes that $100 was
invested on May 18, 2005 in our common stock and in each of the market
index and the industry index, and that all cash distributions were reinvested.
Our common stock price performance shown on the graph is not indicative of
future price performance.
COMPARISON
OF 56 MONTH CUMULATIVE TOTAL RETURN*
Among
Citi Trends, Inc., The NASDAQ Composite Index
And
The NASDAQ Retail Trade Index
*$100
invested on 5/18/05 in stock or 4/30/05 in index, including reinvestment of
dividends. Fiscal year ending January 31.
Total
Return Analysis
|
|
5/18/05
|
|
1/06
|
|
1/07
|
|
1/08
|
|
1/09
|
|
1/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citi
Trends, Inc.
|
|
100.00
|
|
292.99
|
|
251.02
|
|
87.07
|
|
60.70
|
|
198.28
|
|
NASDAQ
Composite
|
|
100.00
|
|
118.83
|
|
130.79
|
|
125.22
|
|
77.27
|
|
112.53
|
|
NASDAQ
Retail Trade
|
|
100.00
|
|
120.99
|
|
116.26
|
|
112.11
|
|
69.09
|
|
121.26
|
|
17
Table of Contents
ITEM
6.
|
|
SELECTED
FINANCIAL DATA
|
Selected
Financial and Operating Data
The following table provides selected consolidated
financial and operating data for each of the fiscal years in the five-year
period ended January 30, 2010, including: (a) consolidated statement
of income data for each such period, (b) additional operating data for
each such period and (c) consolidated balance sheet data as of the end of
each such period. The consolidated statement of income data for the fiscal
years ended January 30, 2010, January 31, 2009 and February 2,
2008 and the consolidated balance sheet data as of January 30, 2010 and January 31,
2009 are derived from our audited consolidated financial statements included in
Item 8 that have been audited by KPMG LLP, an independent registered public
accounting firm. The statement of income data for the fiscal years ended February 3,
2007 and January 28, 2006 and the balance sheet data as of February 2,
2008, February 3, 2007 and January 28, 2006 are derived from our
audited financial statements that are not included in this Report. The selected
consolidated financial and operating data set forth below should be read in
conjunction with, and are qualified in their entirety by reference to, the
section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 and our consolidated
financial statements and related notes set forth in the financial pages of
this Report. Historical results are not necessarily indicative of results to be
expected for any future period.
|
|
Fiscal Year Ended (1)
|
|
|
|
January 30,
2010
|
|
January 31,
2009
|
|
February 2,
2008
|
|
February 3,
2007
|
|
January 28,
2006
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
551,869
|
|
$
|
488,202
|
|
$
|
437,515
|
|
$
|
381,918
|
|
$
|
289,804
|
|
Cost
of sales
|
|
338,898
|
|
301,867
|
|
278,783
|
|
235,744
|
|
178,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
212,971
|
|
186,335
|
|
158,732
|
|
146,174
|
|
110,851
|
|
Selling,
general and administrative expenses
|
|
165,166
|
|
147,009
|
|
127,470
|
|
107,535
|
|
83,559
|
|
Depreciation
and amortization
|
|
18,431
|
|
16,261
|
|
12,583
|
|
8,326
|
|
6,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
29,374
|
|
23,065
|
|
18,679
|
|
30,313
|
|
21,205
|
|
Interest,
net
|
|
312
|
|
2,188
|
|
1,914
|
|
1,655
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
29,686
|
|
25,253
|
|
20,593
|
|
31,968
|
|
21,751
|
|
Income
tax expense
|
|
9,969
|
|
7,870
|
|
6,379
|
|
10,617
|
|
7,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,717
|
|
$
|
17,383
|
|
$
|
14,214
|
|
$
|
21,351
|
|
$
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.36
|
|
$
|
1.21
|
|
$
|
1.02
|
|
$
|
1.57
|
|
$
|
1.21
|
|
Diluted
|
|
$
|
1.36
|
|
$
|
1.20
|
|
$
|
1.00
|
|
$
|
1.51
|
|
$
|
1.08
|
|
Weighted
average shares used to compute net income per share (2):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,363,894
|
|
14,131,077
|
|
13,946,342
|
|
13,574,718
|
|
11,746,866
|
|
Diluted
|
|
14,395,605
|
|
14,268,788
|
|
14,223,229
|
|
14,138,063
|
|
13,148,602
|
|
Additional
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores:
|
|
|
|
|
|
|
|
|
|
|
|
Opened
during period
|
|
49
|
|
39
|
|
42
|
|
42
|
|
36
|
|
Closed
during period
|
|
3
|
|
1
|
|
0
|
|
0
|
|
1
|
|
Open
at end of period
|
|
403
|
|
357
|
|
319
|
|
277
|
|
235
|
|
Selling
square footage at end of period
|
|
4,205,046
|
|
3,654,378
|
|
3,168,866
|
|
2,628,539
|
|
2,123,684
|
|
Comparable
store sales increase (3)
|
|
0.6
|
%
|
0.0
|
%
|
1.0
|
%(4)
|
8.2
|
%(4)
|
16.7
|
%(5)
|
Average
sales per store (6)
|
|
$
|
1,452
|
|
$
|
1,444
|
|
$
|
1,468
|
|
$
|
1,492
|
|
$
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
62,993
|
|
$
|
33,516
|
|
$
|
6,203
|
|
$
|
7,707
|
|
$
|
3,995
|
|
Short-term
investments
|
|
33,025
|
|
|
|
56,165
|
|
65,956
|
|
54,458
|
|
Long-term
investments
|
|
|
|
43,825
|
|
|
|
|
|
|
|
Total
assets
|
|
279,986
|
|
240,789
|
|
210,177
|
|
192,107
|
|
142,205
|
|
Total
liabilities
|
|
98,643
|
|
82,582
|
|
72,030
|
|
73,898
|
|
58,456
|
|
Total
stockholders equity
|
|
181,343
|
|
158,207
|
|
138,147
|
|
118,209
|
|
83,749
|
|
18
Table of Contents
(1)
|
|
Our fiscal year ends on the Saturday closest to
January 31 of each year. The years ended January 30, 2010,
January 31, 2009, February 2, 2008, February 3, 2007 and
January 28, 2006 are referred to as fiscal 2009, 2008, 2007, 2006 and
2005, respectively. Fiscal 2006 is comprised of 53 weeks. Fiscal years
2009, 2008, 2007and 2005 are each comprised of 52 weeks.
|
|
|
|
(2)
|
|
Reflects 26 for 1 stock split completed in
May 2005.
|
|
|
|
(3)
|
|
Stores included in the comparable store sales
calculation for any period are those stores that were opened prior to the
beginning of the preceding fiscal year and were still open at the end of such
period. Relocated stores and expanded stores are included in the comparable
store sales results.
|
|
|
|
(4)
|
|
The Company is reporting comparable store sales on a
comparable store and comparable weeks basis; for fiscal 2007, the 52
weeks ended February 2, 2008 were compared to the 52 weeks ended
February 3, 2007; for fiscal 2006, the 53 weeks ended February 3,
2007 were compared to the 53 weeks ended February 4, 2006.
|
|
|
|
(5)
|
|
This data includes the positive impact of
post-hurricane sales as a result of Hurricanes Katrina, Rita and Wilma during
the months of September 2005 through January 2006.
|
|
|
|
(6)
|
|
Average sales per store is defined as net sales
divided by the average of stores open at the end of the prior fiscal year and
stores open at the end of the current fiscal year.
|
19
Table of Contents
ITEM
7.
|
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the section entitled Selected Financial and Operating
Data and our audited consolidated financial statements and the respective
related notes included elsewhere in this Annual Report on Form 10-K. This
discussion may contain forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth under the
section entitled Risk Factors and elsewhere in this Report, our actual
results may differ materially from those anticipated in these
forward-looking statements.
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 operate 403 stores in both
urban and rural markets in 24 states.
We are pursuing an aggressive store growth strategy
and believe that the addition of new stores will be the primary source of
future growth. In fiscal 2009 we opened 49 new stores, entering the California
and western Michigan markets for the first time. We expect to open
approximately 55 new stores in fiscal 2010. Approximately 90% of the new stores
we intend to open in fiscal 2010 will be located in states that we currently
serve.
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 were 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 have increased from $0.8 million in fiscal 2000 to
$1.5 million in fiscal 2009. 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. All of the statistics discussed above are
critical components of earnings before interest, taxes, depreciation and
amortization (EBITDA) which is considered our most important operating
statistic.
Basis of the Presentation
Net sales consist of store sales and layaway fees, net
of returns by customers. Cost of sales consists of the cost of products we sell
and associated freight costs. Selling, general and administrative expenses are
comprised of store costs, including payroll and occupancy costs, corporate and
distribution center costs and advertising costs. We operate on a 52- or 53-week
fiscal year, which ends on the Saturday closest to January 31. Each of our
fiscal quarters consists of four 13-week periods, with an extra week added to
the fourth quarter every five to six years. The years ended January 30,
2010, January 31, 2009, February 2, 2008, February 3, 2007 and January 28,
2006 are referred to as fiscal 2009, 2008, 2007, 2006 and 2005, respectively.
Fiscal year 2006 is comprised of 53 weeks. Fiscal years 2009, 2008, 2007
and 2005 are each comprised of 52 weeks.
Results of Operations
The following discussion of our financial performance
is based on the consolidated financial statements set forth in the financial pages of
this Report. The nature of our business is seasonal. Historically, sales in the
first and fourth quarters have been higher than sales achieved in the 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 our business may affect comparisons between
periods.
20
Table of Contents
Net Sales and Additional Operating Data
The following table sets forth, for the periods
indicated, selected consolidated statement of income data expressed both in
dollars and as a percentage of net sales:
|
|
Fiscal Year Ended
|
|
|
|
January 30,
2010
|
|
January 31,
2009
|
|
February 2,
2008
|
|
|
|
(dollars in thousands)
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
551,869
|
|
100.0
|
%
|
$
|
488,202
|
|
100.0
|
%
|
$
|
437,515
|
|
100.0
|
%
|
Cost
of sales
|
|
338,898
|
|
61.4
|
%
|
301,867
|
|
61.8
|
%
|
278,783
|
|
63.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
212,971
|
|
38.6
|
%
|
186,335
|
|
38.2
|
%
|
158,732
|
|
36.3
|
%
|
Selling,
general and administrative expenses
|
|
165,166
|
|
29.9
|
%
|
147,009
|
|
30.1
|
%
|
127,470
|
|
29.1
|
%
|
Depreciation
and amortization
|
|
18,431
|
|
3.3
|
%
|
16,261
|
|
3.3
|
%
|
12,583
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
29,374
|
|
5.3
|
%
|
23,065
|
|
4.7
|
%
|
18,679
|
|
4.3
|
%
|
Interest
income
|
|
404
|
|
0.1
|
%
|
2,495
|
|
0.5
|
%
|
2,383
|
|
0.5
|
%
|
Interest
expense
|
|
(92
|
)
|
(0.0
|
)%
|
(307
|
)
|
(0.0
|
)%
|
(469
|
)
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
29,686
|
|
5.4
|
%
|
25,253
|
|
5.2
|
%
|
20,593
|
|
4.7
|
%
|
Income
tax expense
|
|
9,969
|
|
1.8
|
%
|
7,870
|
|
1.6
|
%
|
6,379
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,717
|
|
3.6
|
%
|
$
|
17,383
|
|
3.6
|
%
|
$
|
14,214
|
|
3.2
|
%
|
The following table provides information, for the
years indicated, about the number of total stores open at the beginning of the
year, stores opened and closed during each year, total stores open at the end
of each year and comparable store sales for the years:
|
|
Fiscal Year Ended
|
|
|
|
January 30,
2010
|
|
January 31,
2009
|
|
February 2,
2008
|
|
|
|
|
|
|
|
|
|
Total
stores open, beginning of year
|
|
357
|
|
319
|
|
277
|
|
New
stores
|
|
49
|
|
39
|
|
42
|
|
Closed
stores
|
|
(3
|
)
|
(1
|
)
|
0
|
|
|
|
|
|
|
|
|
|
Total
stores open, end of year
|
|
403
|
|
357
|
|
319
|
|
|
|
|
|
|
|
|
|
Comparable
store sales increase (1)
|
|
0.6
|
%
|
0.0
|
%
|
1.0
|
%(2)
|
(1)
Stores included in the comparable store sales
calculation for any year are those stores that were opened prior to the
beginning of the preceding fiscal year and were still open at the end of such
year. Relocated stores and expanded stores are included in the comparable store
sales results.
(2)
The Company is reporting comparable store sales on a
comparable store and comparable weeks basis. For fiscal 2007, the 52 weeks
ended February 2, 2008 are compared to the 52 weeks ended February 3,
2007.
21
Table of Contents
Fiscal 2009
Compared to Fiscal 2008
Net Sales.
Net sales increased $63.7 million,
or 13.0%, to $551.9 million in fiscal 2009 from $488.2 million in
fiscal 2008. The increase in net sales
was due primarily to 49 new store openings in fiscal 2009 and 39 new store openings
in fiscal 2008 for which there was not a full year of sales in fiscal 2008,
partially offset by the closing of three stores in fiscal 2009 and one store in
fiscal 2008. Additionally, comparable
store sales were up 0.6% in fiscal 2009. The 49 stores opened in fiscal
2009 accounted for $36.0 million of the increase in sales, the 39 stores
opened in fiscal 2008 accounted for $26.5 million of the increase, and the
315 comparable stores contributed $3.1 million in additional sales, while the
closed stores had the effect of reducing sales by $1.9 million. Comparable
stores include locations that have been relocated or expanded. There were 11 stores relocated or expanded in
fiscal 2009 and 9 stores relocated or expanded in fiscal 2008. Sales in these comparable relocated and
expanded stores increased 9.3% in fiscal 2009, while sales in all other
comparable stores decreased less than 0.1%.
Approximately 70% of the 0.6% improvement in
comparable store sales was due to an increase in the number of customer
transactions, with the remainder due to a higher average customer
purchase. Comparable store sales changes by major merchandise class were
as follows: Accessories +11%; Home +6%;
Childrens +2%; Mens -2%; and Womens -2%.
Gross Profit.
Gross profit increased
$26.7 million, or 14.3%, to $213.0 million in fiscal 2009 from
$186.3 million in fiscal 2008. 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 fiscal 2009 from 38.2% in fiscal 2008. This increase in gross margin
resulted from inventory shrinkage as a percentage of sales being 40 basis
points lower due to steps taken to better control inventory 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.
Selling, General and Administrative
Expenses.
Selling, general and administrative expenses increased $18.2 million, or
12.4%, to $165.2 million in fiscal 2009 from $147.0 million in fiscal
2008. The increase in these expenses was due primarily to additional store
level, distribution and corporate costs arising from the opening of 49 new
stores in fiscal 2009 and 39 new stores in fiscal 2008. Selling, general and
administrative expenses as a percentage of net sales decreased to 29.9% in
fiscal 2009 from 30.1% in fiscal 2008.
Typically, it is difficult for us to achieve such expense leverage when
comparable store sales increase at a rate as low as 0.6%, because most expense
components have inflation in excess of that level. However, expenses were
tightly controlled in 2009 in expectation of a slow sales environment. As a result, the 12.4% increase in expenses
was less than the 13.0% increase in net sales and the 15.1% increase in store
selling square footage.
Depreciation and Amortization.
Depreciation and amortization expense
increased $2.1 million, or 13.3%, to $18.4 million in fiscal 2009 from $16.3
million in fiscal 2008, as the result of capital expenditures incurred for new
and relocated/expanded stores and the completion of the expansion of the
Darlington distribution center in early 2008.
Interest Income.
Interest income decreased to $0.4
million in fiscal 2009 from $2.5 million in fiscal 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 $0.1
million in fiscal 2009 from $0.3 million in fiscal 2008 due to the normal
decline in the interest portion of payments on our capital lease obligations as
the principal portion of such obligations was reduced.
Income
Tax Expense.
Income tax expense increased $2.1 million, or 26.7%, to $10.0 million in fiscal
2009 from $7.9 million in fiscal 2008 due to higher pretax earnings in
fiscal 2009 and an increase in the effective income tax rate to 33.6% in fiscal
2009 from 31.2% in fiscal 2008. The
increase in the tax rate was due to having less tax-free interest income in
fiscal 2009, as discussed above.
Net
Income.
Net
income increased 13.4% to $19.7 million in fiscal 2009 from
$17.4 million in fiscal 2008 due to the factors discussed above.
Fiscal 2008
Compared to Fiscal 2007
Net Sales.
Net sales increased $50.7 million,
or 11.6%, to $488.2 million in fiscal 2008 from $437.5 million in
fiscal 2007. The increase in net sales was due to 39 new store openings in
fiscal 2008 and 42 new store openings in fiscal 2007 for which there was not a
full year of sales in fiscal 2007, partially offset by the closing of one store
in fiscal 2008. Comparable store sales
were up less than 0.1% in fiscal 2008. The 39 stores opened in fiscal 2008
accounted for $30.2 million of the increase in sales, the 42 stores opened
in fiscal 2007 accounted for $20.7 million of the increase, and the 276
comparable stores contributed $0.3 million in additional sales, while the
closed store had the effect of reducing sales by $0.5 million. Comparable
stores include locations that have been relocated or expanded. There were 9 stores relocated or expanded in
fiscal 2008 and 12 stores relocated or expanded in fiscal 2007. Sales in these comparable relocated and
expanded stores increased 6.2% in fiscal 2008, while sales in all other
comparable stores decreased 0.6%.
22
Table of Contents
The negligible increase in comparable store sales
included a 1.1% increase in the average customer purchase, offset by a similar
decrease in the number of customer transactions. Comparable store sales
changes by major merchandise class were as follows: Childrens +8%; Home +5%; Mens -2%; Womens
-3%; and Accessories -8%.
Gross Profit.
Gross profit increased
$27.6 million, or 17.4%, to $186.3 million in fiscal 2008 from
$158.7 million in fiscal 2007. The increase in gross profit is a result of
the increase in sales, together with an improvement in the gross margin to
38.2% in fiscal 2008 from 36.3% in fiscal 2007. This increase in gross margin
resulted primarily from merchandise markdowns being approximately 140 basis
points lower as a percentage of sales due to improved management of inventory
levels. In addition, gross margin
benefited from inventory shrinkage being approximately 40 basis points lower
due to steps taken to better control inventory shrinkage, including, a
reduction in the span of control given to our district managers in order to
increase the level of supervision, 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.
Selling, General and Administrative
Expenses.
Selling, general and administrative expenses increased $19.5 million, or
15.3%, to $147.0 million in fiscal 2008 from $127.5 million in fiscal
2007. The increase in these expenses was due primarily to additional store
level, distribution and corporate costs arising from the opening of 39 new
stores in fiscal 2008 and 42 new stores in fiscal 2007. Selling, general and
administrative expenses as a percentage of net sales increased to 30.1% in
fiscal 2008 from 29.1% in fiscal 2007, due primarily to the deleveraging effect
that occurs on expenses as a percentage of sales when comparable store sales
increase at a rate that is lower than the rate of inflation on
expenses. In particular, payroll-related costs increased 80 basis points
due to this deleveraging effect, together with higher incentive compensation
expense resulting from better results in relation to goals, and an increase in
store supervision costs in connection with a reduction in the span of control
given to our district managers. These increases in the expense percentage were
partially offset by approximately $0.6 million of expenses in fiscal 2007
related to a secondary stock offering and stock registration of which the
Company received no proceeds.
Depreciation and Amortization.
Depreciation and amortization expense
increased $3.7 million, or 29.2%, to $16.3 million in fiscal 2008 from $12.6
million in fiscal 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 $2.5 million
in fiscal 2008 from $2.4 million in fiscal 2007 due primarily to higher
interest rates earned on our investments in auction rate securities once the
auctions of such securities began to fail in February 2008 and due to an
increase in market rates for a short period of time during the banking crisis
in the third quarter.
Interest Expense
. Interest expense decreased to $0.3
million in fiscal 2008 from $0.5 million in fiscal 2007 due to the normal
decline in the interest portion of payments on our capital lease obligations as
the principal portion of such obligations was reduced.
Income Tax Expense.
Income tax expense increased $1.5
million, or 23.4%, to $7.9 million in fiscal 2008 from $6.4 million in
fiscal 2007 due primarily to higher pretax earnings in fiscal 2008. The
effective income tax rates in fiscal 2008 and fiscal 2007 were virtually
unchanged at 31.2% and 31.0%, respectively.
Net Income.
Net income increased 22.3% to
$17.4 million in fiscal 2008 from $14.2 million in fiscal 2007 due to
the factors discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working
capital, expansion of our distribution infrastructure, opening 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, if necessary, borrowings under our revolving credit facility (described
below). In fiscal 2009, there was no need to borrow under the credit facility,
including during the seasonal build of inventory in advance of the Christmas
season. Due to our strong cash and cash equivalents position at January 30,
2010 ($63.0 million), we believe that we will likely not have to borrow under
the credit facility during fiscal 2010.
Discussion of Cash Flows
Fiscal 2009
Compared to Fiscal 2008
As of January 30, 2010, we had total cash and
cash equivalents of $63.0 million, compared with $33.5 million as of January 31,
2009. The most significant factors in the increase in our cash and cash
equivalents position during fiscal 2009 were positive cash flow from operations
and sales/redemptions of investment securities, partially offset by capital
expenditures.
23
Table of Contents
Inventory represented 36.0% of our total assets as of January 30,
2010, compared with 35.8% as of January 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.
Cash Flows Provided by Operating
Activities
. Net
cash provided by operating activities was $42.8 million in fiscal 2009
compared with $39.6 million in fiscal 2008. The main source of cash during
fiscal 2009 was net income, adjusted for noncash expenses such as depreciation
and amortization, deferred income taxes, loss on disposal of property and
equipment, and stock-based compensation expense, totaling $39.8 million
(compared with $35.4 million in fiscal 2008).
In addition, cash provided by operating activities benefited from (1) accounts
payable increasing $10.4 million (compared with $8.7 million in fiscal 2008)
due to an increase in inventory and an improvement in inventory turnover in
fiscal 2009 which resulted in more of our inventory still being in accounts
payable at year end; (2) income tax payable increasing $2.9 million
(compared with $0.7 million in fiscal 2008) due to higher pretax income and a
higher effective tax rate in fiscal 2009; (3) accrued expenses and other
long-term liabilities increasing $2.6 million (compared with $1.7 million in
fiscal 2008) which represents a 13.1% increase, relatively consistent with the
Companys growth during 2009; and (4) accrued compensation increasing $2.0
million (compared with $2.3 million in fiscal 2008) due to the Companys growth
and a higher bonus accrual resulting from improved performance in relation to
our budget in fiscal 2009. The only
significant use of cash was inventory which increased $14.6 million (compared
with $3.8 million in fiscal 2008).
Approximately 75% of the increase in inventory was in new stores, while
the remainder was in comparable stores and the distribution centers. There was more inventory in comparable stores
due to a shift of sales near the end of fiscal 2009 from late January to
early February, causing inventories on the last day of the year to be higher
than normal. This shift in sales was a
result of later income tax refunds, which often spur spending by our customers,
and the last weekend of fiscal 2009 experiencing sales declines due to
weather-related store closings and a shift in the timing of the first of the
month around the end of the fiscal year.
Cash Flows Used in Investing
Activities.
Cash
used in investing activities was $12.8 million in fiscal 2009 compared with
$11.4 million in fiscal 2008. Cash
used for the purchase of property and equipment was $23.6 million during fiscal
2009 and $23.0 million in fiscal 2008, with fiscal 2009 including capital
expenditures for more new stores (49 vs. 39) and fiscal 2008 including the
final portion of the costs related to completing the expansion of the
Darlington, South Carolina distribution center which began in fiscal 2007. Sales/redemptions of municipal auction rate
securities, net of purchases, provided cash of $10.8 million and $11.7 million
in fiscal 2009 and 2008, respectively.
Cash Flows Used in Financing
Activities.
Cash
used in financing activities was $0.5 million in fiscal 2009 and
$0.9 million in fiscal 2008. Cash used in financing activities consisted
of payments on capital lease obligations totaling $1.4 million and $1.6 million
in fiscal 2009 and 2008, respectively, partially offset by cash provided in
connection with stock option exercises and the related tax benefits.
Until required for other
purposes, we maintain cash and cash equivalents in deposit or money market
accounts.
Fiscal 2008
Compared to Fiscal 2007
As of January 31, 2009, we had total cash and
cash equivalents of $33.5 million compared with total cash and cash
equivalents of $6.2 million as of February 2, 2008. The most
significant factors in the increase in our net liquidity position during fiscal
2008 were positive cash flow from operations and net sales/redemptions of
investment securities, partially offset by capital expenditures.
Inventory represented 35.8% of our total assets as of January 31,
2009, compared with 39.2% as of February 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.
Cash Flows Provided by Operating
Activities
. Net
cash provided by operating activities was $39.6 million in fiscal 2008
compared to $16.6 million in fiscal 2007. The main source of cash during fiscal
2008 was net income, adjusted for noncash expenses such as depreciation and
amortization, deferred income taxes, loss on disposal of property and
equipment, and stock-based compensation expense, totaling $35.4 million
(compared with $27.0 million in fiscal 2007).
In addition, cash provided by operating activities benefited from
accounts payable increasing $8.7 million (compared with a decrease of $3.3
million in fiscal 2007), despite inventory increasing only $3.8 million, due to
improved inventory turnover which caused a greater percentage of inventory
purchases to be included in accounts payable as of the end of fiscal 2008. The
only significant use of cash, other than inventory, was a $4.1 million increase
in prepaid and other current assets (compared with $1.1 million in fiscal 2007)
due to (1) an increase in receivables from landlords for tenant
improvement reimbursements, as the result of an effort by us to take on more of
the construction work for new store leasehold improvements, in order to better
control the projects, in return for reimbursements from the landlords, and (2) normal
increases in credit card receivables, prepaid rent and prepaid insurance due to
the Companys growth.
Cash Flows Used in Investing
Activities.
Cash
used in investing activities was $11.4 million in fiscal 2008 compared
with $20.3 million in fiscal 2007. Cash used for the purchase of property
and equipment was $7.1 million lower during fiscal 2008 than in
24
Table of Contents
fiscal 2007 due primarily to the larger portion of the
capital expenditures related to the expansion of the Darlington, South Carolina
distribution center occurring in fiscal 2007.
In addition, fiscal 2007 capital expenditures included the purchase of
our corporate headquarters/inventory storage facility in Savannah, Georgia that
had previously been leased. Sales/redemptions of municipal auction rate
securities, net of purchases, provided cash of $11.7 million and $9.8 million
in fiscal 2008 and 2007, respectively.
Cash Flows (Used in)/Provided by
Financing Activities.
Cash used in financing activities was $0.9 million in fiscal 2008 and
cash provided by financing activities was $2.2 million in fiscal 2007.
Cash used in financing activities consisted of payments on capital lease
obligations totaling $1.6 million and $1.8 million in fiscal 2008 and 2007,
respectively. In addition, cash totaling
$1.0 million was used in fiscal 2008 to settle a stock option exercise. Cash provided by financing activities
consisted primarily of the tax benefit from stock option exercises of $1.2
million in 2008 and $3.5 million in fiscal 2007.
Liquidity Sources, Requirements and
Contractual Cash Requirements and Commitments
Our principal sources of liquidity consist of: (i) cash
and cash equivalents (which equaled $63.0 million as of January 30,
2010); (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 January 30, 2010, we had $29.7 million
($33.0 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 76% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation
(7%). 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, $23.0 million of our ARS have been
redeemed at par value by certain issuers and our investment banks since February 2008.
In addition, 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. As of January 30, 2010, the
Right was valued at $3.3 million. 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.
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.
We anticipate that capital expenditures will be
approximately $45 million to $50 million in fiscal 2010,
approximately one-half of which is expected to relate to the Companys next
distribution center in the southwestern United States. Most of the other expenditures will relate to
the capital costs associated with approximately 55 new stores that we plan to
open in fiscal 2010. We plan to finance these capital expenditures with cash
flow from operations and existing cash balances.
25
Table of Contents
The following table discloses aggregate information
about our contractual obligations as of January 30, 2010 and the periods
in which payments are due:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More than
5 Years
|
|
|
|
(in thousands)
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
$
|
94,654
|
|
$
|
27,093
|
|
$
|
42,828
|
|
$
|
19,739
|
|
$
|
4,994
|
|
Purchase obligations
|
|
82,081
|
|
82,081
|
|
|
|
|
|
|
|
Total contractual cash
obligations
|
|
$
|
176,735
|
|
$
|
109,174
|
|
$
|
42,828
|
|
$
|
19,739
|
|
$
|
4,994
|
|
(1)
Represents fixed minimum rents in stores and does not
include incremental rents which are computed as a percentage of net sales. For
example, in fiscal 2009 incremental percentage rent was approximately $1.5
million, which represented 5.4% of total rent expense.
Indebtedness.
On
March 25, 2009, we amended our credit facility with Bank of America to
extend the expiration date to March 24, 2010 and to lower the commitment
from $35 million to $20 million, reflecting our cash position and the fact that
we previously had not had any 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 amended
facility 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 is dependent on our
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. Under the
terms of the credit facility, the payment of cash dividends is prohibited and
there is one financial covenant (consolidated leverage ratio). On March 22,
2010, the facility was amended to extend the expiration date to March 22,
2012. We have had no borrowings under the facility.
Operating Leases.
We lease our stores under operating
leases, which generally have an initial term of five years with renewal
options. The typical store lease requires a combination of both fixed monthly
rents and contingent rents computed as a percentage of net sales after a certain
sales threshold has been met. For fiscal 2009, rent expense was
$28.2 million compared with $23.1 million in fiscal 2008 (including
$1.5 million and $1.6 million of percentage rent, respectively, in fiscal 2009
and 2008).
Purchase Obligations.
As of January 30, 2010, we had
purchase obligations of $82.1 million, all of which were for less than one
year. These purchase obligations primarily consist of outstanding merchandise
orders.
Off-Balance Sheet Arrangements
Other than the store operating leases described above,
we do not have any off-balance sheet arrangements.
Outstanding Stock Options
As of January 30, 2010, we had outstanding vested
options to purchase 111,990 shares of common stock at a weighted average
exercise price of $22.59 per share and outstanding unvested options to purchase
11,738 shares of common stock at a weighted average price of $41.14 per share.
The per share value of each share of common stock underlying the vested and
unvested options, based on the difference between the exercise price per option
and the estimated fair market value of the shares at the dates of the grant of
the options (also referred to as intrinsic value), ranges from $0 to $1.25 per
share. Based on the closing price of our common stock of $31.13 per share on January 29,
2010, the intrinsic value of the options outstanding on January 30, 2010
was $1,414,000, substantially all of which related to vested options.
Critical Accounting Policies and
Estimates
The preparation of our 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. We believe
the following critical
26
Table of Contents
accounting policies describe the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Revenue Recognition
While the recognition of revenue is predominantly
derived from routine retail transactions and does not involve significant
judgment, revenue recognition represents an important accounting policy of
ours. We recognize retail sales net of sales taxes at the time the customer
takes possession of and pays for merchandise, less an allowance for returns. We
allow customers to return merchandise for up to thirty days after the date
of sale and we reduce revenues for each fiscal year using a combination of
actual and estimated return information for the returns in the thirty days
after the year ends. As of January 30, 2010, the provision for returns was
$224,000. Revenue from layaway sales is recognized when the customer has paid
for and received the merchandise. If the merchandise is not fully paid for
within sixty days, the customer is given a store credit for merchandise
payments made, less a re-stocking fee and a layaway service charge. Layaway
service charges, which are non-refundable, are recognized in revenue when
collected. Gift cards were introduced in 45 stores in late fiscal 2009, with a
rollout to all other stores expected to occur in 2010. Proceeds from the sale
of gift cards are deferred until the customers use the cards to purchase
merchandise. No amounts have yet been amortized into income for gift cards not
expected to be redeemed (breakage) due to the lack of time that has lapsed
since cards began being sold under the recently implemented program. All sales
are from cash, check or major credit card company transactions. We do not offer
company-sponsored customer credit accounts. There were no material changes in
the estimates or assumptions related to revenue recognition during fiscal 2009.
Inventory
Inventory is stated at
the lower of cost (first-in, first-out basis) or market as determined by the
retail inventory method for store inventory and the average cost method for
distribution center inventory. Under the retail inventory method, the cost
value of inventory and gross margins are determined by calculating a
cost-to-retail ratio and applying it to the retail value of inventory. Inherent
in the retail inventory calculation are certain significant management
judgments and estimates, including, among others, merchandise markups,
markdowns and shrinkage, which impact the ending inventory valuation at cost as
well as resulting gross margins. Merchandise markdowns are reflected in the
inventory valuation when the price of an item is lowered in the stores. As a
result, we believe the retail inventory method results in a more conservative
inventory valuation than other accounting methods. We estimate and record an
allowance for shrinkage for the period between the last physical count and the
balance sheet date. The estimate of shrinkage can be affected by changes in
actual shrinkage trends. Inventory shrinkage as a percentage of sales has
ranged from 1.1% to 1.9% during fiscal years 2007 through 2009. Many retailers
have arrangements with vendors that provide for rebates and allowances under
certain conditions, which ultimately affect the value of the inventory. We do
not generally enter into such arrangements with our vendors. There were no
material changes in the estimates or assumptions related to the valuation of
inventory during fiscal 2009.
Property and
Equipment, net
We have a significant investment in property and
equipment stated at cost less accumulated depreciation and amortization.
Equipment under capital leases is stated at the present value of the required
minimum lease payments. Depreciation and amortization are computed using the
straight-line method over the lesser of the estimated useful lives (primarily
three to five years for computer equipment and furniture, fixtures and
equipment, five years for leasehold improvements, seven years for major
purchased software systems, and fifteen to twenty years for buildings and
building improvements) of the related assets or the relevant lease term. Any
reduction in these estimated useful lives would result in a higher annual depreciation
expense for the related assets. There were no material changes in the estimates
or assumptions related to the valuation and classification of property and
equipment during fiscal 2009.
27
Table of Contents
Impairment of
Long-Lived Assets
We continually evaluate whether events and changes in
circumstances warrant revised estimates of the useful lives or recognition of
an impairment loss for long-lived assets. If facts and circumstances indicate
that a long-lived asset, including property and equipment, may be impaired, the
carrying value is reviewed. If this review indicates that the carrying value of
the asset will not be recovered as determined based on projected undiscounted
cash flows related to the asset over its remaining life, the carrying value of
the asset is reduced to its estimated fair value. Impairment losses charged to
depreciation expense totaled approximately $0.1 million in fiscal 2009. There
were no impairment losses recognized in fiscal 2008 or 2007. Impairment losses
in the future are dependent on a number of factors such as site selection and
general economic trends, and thus could be significantly different from
historical results. To the extent our estimates for net sales, gross profit and
store expenses are not realized, future assessments of recoverability could
result in impairment charges. There were no material changes in the estimates
or assumptions related to impairment of long-lived assets during fiscal 2009.
Fair Value
Measurements
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 January 30, 2010, we had $29.7 million ($33.0
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 in current assets as of January 30, 2010 and are reflected at
estimated fair value. These securities are high-grade (at least AA-rated with
one or more rating agencies) and approximately 76% are either guaranteed by the
Department of Education under the Federal Family Education Loan Program (37%)
or backed by insurance companies, AMBAC Assurance Corporation (32%) or MBIA
Insurance Corporation (7%). 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, $23.0
million of our ARS have been redeemed at par value by certain issuers and our
investment banks since February 2008.
In addition, we have not experienced any defaults and continue to earn
and receive interest on all of the investments that we still own.
There was insufficient observable market information
available as of January 30, 2010 to determine the fair value of ARS held
by us. Accordingly, we 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, we valued the ARS investments at $29.7 million as of
January 30, 2010, representing a $3.3 million decline from par value.
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 represents a put option and is recognized as an instrument separate from
the ARS. We elected to account for this
Right at its fair value of $3.3 million
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. We expect that subsequent changes in the
value of the Right will largely offset the subsequent fair value movements of
the ARS, subject to the continued expected performance by UBS of its
obligations under the Right.
28
Table of Contents
Insurance
Liabilities
We are largely self-insured for workers compensation
costs and employee medical claims. Our
self-insurance liabilities are based on the total estimated costs of claims
filed and estimates of claims incurred but not reported, less amounts paid
against such claims. We use current and
historical claims data, together with information from actuarial studies, in
developing our estimates. The insurance
liabilities we record are primarily influenced by the frequency and severity of
claims and the Companys growth. If the
underlying facts and circumstances related to the claims change, then we may be
required to record more or less expense which could be material in relation to
our results of operations. There were no
material changes in the estimates or assumptions related to insurance
liabilities during fiscal 2009, except that estimates for workers compensation
costs were required for the entire year in fiscal 2009 versus just two months
in fiscal 2008 due to the conversion in late fiscal 2008 of our insurance
policy to a much higher level of self-insurance.
Stock-Based
Compensation
Compensation expense associated with all nonvested
restricted stock and stock options is recognized based on an estimate of the
grant-date fair value of each equity award. The fair values of grants of
nonvested restricted stock are estimated based on the closing stock price on
the grant date while the fair values of stock option awards are estimated at
each grant date using the Black-Scholes Merton option pricing model. There
were no grants of options in fiscal 2009. If factors change and we employ
different assumptions in future periods, the stock-based compensation expense
may differ significantly from the amount recorded in the current period. There
were no material changes in the estimates or assumptions used to determine
stock-based compensation during fiscal 2009.
Operating Leases
We lease all of our store properties and account for
the leases as operating leases
.
Many lease agreements contain tenant improvement allowances, rent holidays,
rent escalation clauses and/or contingent rent provisions. For purposes of
recognizing incentives and minimum rent expense on a straight-line basis over
the terms of the leases, we use the date of initial possession to begin
amortization, which is generally when we enter the space and begin to make
improvements in preparation of intended use.
For scheduled rent
escalation clauses during the lease terms or for rental payments commencing rent
holidays at a date other than the date of initial occupancy, we record minimum
rent expense on a straight-line basis over the terms of the leases. Tenant
improvement allowances are included in accrued expenses (current portion) and
other long-term liabilities (noncurrent portion) and are amortized over the
lease term. Changes in the balances of tenant improvement allowances are
included as a component of operating activities in the consolidated statements
of cash flows.
Certain leases provide for contingent rents that are
not measurable at inception. These contingent rents are primarily based on a
percentage of net sales that are in excess of a predetermined level. These
amounts are excluded from minimum rent and are included in the determination of
total rent expense when it is probable that the expense has been incurred and
the amount is reasonably estimable. There were no material changes in the
estimates or assumptions related to operating leases during fiscal 2009.
Accounting for
Income Taxes
We account for income taxes under the asset and
liability method. The computation of income taxes is subject to estimation due
to the judgment required and the uncertainty related to the recoverability of
deferred tax assets or the outcome of tax audits. We adjust our income tax
provision in the period it is determined that actual results will differ from
our estimates. Tax law and rate changes are reflected in the income tax
provision in the year in which such changes are enacted. There were no material
changes in the estimates or assumptions related to income taxes during fiscal
2009.
The above listing is not intended to be a
comprehensive list of all our accounting policies. In many cases the accounting
treatment of a particular transaction is specifically dictated by U.S.
generally accepted accounting principles, with no need for managements
judgment in their application. There are also areas in which managements
judgment in selecting any available alternative would not produce a materially
different result.
Recent Accounting Pronouncements
See note 2 to our
consolidated financial statements included in this Report for recently issued
accounting standards, including the expected dates of adoption and estimated
effects on our consolidated financial statements.
29
Table of Contents
ITEM
7A.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We are exposed to financial market risks related to
changes in interest rates earned on our investments. We cannot predict market
fluctuations in interest rates. As a result, future results may differ
materially from estimated results due to changes in interest rates. A
hypothetical 100 basis point change in prevailing market interest rates would
not have materially impacted our financial position, results of operations or
cash flows for fiscal 2009. We do not engage in financial transactions for
trading or speculative purposes and have not entered into any interest rate
hedging contracts. Interest rates on our credit facility did not impact us in
fiscal 2009 because we did not borrow during the year.
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
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 January 30, 2010, we had $29.7 million
($33.0 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 76% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation
(7%). 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, $23.0 million of our ARS have been
redeemed at par value by certain issuers and our investment banks since February 2008. In addition, 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. As of January 30, 2010, the
Right was valued at $3.3 million. 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.
ITEM
8.
|
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements required by this item and the
report of the independent accountant thereon required by Item 14(a)(2) appear
beginning on page F-2 of this Report. See accompanying Index to the
consolidated financial statements on page F-1. The supplementary financial
data required by Item 302 of Regulation S-K appears in note 12 to the
consolidated financial statements.
ITEM
9.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
Not applicable.
ITEM
9A.
|
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
We 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 the end of the period covered
by this Report 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 provide reasonable assurance 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.
Our disclosure controls and procedures are designed to
provide reasonable assurance that the controls and procedures will meet their
objectives. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
30
Table of Contents
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over
financial reporting that occurred during the fiscal quarter ended January 30,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements Report on Internal Control Over Financial
Reporting
For the Report of Management on Internal Control over
Financial Reporting and the report of our independent registered public
accounting firm on Internal Control over Financial Reporting, see Item 8,
Financial Statements and Supplementary Data.
ITEM
9B.
|
|
OTHER
INFORMATION
|
None.
31
Table of Contents
PART III
ITEM
10.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
|
The information required by this Item with respect to
our executive officers and directors, compliance by our directors, executive
officers and certain beneficial owners of our common stock with Section 16(a) of
the Exchange Act, the committees of our Board of Directors, our Audit Committee
Financial Expert and our Code of Ethics is incorporated herein by reference to
information under the captions entitled Board of Directors and Committees of
the Board of Directors, Executive Officers, and Section 16(a) Beneficial
Ownership Reporting Compliance in our definitive proxy statement (to be
filed hereafter) in connection with our 2010 Annual Meeting of Stockholders and
possibly elsewhere in the proxy statement (or will be filed by amendment to
this Report).
ITEM
11.
|
|
EXECUTIVE COMPENSATION
|
The information required by this Item is incorporated
herein by reference to information under the captions entitled Executive
Compensation, Board of Directors and Committees of the Board of Directors
and Compensation Committee Report in our definitive proxy statement (to be
filed hereafter) in connection with our 2010 Annual Meeting of Stockholders and
possibly elsewhere in the proxy statement (or will be filed by amendment to
this Report).
ITEM
12.
|
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The information required by this Item with respect to
ownership of our common stock is incorporated herein by reference to the
information under the caption entitled Security Ownership of Certain
Beneficial Owners and Management in our definitive proxy statement (to be
filed hereafter) in connection with our 2010 Annual Meeting of Stockholders and
possibly elsewhere in the proxy statement (or will be filed by amendment to
this Report).
Equity Compensation Plan Information
. The following table represents
those securities authorized for issuance as of January 30, 2010 under our
existing equity compensation plans.
Plan category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
(a)
|
|
Weighted average
exercise price of
outstanding options,
warrants and rights (2)
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (3) (c)
|
|
Equity compensation
plans approved by security holders
|
|
432,759
|
|
$
|
24.35
|
|
739,645
|
|
Equity compensation
plans not approved by security holders
|
|
|
|
|
|
|
|
Total
|
|
432,759
|
|
$
|
24.35
|
|
739,645
|
|
(1)
|
|
Includes 31,798 outstanding options issued under the
1999 Allied Fashion Stock Option Plan. This plan was replaced in
May 2005 by the Citi Trends, Inc. 2005 Long-Term Incentive Plan
(the Incentive Plan), which provides for the issuance of up to 1,300,000
shares of common stock upon the exercise of stock options or as awards of
nonvested restricted stock and other performance awards. Also, includes
91,930 outstanding options and 309,031 nonvested restricted stock grants
issued under the Incentive Plan.
|
|
|
|
(2)
|
|
The weighted average exercise price is for options
only and does not include nonvested restricted stock.
|
|
|
|
(3)
|
|
Consists of shares available for awards of options,
nonvested restricted stock and other performance awards under the Incentive
Plan.
|
ITEM
13.
|
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this Item is incorporated
herein by reference to the information under the captions entitled Certain
Relationships and Related Party Transactions and Board of Directors and
Committees of the Board of Directors in our definitive
32
Table of Contents
proxy statement (to be filed hereafter) in connection
with our 2010 Annual Meeting of Stockholders and possibly elsewhere in the
proxy statement (or will be filed by amendment to this Report).
ITEM
14.
|
|
PRINCIPAL ACCOUNTING FEES AND
SERVICES
|
The information required by this Item is incorporated
herein by reference to the information under the caption entitled Ratification
of Independent Registered Public Accounting Firm in our definitive proxy
statement (to be filed hereafter) in connection with our 2010 Annual Meeting of
Stockholders and possibly elsewhere in the proxy statement (or will be filed by
amendment to this Report).
33
Table of Contents
PART IV
ITEM
15.
|
|
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
(a)(1) Financial
Statements
See accompanying Financial Statements beginning on page F-1.
(a)(2) Financial
Statement Schedules
All schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the related
instructions, are inapplicable or the information is included in the Financial
Statements, and therefore, have been omitted.
(a)(3) Exhibits
Exhibit Index
Exhibit No.
|
|
Description
|
3.1
|
|
Second Amended and
Restated Certificate of Incorporation, as amended by the Certificate of
Amendment dated June 22, 2006 (incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 29, 2006)
|
|
|
|
3.2
|
|
Amended and Restated
By-laws (incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8 (File No. 333-125611) filed with
the SEC on June 8, 2005)
|
|
|
|
4.1
|
|
Specimen certificate
for shares of common stock, $.01 par value (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
April 29, 2005)
|
|
|
|
*10.1
|
|
Amended and Restated
Employment Agreement by and between R. Edward Anderson and Citi
Trends, Inc., dated as of December 30, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on December 30, 2005)
|
|
|
|
10.2
|
|
Lease Agreement, dated
as of September 30, 2004, by and between Meyer Warehouse, LLC, as
landlord, and Citi Trends, Inc., as tenant (incorporated by reference to
Exhibit 10.9 to the Companys Registration Statement on Form S-1
(File No. 333-123028) filed with the SEC on February 28, 2005)
|
|
|
|
10.3
|
|
$3.0 Million Loan
Agreement between Citi Trends, Inc. and Bank of America dated
June 16, 2006 (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
July 29, 2006)
|
|
|
|
10.4
|
|
Amendment No. 1
dated August 28, 2006 to $3.0 Million Loan Agreement between Citi Trends, Inc.
and Bank of America dated June 16, 2006 (incorporated by reference to
Exhibit 10.12 to the Companys Annual Report on Form 10-K for the
year ended February 3, 2007)
|
|
|
|
*10.5
|
|
Allied
Fashion, Inc. Amended and Restated 1999 Stock Option Plan (as previously
amended and restated effective as of June 17, 2004) (incorporated by
reference to Exhibit 2.2 to the Companys Registration Statement on
Form S-8 (File No. 333-125611) filed with the SEC on June 8,
2005)
|
|
|
|
*10.6
|
|
Amendment to the 1999
Allied Fashion Inc. Stock Option Plan (as previously amended and restated
effective as of June 17, 2004) (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended October 28, 2006)
|
|
|
|
*10.7
|
|
Citi Trends, Inc.
2005 Amended and Restated Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended August 2, 2008)
|
|
|
|
*10.8
|
|
Form of Restricted
Stock Award Agreement for Employees (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 2, 2008)
|
|
|
|
*10.9
|
|
Form of Restricted
Stock Award Agreement for Directors (incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on Form 10-K for the
year ended February 3, 2007)
|
34
Table of Contents
*10.10
|
|
Form of Stock
Option Agreement for Employees (incorporated by reference to
Exhibit 10.20 to the Companys Annual Report on Form 10-K for the
year ended February 3, 2007)
|
|
|
|
*10.11
|
|
Form of Stock
Option Agreement for Directors (incorporated by reference to
Exhibit 10.21 to the Companys Annual Report on Form 10-K for the
year ended February 3, 2007)
|
|
|
|
*10.12
|
|
Offer Letter to Ivy
Council dated December 6, 2006 (incorporated by reference to
Exhibit 10.24 to the Companys Annual Report on Form 10-K for the
year ended February 2, 2008)
|
|
|
|
*10.13
|
|
Offer Letter to Bruce
D. Smith dated April 2, 2007 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 5, 2007)
|
|
|
|
*10.14
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Bruce D.
Smith dated April 2, 2007 (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 5, 2007)
|
|
|
|
10.15
|
|
Credit Agreement dated
March 26, 2008 among Citi Trends, Inc., as Borrower, the
Subsidiaries of the Borrower identified therein, as the Guarantors, and Bank
of America, N.A., as Lender (incorporated by reference to Exhibit 10.25
to the Companys Annual Report on Form 10-K for the year ended
February 2, 2008)
|
|
|
|
*10.16
|
|
Employment Agreement
between the Company and Elizabeth Feher dated April 2, 2008
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended May 3, 2008)
|
|
|
|
*10.17
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Elizabeth
Feher dated April 2, 2008 (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 3, 2008)
|
|
|
|
10.18
|
|
UBS Offer Letter dated
October 8, 2008, together with Acceptance Form of Citi
Trends, Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
November 1, 2008)
|
|
|
|
*10.19
|
|
Employment Agreement
between the Company and R. David Alexander, Jr. dated December 5,
2008 (incorporated by reference to Exhibit 10.26 to the Companys Annual
Report on Form 10-K for the year ended January 31, 2009)
|
|
|
|
*10.20
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and R. David
Alexander, Jr. dated December 5, 2008 (incorporated by reference to
Exhibit 10.27 to the Companys Annual Report on Form 10-K for the
year ended January 31, 2009)
|
|
|
|
10.21
|
|
First Amendment to
Credit Agreement, dated as of March 25, 2009, by and between Citi
Trends, Inc. and Bank of America, N.A. (incorporated by reference to
Exhibit 10.28 to the Companys Annual Report on Form 10-K for the
year ended January 31, 2009)
|
|
|
|
*10.22
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and R. Edward
Anderson dated March 25, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
|
|
|
*10.23
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and R. David
Alexander, Jr. dated March 25, 2009 (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
|
|
|
*10.24
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Elizabeth
R. Feher dated March 25, 2009 (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
|
|
|
*10.25
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Bruce D.
Smith dated March 25, 2009 (incorporated by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
35
Table of Contents
*10.26
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Ivy D.
Council dated March 25, 2009 (incorporated by reference to
Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
|
|
|
*10.27
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and James A.
Dunn dated March 25, 2009 (incorporated by reference to
Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 2, 2009)
|
|
|
|
*10.28
|
|
Severance Agreement
between the Company and R. Edward Anderson dated March 25, 2009
(incorporated by reference to Exhibit 10.7 to the Companys Quarterly
Report on Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.29
|
|
Severance Agreement
between the Company and R. David Alexander, Jr. dated March 25,
2009 (incorporated by reference to Exhibit 10.8 to the Companys
Quarterly Report on Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.30
|
|
Severance Agreement
between the Company and Elizabeth R. Feher dated March 25, 2009
(incorporated by reference to Exhibit 10.9 to the Companys Quarterly
Report on Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.31
|
|
Severance Agreement
between the Company and Bruce D. Smith dated March 25, 2009
(incorporated by reference to Exhibit 10.10 to the Companys Quarterly
Report on Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.32
|
|
Severance Agreement
between the Company and Ivy D. Council dated March 25, 2009
(incorporated by reference to Exhibit 10.11 to the Companys Quarterly
Report on Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.33
|
|
Severance Agreement
between the Company and James A. Dunn dated March 25, 2009 (incorporated
by reference to Exhibit 10.12 to the Companys Quarterly Report on
Form 10-Q for the quarter ended May 2, 2009)
|
|
|
|
*10.34
|
|
Citi Trends, Inc.
Annual Incentive Bonus Plan (incorporated by reference to Exhibit 10.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended
August 1, 2009)
|
|
|
|
*10.35
|
|
Form of Restricted
Stock Award Agreement for Employees (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended October 31, 2009)
|
|
|
|
*10.36
|
|
Form of Restricted
Stock Award Agreement for Directors (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended October 31, 2009)
|
|
|
|
*10.37
|
|
Second Amendment to
Credit Agreement, dated as of March 22, 2010, by and between Citi
Trends, Inc. and Bank of America, N.A.
|
|
|
|
21.1
|
|
Subsidiary of the
Registrant
|
|
|
|
23.1
|
|
Consent of KPMG LLP
|
|
|
|
31.1
|
|
Certification of R.
David Alexander, Jr., President and Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Bruce
D. Smith, Chief Financial Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of R.
David Alexander, Jr., President and Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Bruce
D. Smith, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
*
|
Indicates management
contract or compensatory plan or arrangement.
|
36
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
CITI TRENDS, INC.
|
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date
|
April 14, 2010
|
By
|
/s/ R. David Alexander, Jr.
|
|
/s/ Bruce D. Smith
|
|
|
|
R. David Alexander, Jr.
|
|
Bruce D. Smith
|
|
|
|
President and Chief Executive
Officer (Principal Executive
Officer)
|
|
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ R. David Alexander, Jr.
|
|
President and Chief Executive Officer
|
|
April 14, 2010
|
R. David Alexander, Jr.
|
|
(Principal Executive Officer) and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Bruce D. Smith
|
|
Executive Vice President and
|
|
April 14, 2010
|
Bruce D. Smith
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ R. Edward Anderson
|
|
Chairman of the Board of Directors
|
|
April 14, 2010
|
R. Edward Anderson
|
|
|
|
|
|
|
|
|
|
/s/ Brian P. Carney
|
|
Director
|
|
April 14, 2010
|
Brian P. Carney
|
|
|
|
|
|
|
|
|
|
/s/ Lawrence E. Hyatt
|
|
Director
|
|
April 14, 2010
|
Lawrence E. Hyatt
|
|
|
|
|
|
|
|
|
|
/s/ John S. Lupo
|
|
Director
|
|
April 14, 2010
|
John S. Lupo
|
|
|
|
|
|
|
|
|
|
/s/ Patricia M. Luzier
|
|
Director
|
|
April 14, 2010
|
Patricia M. Luzier
|
|
|
|
|
37
Table of Contents
Citi
Trends, Inc.
Index to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEARS ENDED JANUARY 30, 2010, JANUARY 31, 2009 AND FEBRUARY 2, 2008
Managements
Annual Report on Internal Control Over Financial Reporting
|
F-2
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Consolidated Balance
Sheets as of January 30, 2010 and January 31, 2009
|
F-5
|
|
|
Consolidated
Statements of Income for the Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
|
F-7
|
|
|
Consolidated Statements of Stockholders Equity
for the Years Ended January 30, 2010, January 31, 2009 and February 2,
2008
|
F-8
|
|
|
Notes to
Consolidated Financial Statements for the Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
|
F-9
|
F-1
Table of Contents
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of
the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of consolidated financial statements
for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation.
Under the supervision and with the participation of
management, including our chief executive officer and chief financial officer,
we assessed the effectiveness of our internal control over financial reporting
as of January 30, 2010, based on the criteria described in
Internal ControlIntegrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, our management concluded that our internal
control over financial reporting was effective based on those criteria as of January 30,
2010.
Our independent registered public accounting firm,
KPMG LLP, audited the effectiveness of our internal control over financial
reporting as of January 30, 2010, as stated in their attestation report
which is included herein.
F-2
Table of Contents
Report of Independent
Registered Public Accounting Firm
The Board of Directors
and Stockholders
Citi Trends, Inc.:
We have audited the accompanying consolidated balance
sheets of Citi Trends, Inc. and subsidiary (the Company) as of January 30,
2010 and January 31, 2009, and the related consolidated statements of
income, stockholders equity, and cash flows for each of the years ended January 30,
2010, January 31, 2009, and February 2, 2008. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Citi Trends, Inc. and subsidiary as of January 30, 2010
and January 31, 2009, and the results of their operations and their cash
flows for each of the fiscal years ended January 30, 2010, January 31,
2009, and February 2, 2008, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), Citi Trends, Inc.s
internal control over financial reporting as of January 30, 2010, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated April 13,
2010 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
As discussed in note 2 to the financial statements,
the Company has changed its method of accounting for fair value measurements
effective February 3, 2008 due to the adoption of SFAS No. 157,
Fair Value Measurements,
(included in FASB ASC 820-
Fair Value Measurements and Disclosures
)
and as discussed in note 7 to the
consolidated financial statements, the Company has changed its method of
accounting for uncertainties in income taxes effective February 4, 2007
due to the adoption of Financial Accounting Standards Board Interpretation No. 48-
Accounting for Uncertainty in Income
Taxes-an interpretation of FAS 109,
(included in FASB ASC 740-
Income
Taxes
).
(signed) KPMG
LLP
|
|
|
April 13, 2010
|
Jacksonville, Florida
|
Certified Public Accountants
|
F-3
Table of
Contents
Report of Independent
Registered Public Accounting Firm
The Board of Directors
and Stockholders
Citi Trends, Inc.:
We have audited Citi Trends, Inc.s (the Company)
internal control over financial reporting as of January 30, 2010, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Annual Report On Internal
Control Over Financial Reporting.
Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A companys internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Citi Trends, Inc. maintained, in
all material respects, effective internal control over financial reporting as
of January 30, 2010, based on criteria established in
Internal
Control Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Citi Trends, Inc. as of January 30,
2010 and January 31, 2009, and the related consolidated statements of
income, stockholders equity, and cash flows for each of the fiscal years ended
January 30, 2010, January 31, 2009, and February 2, 2008, and
our report dated April 13, 2010 expressed an unqualified opinion on those
consolidated financial statements.
(signed) KPMG LLP
April 13, 2010
Jacksonville, Florida
Certified Public Accountants
F-4
Table of Contents
Citi Trends, Inc.
Consolidated
Balance Sheets
January 30, 2010 and January 31, 2009
(in thousands, except share data)
|
|
January 30,
2010
|
|
January 31,
2009
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
62,993
|
|
$
|
33,516
|
|
Short-term investment securities
|
|
33,025
|
|
|
|
Inventory
|
|
100,874
|
|
86,259
|
|
Prepaid and other current assets
|
|
10,409
|
|
10,625
|
|
Deferred tax asset
|
|
4,518
|
|
3,447
|
|
Total current assets
|
|
211,819
|
|
133,847
|
|
Property and equipment, net
|
|
63,791
|
|
58,861
|
|
Long-term investment securities
|
|
|
|
43,825
|
|
Goodwill
|
|
1,371
|
|
1,371
|
|
Deferred tax asset
|
|
2,488
|
|
2,480
|
|
Other assets
|
|
517
|
|
405
|
|
Total assets
|
|
$
|
279,986
|
|
$
|
240,789
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
62,706
|
|
$
|
52,295
|
|
Accrued expenses
|
|
12,773
|
|
11,478
|
|
Accrued compensation
|
|
9,500
|
|
7,514
|
|
Current portion of capital lease obligations
|
|
|
|
1,403
|
|
Income tax payable
|
|
3,024
|
|
682
|
|
Layaway deposits
|
|
645
|
|
564
|
|
Total current liabilities
|
|
88,648
|
|
73,936
|
|
Other long-term liabilities
|
|
9,995
|
|
8,646
|
|
Total liabilities
|
|
98,643
|
|
82,582
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
32,000,000 shares; 14,899,577 shares issued as of January 30, 2010 and
14,698,852 shares issued as of January 31, 2009; 14,733,827 shares
outstanding as of January 30, 2010 and 14,533,102 shares outstanding as
of January 31, 2009
|
|
146
|
|
145
|
|
Paid in capital
|
|
74,368
|
|
70,950
|
|
Retained earnings
|
|
106,994
|
|
87,277
|
|
Treasury stock, at cost; 165,750 shares as of
January 30, 2010 and January 31, 2009
|
|
(165
|
)
|
(165
|
)
|
Total stockholders equity
|
|
181,343
|
|
158,207
|
|
|
|
|
|
|
|
Commitments and contingencies (note 10)
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
279,986
|
|
$
|
240,789
|
|
See accompanying notes to consolidated financial
statements
F-5
Table of Contents
Citi Trends, Inc.
Consolidated Statements of Income
Years Ended January 30,
2010, January 31, 2009, and February 2, 2008
(in
thousands, except per share data)
|
|
Fiscal 2009
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
Net
sales
|
|
$
|
551,869
|
|
$
|
488,202
|
|
$
|
437,515
|
|
Cost
of sales
|
|
338,898
|
|
301,867
|
|
278,783
|
|
Gross
profit
|
|
212,971
|
|
186,335
|
|
158,732
|
|
Selling,
general and administrative expenses
|
|
165,166
|
|
147,009
|
|
127,470
|
|
Depreciation
and amortization
|
|
18,431
|
|
16,261
|
|
12,583
|
|
Income
from operations
|
|
29,374
|
|
23,065
|
|
18,679
|
|
Interest
income
|
|
404
|
|
2,495
|
|
2,383
|
|
Interest
expense
|
|
(92
|
)
|
(307
|
)
|
(469
|
)
|
Income
before income tax expense
|
|
29,686
|
|
25,253
|
|
20,593
|
|
Income
tax expense
|
|
9,969
|
|
7,870
|
|
6,379
|
|
Net
income
|
|
$
|
19,717
|
|
$
|
17,383
|
|
$
|
14,214
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
1.36
|
|
$
|
1.21
|
|
$
|
1.02
|
|
Diluted
net income per common share
|
|
$
|
1.36
|
|
$
|
1.20
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common shares
|
|
|
|
|
|
|
|
Basic
|
|
$
|
19,540
|
|
$
|
17,162
|
|
$
|
14,160
|
|
Diluted
|
|
$
|
19,541
|
|
$
|
17,164
|
|
$
|
14,162
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
14,364
|
|
14,131
|
|
13,946
|
|
Diluted
|
|
14,396
|
|
14,269
|
|
14,223
|
|
See accompanying notes to consolidated financial
statements
F-6
Table of Contents
Citi Trends, Inc.
Consolidated Statements of Cash Flows
Years Ended January 30,
2010, January 31, 2009, and February 2, 2008
(in
thousands)
|
|
Fiscal 2009
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,717
|
|
$
|
17,383
|
|
$
|
14,214
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
18,431
|
|
16,261
|
|
12,583
|
|
Deferred
income taxes
|
|
(1,079
|
)
|
(333
|
)
|
(1,401
|
)
|
Loss
on disposal of property and equipment
|
|
260
|
|
110
|
|
59
|
|
Noncash
stock-based compensation expense
|
|
2,495
|
|
2,024
|
|
1,496
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
(570
|
)
|
(1,218
|
)
|
(3,516
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Inventory
|
|
(14,615
|
)
|
(3,839
|
)
|
(9,060
|
)
|
Prepaid
and other current assets
|
|
216
|
|
(4,072
|
)
|
(1,078
|
)
|
Other
assets
|
|
(112
|
)
|
(76
|
)
|
(51
|
)
|
Accounts
payable
|
|
10,411
|
|
8,729
|
|
(3,328
|
)
|
Accrued
expenses and other long-term liabilities
|
|
2,644
|
|
1,658
|
|
3,813
|
|
Accrued
compensation
|
|
1,986
|
|
2,289
|
|
(969
|
)
|
Income
tax payable
|
|
2,912
|
|
745
|
|
3,820
|
|
Layaway
deposits
|
|
81
|
|
(71
|
)
|
59
|
|
Net
cash provided by operating activities
|
|
42,777
|
|
39,590
|
|
16,641
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchases
of investment securities
|
|
|
|
(4,000
|
)
|
(33,989
|
)
|
Sales/redemptions
of investment securities
|
|
10,800
|
|
15,675
|
|
43,780
|
|
Purchases
of property and equipment
|
|
(23,621
|
)
|
(23,025
|
)
|
(30,095
|
)
|
Net
cash used in investing activities
|
|
(12,821
|
)
|
(11,350
|
)
|
(20,304
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
570
|
|
1,218
|
|
3,516
|
|
Repayments
on long-term debt and capital lease obligations
|
|
(1,403
|
)
|
(1,580
|
)
|
(1,768
|
)
|
Cash
used to settle equity instruments granted under stock-based payment
arrangements
|
|
(489
|
)
|
(1,040
|
)
|
|
|
Proceeds
from the exercise of stock options
|
|
843
|
|
475
|
|
411
|
|
Net
cash (used in) provided by financing activities
|
|
(479
|
)
|
(927
|
)
|
2,159
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
29,477
|
|
27,313
|
|
(1,504
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Beginning
of period
|
|
33,516
|
|
6,203
|
|
7,707
|
|
End
of period
|
|
$
|
62,993
|
|
$
|
33,516
|
|
$
|
6,203
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
72
|
|
$
|
285
|
|
$
|
446
|
|
Cash
paid for income taxes
|
|
$
|
8,136
|
|
$
|
7,458
|
|
$
|
3,961
|
|
Supplemental
disclosures of noncash financing and investing activities:
|
|
|
|
|
|
|
|
Paid
in capital for the exercise of stock options satisfied by the surrender of
shares
|
|
$
|
|
|
$
|
43
|
|
$
|
45
|
|
Cumulative
effect of adopting new accounting pronouncement for uncertain tax positions
|
|
$
|
|
|
$
|
|
|
$
|
301
|
|
See accompanying notes to
consolidated financial statements
F-7
Table of
Contents
Citi Trends, Inc.
Consolidated Statements of Stockholders Equity
Years Ended January 30, 2010, January 31, 2009, and
February 2, 2008
(in thousands, except share amounts)
|
|
Common Stock
|
|
Paid in
|
|
Retained
|
|
Treasury Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Total
|
|
BalancesFebruary 3,
2007
|
|
13,972,437
|
|
$
|
140
|
|
$
|
62,855
|
|
$
|
55,379
|
|
165,750
|
|
$
|
(165
|
)
|
$
|
118,209
|
|
Cumulative effect of
adopting new accounting pronouncement for uncertain tax positions
|
|
|
|
|
|
|
|
301
|
|
|
|
|
|
301
|
|
Exercise of stock
options
|
|
228,563
|
|
2
|
|
454
|
|
|
|
|
|
|
|
456
|
|
Tax benefit of stock
options exercised
|
|
|
|
|
|
3,516
|
|
|
|
|
|
|
|
3,516
|
|
Issuance of nonvested
shares to employees and directors under incentive plan
|
|
69,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of nonvested
shares by employees and directors
|
|
(5,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
1,496
|
|
|
|
|
|
|
|
1,496
|
|
Net share settlement of
options
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
Net income
|
|
|
|
|
|
|
|
14,214
|
|
|
|
|
|
14,214
|
|
BalancesFebruary 2,
2008
|
|
14,265,471
|
|
142
|
|
68,276
|
|
69,894
|
|
165,750
|
|
(165
|
)
|
138,147
|
|
Exercise of stock
options
|
|
246,823
|
|
3
|
|
515
|
|
|
|
|
|
|
|
518
|
|
Tax benefit of stock
options exercised
|
|
|
|
|
|
1,218
|
|
|
|
|
|
|
|
1,218
|
|
Issuance of nonvested
shares to employees and directors under incentive plan
|
|
212,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of nonvested
shares by employees and directors
|
|
(20,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
2,024
|
|
|
|
|
|
|
|
2,024
|
|
Net share settlement of
options
|
|
|
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
(1,003
|
)
|
Net share settlement of
nonvested shares
|
|
(5,264
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
(80
|
)
|
Net income
|
|
|
|
|
|
|
|
17,383
|
|
|
|
|
|
17,383
|
|
BalancesJanuary 31,
2009
|
|
14,698,852
|
|
145
|
|
70,950
|
|
87,277
|
|
165,750
|
|
(165
|
)
|
158,207
|
|
Exercise of stock
options
|
|
79,197
|
|
1
|
|
842
|
|
|
|
|
|
|
|
843
|
|
Tax benefit of stock
options exercised
|
|
|
|
|
|
570
|
|
|
|
|
|
|
|
570
|
|
Issuance of nonvested
shares to employees and directors under incentive plan
|
|
159,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of nonvested
shares by employees and directors
|
|
(18,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
2,495
|
|
|
|
|
|
|
|
2,495
|
|
Net share settlement of
nonvested shares
|
|
(20,196
|
)
|
|
|
(489
|
)
|
|
|
|
|
|
|
(489
|
)
|
Net income
|
|
|
|
|
|
|
|
19,717
|
|
|
|
|
|
19,717
|
|
BalancesJanuary 30,
2010
|
|
14,899,577
|
|
$
|
146
|
|
$
|
74,368
|
|
$
|
106,994
|
|
165,750
|
|
$
|
(165
|
)
|
$
|
181,343
|
|
See accompanying notes to consolidated financial
statements
F-8
Table of Contents
Citi
Trends, Inc.
Notes
to Consolidated Financial Statements
January 30,
2010, January 31, 2009 and February 2, 2008
(1)
Organization and Business
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 January 30, 2010, the Company
operated 403 stores in 24 states.
(2)
Summary of Significant Accounting Policies
(a) Principles of
Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary.
All intercompany transactions and balances have been eliminated in
consolidation.
(b) Fiscal Year
The Companys fiscal year ends on the Saturday closest
to January 31 of each year. The years ended January 30, 2010, January 31,
2009, and February 2, 2008 are referred to as fiscal 2009, fiscal 2008 and
fiscal 2007, respectively, in the accompanying consolidated financial
statements. Each of these three fiscal years is comprised of 52 weeks.
(c) Cash and Cash Equivalents
For purposes of the consolidated balance sheets and
consolidated statements of cash flows, the Company considers all highly liquid
investments with maturities at date of purchase of three months or less to be
cash equivalents.
(d) Investment
Securities
The Companys investment securities are carried at
fair value and consist of investments in municipal auction rate securities (ARS)
issued by student loan funding organizations. During the fourth quarter of
fiscal 2008, the Company reclassified the ARS from available-for-sale to
trading securities. Unrealized gains and
losses, net of deferred income taxes (benefits), on investments the Company
designates as available-for-sale are excluded from earnings and are credited or
charged directly to other comprehensive income, a separate component of
stockholders equity. If any unrealized losses are deemed other than temporary,
such unrealized losses are recognized as realized losses. Investments that the
Company designates as trading securities are reported at fair value, with
unrealized gains or losses resulting from changes in fair value recognized in
the consolidated statements of income.
See Note 4 for further detailed discussion.
(e) Inventory
Inventory is stated at the lower of cost (first-in,
first-out basis) or market as determined by the retail inventory method for
store inventory and the average cost method for distribution center inventory.
Under the retail inventory method, the cost value of inventory and gross
margins are determined by calculating a cost-to-retail ratio and applying it to
the retail value of inventory. Merchandise markdowns are reflected in the
inventory valuation when the retail price of an item is lowered in the stores.
Inventory is recorded net of an allowance for shrinkage based on the most
recent physical inventory counts.
(f) Property and
Equipment, net
Property and equipment, net are stated at cost less
accumulated depreciation and amortization. Equipment under capital leases is
stated at the present value of the required minimum lease payments.
Depreciation and amortization are computed using the straight-line method over
the lesser of the estimated useful lives (primarily three to five years for
computer equipment and furniture, fixtures and equipment, five years for
leasehold improvements, seven years for major purchased software systems, and
fifteen to twenty years for buildings and building improvements) of the related
assets or the relevant lease term.
(g) Goodwill
Goodwill represents the excess of the purchase price
over the fair value of assets acquired. Goodwill acquired in a purchase
business combination and determined to have an indefinite useful life is not
amortized, but instead tested for impairment at least annually. The Company
performed this analysis at the end of fiscal 2009 and fiscal 2008 and no
impairment was indicated for either year.
F-9
Table of Contents
(h) Impairment of Long-Lived
Assets
If facts and circumstances indicate that a long-lived
asset, including property and equipment, may be impaired, the carrying value is
reviewed. If this review indicates that the carrying value of the asset will
not be recovered as determined based on projected undiscounted cash flows
related to the asset over its remaining life, the carrying value of the asset
is reduced to its estimated fair value. Impairment losses charged to
depreciation expense totaled approximately $0.1 million in fiscal 2009. There
were no impairment losses recognized in fiscal 2008 or 2007. Impairment losses
in the future are dependent on a number of factors such as site selection and
general economic trends, and thus could be significantly different from
historical results. To the extent the Companys estimates for net sales, gross
profit and store expenses are not realized, future assessments of
recoverability could result in impairment charges.
(i) Insurance Liabilities
The Company is largely self-insured for workers
compensation costs and employee medical claims.
Self-insurance liabilities are based on the total estimated costs of
claims filed and estimates of claims incurred but not reported, less amounts
paid against such claims. Current and
historical claims data, together with information from actuarial studies, are
used in developing the estimates. The
insurance liabilities that are recorded are primarily influenced by the
frequency and severity of claims and the Companys growth. If the underlying facts and circumstances
related to the claims change, then the Company may be required to record more
or less expense which could be material in relation to results of operations.
(j) Stock-Based Compensation
The Company recognizes compensation expense associated
with all nonvested restricted stock and stock options based on an estimate of
the grant-date fair value of each equity award. Grants of nonvested restricted
stock are valued based on the stock price on the grant date, while the fair
values of options issued are estimated at each grant date using the
Black-Scholes Merton option pricing model. See Note 9 for additional
information on the Companys stock-based compensation plans.
(k) Revenue Recognition
Revenue from retail sales net of sales taxes is
recognized at the time the customer takes possession of and pays for
merchandise, less an allowance for returns. The Company allows customers to
return merchandise for up to thirty days after the date of sale and the Company
reduces revenues for each fiscal year using a combination of actual and
estimated return information for the returns in the thirty days after the year
ends. The provision for returns was $224,000 and $258,000 as of January 30,
2010 and January 31, 2009, respectively. Revenue from layaway sales is
recognized when the customer has paid for and received the merchandise. If the
merchandise is not fully paid for within sixty days, the customer is given a
store credit for merchandise payments made, less a re-stocking fee and a
layaway service charge. Layaway service charges, which are non-refundable, are
recognized in revenue when collected. Gift cards were introduced in 45 stores
in late fiscal 2009, with a rollout to all other stores expected to occur in
2010. Proceeds from the sale of gift cards are deferred until the customers use
the cards to purchase merchandise. No
amounts have yet been amortized into income for gift cards not expected to be
redeemed (breakage) due to the lack of time that has lapsed since cards began
being sold under the recently implemented program. All sales are from cash,
check or major credit card company transactions. The Company does not offer
company-sponsored customer credit accounts.
(l) Cost of Sales
Cost of sales includes the cost of inventory sold
during the period and transportation costs, including inbound freight and
freight from the distribution centers to the stores, net of discounts and
allowances. Distribution center costs, store occupancy expenses and advertising
expenses are not considered components of cost of sales and are included as
part of selling, general and administrative expenses.
(m)
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.
The following table provides a reconciliation of the
number of average 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 fiscal 2009,
2008 and 2007:
F-10
Table of
Contents
|
|
2009
|
|
2008
|
|
2007
|
|
Average number of
common shares outstanding
|
|
14,363,894
|
|
14,131,077
|
|
13,946,342
|
|
Incremental shares from
assumed exercises of stock options
|
|
31,711
|
|
137,711
|
|
276,887
|
|
Average number of
common shares and common stock equivalents outstanding
|
|
14,395,605
|
|
14,268,788
|
|
14,223,229
|
|
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 fiscal
2009, 2008 and 2007, respectively, there were 65,000, 95,000 and 61,000 options
outstanding to purchase shares of common stock excluded from the calculation of
diluted earnings per share because of antidilution. There were no shares of nonvested restricted
stock included in the calculation of diluted earnings per share for fiscal
2009, 2008 and 2007, because of antidilution.
On February 1, 2009, the Company changed its
method of computing earnings per share as required by the newly issued
Financial Accounting Standards Board (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 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 fiscal 2009; however, they are not 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 through October 31, 2009. The effect of retrospectively adjusting
net income per share for fiscal 2008 was to reduce previously reported basic
net income per common share from $1.23 to $1.21 and to reduce diluted net
income per common share from $1.22 to $1.20. There was no change in the previously
reported net income per common share for fiscal 2007.
(n) Advertising
The Company expenses advertising as incurred.
Advertising expense for fiscal 2009, 2008 and 2007 was $2.6 million, $2.5
million and $2.5 million, respectively.
(o)
Operating Leases
The Company leases all of its store properties and
accounts for the leases as operating leases. Many lease agreements contain
tenant improvement allowances, rent holidays, rent escalation clauses and/or
contingent rent provisions. For purposes of recognizing incentives and minimum
rent expense on a straight-line basis over the terms of the leases, the Company
uses the date of initial possession to begin amortization, which is generally
when the Company enters the space and begins to make improvements in
preparation of intended use.
For scheduled rent escalation clauses during the lease
terms or for rental payments commencing rent holidays at a date other than
the date of initial occupancy, the Company records minimum rent expense on a
straight-line basis over the terms of the leases. Tenant improvement allowances
are included in accrued expenses (current portion) and other long-term
liabilities (noncurrent portion) and are amortized over the lease term. Changes
in the balances of tenant improvement allowances are included as a component of
operating activities in the consolidated statements of cash flows.
Certain leases provide for contingent rents that are
not measurable at inception. These contingent rents are primarily based on a
percentage of net sales that are in excess of a predetermined level. These
amounts are excluded from minimum rent and are included in the determination of
total rent expense when it is probable that the expense has been incurred and
the amount is reasonably estimable.
The Company is required to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred if
the liabilitys fair value can be reasonably estimated. As of January 30,
2010 and January 31, 2009, the Company included a liability of $550,000
and $482,000, respectively, in other long-term liabilities, representing
estimated expenses that would be incurred upon the termination of the Companys
operating leases
.
F-11
Table of Contents
(p) Store Opening and Closing
Costs
New and relocated store opening period costs are
charged directly to expense when incurred. When the Company decides to close or
relocate a store, the Company records an expense for the present value of
expected future rent payments, net of sublease income, if any, in the period
that a store closes or relocates. All store opening and closing costs are
included in selling, general and administrative expenses on the consolidated
statements of income.
(q) Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(r) 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.
(s) Business Reporting
Segments
The Company is a value-priced retailer of urban
fashion apparel and accessories for the entire family. The Companys executive
officers review performance and the allocation of resources on a store by store
basis. Because the Company operates one business activity and the level of
review by the Companys executive officers is on a store by store basis, the
Company has determined that its operations are within one reportable segment.
Accordingly, financial information on industry segments is not applicable. All
sales and assets are located within the United States.
(t) Recent Accounting
Pronouncements
In June 2009, the
FASB Accounting Standards Codification (the Codification) was approved as the
single source of authoritative nongovernmental generally accepted accounting
principles (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 consolidated financial statements as all
references to authoritative accounting literature are referenced in accordance
with the Codification. There have been no changes to the content of the Companys
consolidated financial statements as a result of implementing the Codification
during fiscal 2009.
As a result of the Companys implementation of the
Codification, previous references to new accounting standards and literature
are no longer applicable. In these consolidated 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.
As discussed above in this Note 2, 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 all prior period earnings per share
information has been adjusted retrospectively.
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
F-12
Table of Contents
June 2009, this guidance became part of FASB ASC
Topic 820,
Fair Value Measurements and Disclosures,
which
defines fair value, establishes a framework for 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 consolidated financial statements.
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 consolidated
financial statements. As of June 2009,
this guidance became part of FASB ASC Topic 825,
Financial
Instruments.
(3)
Property and Equipment, net
The components of
property and equipment as of January 30, 2010 and January 31, 2009
are as follows (in thousands):
|
|
January 30,
|
|
January 31,
|
|
|
|
2010
|
|
2009
|
|
Land
|
|
$
|
855
|
|
$
|
858
|
|
Buildings
|
|
15,548
|
|
15,295
|
|
Leashold
improvements
|
|
47,204
|
|
37,681
|
|
Furniture,
fixtures and equipment
|
|
57,160
|
|
47,525
|
|
Computer
equipment
|
|
17,100
|
|
15,433
|
|
Construction
in progress
|
|
2,171
|
|
194
|
|
|
|
140,038
|
|
116,986
|
|
Accumulated
depreciation and amortization
|
|
(76,247
|
)
|
(58,125
|
)
|
|
|
$
|
63,791
|
|
$
|
58,861
|
|
Technology equipment held under capital leases became
fully amortized in fiscal 2009 upon termination of the related lease agreements.
As of January 31, 2009, technology equipment held under capital leases and
related accumulated depreciation was $8.4 million and $7.1 million,
respectively.
(4)
Fair Value Measurements
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 January 30, 2010, the Company had $29.7
million ($33.0 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 in current assets as of January 30, 2010
and are reflected at estimated fair value. These securities are high-grade (at
least AA-rated with one or more rating agencies) and approximately 76% are
either guaranteed by the Department of Education under the Federal Family
Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance
Corporation (32%) or MBIA Insurance Corporation (7%). 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, $23.0 million of the Companys ARS have been redeemed
at par value by certain issuers and the Companys investment banks since February 2008. In addition, the Company has not experienced
any defaults and continues to earn and receive interest on all of the
investments still owned by the Company.
F-13
Table of Contents
There was insufficient observable market information
available as of January 30, 2010 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 $29.7 million as of January 30, 2010, representing
a $3.3 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
using a discounted cash flow approach that includes estimates of
interest rates and the credit risk associated with UBS. The Right was valued at $3.3 million as of January 30,
2010. This valuation was based on unobservable inputs, therefore, represented a
Level 3 fair value. The Company expects
that subsequent changes in the value of the Right will largely offset the
subsequent fair value movements of the ARS, subject to the continued expected
performance by UBS of its obligations under the Right. Prior to the acceptance
of the Right, the ARS were classified as available-for-sale securities. Upon acceptance of the Right to sell the ARS,
the ARS were reclassified to trading securities. As of January 30, 2010, the ARS and the
Right were classified as current assets due to the expectation that liquidity
will occur during the next twelve months through the Companys exercise of the
Right. As of January 31, 2009, the ARS and the Right were classified as
noncurrent assets.
The following table provides a summary of changes in
fair value of the Companys investment securities for the years ended January 30,
2010 and January 31, 2009 (in thousands):
|
|
|
|
Level 3
|
|
|
|
Level 2
|
|
Put Option
Related to ARS
|
|
Auction Rate
Securities
|
|
Balance
as of February 2, 2008
|
|
$
|
56,165
|
|
$
|
|
|
$
|
|
|
Transfer
from Level 2 to Level 3
|
|
(56,665
|
)
|
|
|
56,665
|
|
Sales/redemptions
of investment securities
|
|
(3,500
|
)
|
|
|
(12,175
|
)
|
Purchases
of investment securities
|
|
4,000
|
|
|
|
|
|
Unrealized
losses included in earnings
|
|
|
|
|
|
(4,901
|
)
|
Recognition
of put option in earnings
|
|
|
|
4,901
|
|
|
|
Reclassification
of interest receivable to other current assets
|
|
|
|
|
|
(665
|
)
|
Balance
as of January 31, 2009
|
|
|
|
4,901
|
|
38,924
|
|
Unrealized
(losses) gains included in earnings
|
|
|
|
(347
|
)
|
347
|
|
Sales/redemptions
of investment securities
|
|
|
|
(1,247
|
)
|
(9,553
|
)
|
Balance
as of January 30, 2010
|
|
$
|
|
|
$
|
3,307
|
|
$
|
29,718
|
|
(5)
Revolving Lines of Credit
On March 25, 2009, a
credit facility with Bank of America was amended to extend the expiration date
to March 24, 2010 and to lower the commitment from $35 million 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 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
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.
Under the terms of the credit facility, the payment of cash dividends is
prohibited, and there is one financial covenant (consolidated leverage ratio).
On March 22, 2010, the facility was amended to extend the expiration date
to March 22, 2012. The Company has had no borrowings under the facility.
F-14
Table of Contents
(6)
Capital Lease Obligations
The Companys capital lease obligations matured and
were liquidated in 2009. As of January 31, 2009, capital lease obligations
consisted of the following (in thousands):
|
|
January 31,
|
|
|
|
2009
|
|
Capital lease
obligations issued to finance purchase of technology equipment; payable in
monthly installments averaging approximately $124 in 2009, with a maturity
date of December 2009; interest rate of 11.3%; secured by technology equipment
|
|
$
|
1,403
|
|
Less current portion of
capital lease obligations
|
|
1,403
|
|
Noncurrent portion of
capital lease obligations
|
|
$
|
|
|
(7)
Income Taxes
Income tax expense for fiscal 2009, 2008 and 2007
consists of the following (in thousands):
|
|
2009
|
|
2008
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,474
|
|
$
|
7,258
|
|
$
|
6,667
|
|
State
|
|
1,574
|
|
945
|
|
1,113
|
|
Total current
|
|
11,048
|
|
8,203
|
|
7,780
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(676
|
)
|
(190
|
)
|
(1,080
|
)
|
State
|
|
(403
|
)
|
(143
|
)
|
(321
|
)
|
Total deferred
|
|
(1,079
|
)
|
(333
|
)
|
(1,401
|
)
|
Total income tax
expense
|
|
$
|
9,969
|
|
$
|
7,870
|
|
$
|
6,379
|
|
Income tax expense computed using the federal
statutory rate is reconciled to the reported income tax expense as follows for
fiscal 2009, 2008 and 2007 (in thousands):
|
|
2009
|
|
2008
|
|
2007
|
|
Statutory rate applied
to income before income taxes
|
|
$
|
10,390
|
|
$
|
8,839
|
|
$
|
7,208
|
|
State income taxes, net
of federal benefit
|
|
1,140
|
|
960
|
|
910
|
|
State tax credits
|
|
(379
|
)
|
(439
|
)
|
(395
|
)
|
Secondary offering
expense
|
|
|
|
|
|
211
|
|
Tax exempt interest
|
|
(128
|
)
|
(811
|
)
|
(834
|
)
|
General business
credits
|
|
(1,028
|
)
|
(786
|
)
|
(697
|
)
|
Other
|
|
(26
|
)
|
107
|
|
(24
|
)
|
Income tax expense
|
|
$
|
9,969
|
|
$
|
7,870
|
|
$
|
6,379
|
|
F-15
Table of Contents
The components of deferred tax assets and deferred tax
liabilities as of January 30, 2010 and January 31, 2009 are as
follows (in thousands):
|
|
2009
|
|
2008
|
|
Deferred tax assets:
|
|
|
|
|
|
Deferred rent
amortization
|
|
$
|
1,706
|
|
$
|
1,526
|
|
Inventory
capitalization
|
|
1,991
|
|
1,807
|
|
Book and tax
depreciation differences
|
|
911
|
|
1,412
|
|
Vacation liability
|
|
592
|
|
459
|
|
State tax credits
|
|
762
|
|
591
|
|
Stock compensation
|
|
1,412
|
|
980
|
|
Insurance liabilities
|
|
320
|
|
|
|
Other
|
|
273
|
|
100
|
|
Total deferred tax
assets
|
|
7,967
|
|
6,875
|
|
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
Prepaid expenses
|
|
(595
|
)
|
(622
|
)
|
Goodwill
|
|
(366
|
)
|
(326
|
)
|
Total deferred tax
liabilities
|
|
(961
|
)
|
(948
|
)
|
Net deferred tax asset
|
|
$
|
7,006
|
|
$
|
5,927
|
|
In 2006, the FASB issued accounting guidance that clarified
the accounting and disclosure for uncertain tax positions. This guidance requires that each tax position
be reviewed and assessed with recognition and measurement of the tax benefit
based on a more-likely-than-not standard with respect to the ultimate
outcome, regardless of whether this assessment is favorable or
unfavorable. The Company performed a review and assessment of all tax
positions and during fiscal year 2007 recorded a net benefit to retained
earnings and a decrease to current liabilities of $301,000 in accordance with
this guidance. The Company files income
tax returns in U.S. federal and state jurisdictions where it does business and
is subject to examinations by the IRS and other taxing authorities. As of
January 30, 2010, there were no benefits taken on the Companys income tax
returns that do not qualify for financial statement recognition. If a tax position does not meet the minimum
statutory threshold to avoid payment of penalties and interest, a company is
required to recognize an expense for the amount of the interest and penalty in
the period in which the company claims or expects to claim the position on its
tax return. For financial statement purposes, companies are allowed to
elect whether to classify such charges as either income tax expense or another
expense classification. Should such expense be incurred in the future,
the Company will classify such interest as a component of interest expense and
penalties as a component of income tax expense.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible and income tax credits may be utilized, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences. Income tax credits generated but not yet
utilized by the Company may be carried forward for periods ranging from 10 to
15 years. As such, a valuation allowance for deferred tax assets was not considered
necessary as of January 30, 2010 or January 31, 2009. The Company has
$1,221,000 of tax credit carryforwards for one state, available for use through
2023. The Company files income tax returns with the U.S. federal government and
various state jurisdictions. With a few exceptions, the Company is no longer
subject to U.S. federal and state income tax examinations by tax authorities
for years prior to fiscal 2006.
F-16
Table of
Contents
(8)
Other Long-Term Liabilities
The components of other long-term liabilities as of January 30,
2010 and January 31, 2009 are as follows (in thousands):
|
|
January 30,
2010
|
|
January 31,
2009
|
|
Deferred
rent
|
|
$
|
3,528
|
|
$
|
3,012
|
|
Tenant
improvement allowances
|
|
5,600
|
|
5,153
|
|
Other
|
|
867
|
|
481
|
|
|
|
$
|
9,995
|
|
$
|
8,646
|
|
(9)
Stockholders Equity
Secondary
Offering
On June 18, 2007, the Company completed a
secondary offering of shares of the Companys common stock by certain of its
stockholders that was priced at $37.92 per share. The offering consisted of 2,455,250 shares of
the Companys common stock. All of the shares were sold by stockholders
of the Company and, as a result, the Company did not receive any of the
proceeds from the offering. In connection with the offering, certain of
the Companys stockholders exercised options which were then sold in the
offering for which the Company received approximately $50,000. The
Company incurred expenses in fiscal 2007 in connection with the secondary
offering of approximately $600,000.
Stock-Based
Compensation
On March 8, 2005, the Company adopted the 2005
Citi Trends, Inc. Long-Term Incentive Plan, (the Incentive Plan),
which became effective upon the consummation of the Companys initial public
offering in May 2005. The Incentive Plan superseded and replaced
the 1999 Allied Fashion Stock Option Plan (the 1999 Plan). The 1999
Plan provided for the grant of incentive and nonqualified options to key
employees and directors. The Board of Directors determined the exercise price
of the option grants. The option grants generally vested in equal
installments over four years from the date of grant and are generally
exercisable up to ten years from the date of grant, which is the contractual
life of the options. The Company authorized up to 1,950,000 shares of common
stock for issuance under the 1999 Plan. In August 2006, the 1999 Plan was
amended to permit the exercise price of stock options to be satisfied through
net share settlements.
The Incentive Plan provides for the grant of incentive
and nonqualified options, nonvested restricted stock and other forms of
stock-based compensation to key employees and directors. The Board of
Directors determines the exercise prices of the option grants which are
generally equal to the closing market price of the Companys stock on the date
of grant. Option grants generally vest in equal installments over four
years from the date of grant for employees and over one to three years for
directors and are generally exercisable up to ten years from the date of
grant. Under the Incentive Plan, the Company may issue up to
1,300,000 shares of common stock upon the exercise of stock options and other
equity incentive awards. In August 2006, the Incentive Plan was
amended to permit the exercise price of stock options to be satisfied through
net share settlements, and in May 2008, the Incentive Plan was amended to
permit the lapsing of restrictions on restricted stock at any time in the event
of a change in control of the Company.
Compensation expense
associated with stock options is based on an estimate of the fair value of each
option award on the date of grant using the Black-Scholes Merton option pricing
model, which uses the assumptions noted in the following table. Expected
volatility is based on estimated future volatility of the Companys common
stock price. Having completed its initial public offering in May 2005, the
Company has limited historical data regarding the price of its publicly traded
shares. To estimate future volatility of the Companys stock price, the
stock price volatility of similar entities for which shares have been publicly
traded for a period of seven years or more was measured (seven years is used
because the weighted average expected life of the Companys stock options is
between six and seven years). The Company uses historical data to estimate
forfeitures used in the model. The expected term of options granted is based on
the simplified method for plain vanilla options. The simplified
method (available for entities which do not have sufficient historical exercise
data available for making a refined estimate of expected term) assumes a 10
year contractual term with vesting at a rate of 25% per year. Accordingly,
expected term = ((vesting term + original contractual term)/2). The risk-free
interest rate for the periods which corresponds with the expected life of the
option is based on the U.S. Treasury yield curve for the vesting period in
effect at the time of grant. No options
were granted in fiscal 2009, 2008 or 2007.
F-17
Table of
Contents
A summary of the status of stock options under the
Companys stock option plans and changes during fiscal 2009 is presented in the
table below:
|
|
2009
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
Price
|
|
Term (Years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
January 31, 2009
|
|
208,850
|
|
$
|
19.38
|
|
5.8
|
|
$
|
391,632
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(79,197
|
)
|
10.65
|
|
4.4
|
|
|
|
Net shares settled
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(5,925
|
)
|
32.33
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 30,
2010
|
|
123,728
|
|
$
|
24.35
|
|
4.9
|
|
$
|
1,413,944
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to
vest as of January 30, 2010
|
|
123,728
|
|
$
|
24.35
|
|
4.9
|
|
$
|
1,413,944
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of
January 30, 2010
|
|
111,990
|
|
$
|
22.59
|
|
4.8
|
|
$
|
1,413,873
|
|
As of January 30, 2010, the range of exercise
prices was $0.38 to $44.03. As of January 31, 2009, the range of
exercise prices and weighted-average remaining contractual life of outstanding
options was $0.38 to $44.03 and 5.8 years, respectively. As of February 2,
2008, the range of exercise prices and weighted-average remaining contractual
life of outstanding options was $0.38 to $44.03 and 5.0 years, respectively.
Cash received from options exercised totaled $843,000,
$475,000 and $411,000 in fiscal 2009, 2008 and 2007, respectively. The
intrinsic value of options exercised was $1,176,000, $4,578,000 and $8,136,000
in fiscal 2009, 2008 and 2007, respectively.
Cash flows resulting from tax deductions in excess of
the cumulative compensation cost recognized for options exercised (excess tax
benefits) are classified as financing cash flows. Excess tax benefits realized
from the exercise of stock options was approximately $0.6 million, $1.2 million
and $3.5 million in fiscal 2009, 2008 and 2007, respectively.
The Company recognized $213,000, $811,000 and $931,000
in compensation expense for option grants during fiscal 2009, 2008 and 2007,
respectively. As of January 30, 2010, the total compensation cost related
to stock option awards that will be incurred in future periods amounts to
$56,000. The weighted-average period over which this amount is expected
to be recognized is 4.7 months. The Companys stock option plans allow
the Company to issue new shares from shares authorized for issuance or
repurchase shares on the open market to complete employee stock option
exercises.
Shares of nonvested restricted stock granted to
employees vest in equal installments over four years from the date of
grant. Shares issued to directors vest
one year from the date of grant. The
Company records compensation expense on a straight line basis over the
requisite service period of the stock recipients which is equal to the vesting
period of the stock. Total compensation
cost is calculated based on the closing market price on the date of grant times
the number of shares granted. Using an
estimated forfeiture rate equal to 3.3%, the Company expects to recognize
$4,166,000 in future compensation expense from the grants of nonvested stock
over the requisite service period of up to four years. During fiscal 2009, 2008 and 2007,
compensation expense arising from nonvested stock grants totaled $2,282,000,
$1,213,000 and $565,000, respectively.
A summary of activity related to nonvested restricted
stock grants during the year ended January 30, 2010 is as follows:
|
|
Nonvested
Shares
|
|
Wtd. Avg. Grant
Date Fair Value
|
|
Outstanding as of
January 31, 2009
|
|
237,310
|
|
$
|
20.87
|
|
Granted
|
|
159,998
|
|
21.57
|
|
Vested
|
|
(70,003
|
)
|
21.43
|
|
Forfeited
|
|
(18,274
|
)
|
19.74
|
|
Outstanding as of
January 30, 2010
|
|
309,031
|
|
$
|
21.17
|
|
F-18
Table of Contents
(10)
Commitments and Contingencies
The Company leases its stores under operating leases,
which generally have an initial term of five years with renewal options. Future
minimum rent payments under operating leases having noncancellable lease terms
as of January 30, 2010 are as follows (in thousands):
Fiscal Year:
|
|
|
|
2010
|
|
$
|
27,093
|
|
2011
|
|
24,060
|
|
2012
|
|
18,768
|
|
2013
|
|
13,028
|
|
2014
|
|
6,711
|
|
Thereafter
|
|
4,994
|
|
Total future minimum
lease payments
|
|
$
|
94,654
|
|
Certain operating leases provide for fixed monthly
rents, while others provide for contingent rents computed as a percentage of
net sales and others provide for a combination of both fixed monthly rents and
contingent rents computed as a percentage of net sales. Rent expense was $28.2
million, $23.1 million and $19.3 million for fiscal 2009, 2008 and 2007
(including $1.5 million, $1.6 million and $1.9 million of percentage rent),
respectively.
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.
(11) Valuation and Qualifying Accounts
The following table summarizes the allowance for
inventory shrinkage (in thousands):
|
|
Allowance for
Inventory
Shrinkage
|
|
Balance
as of February 3, 2007
|
|
$
|
2,269
|
|
Additions
charged to costs and expenses
|
|
8,374
|
|
Deductions
|
|
(8,109
|
)
|
Balance
as of February 2, 2008
|
|
2,534
|
|
Additions
charged to costs and expenses
|
|
7,331
|
|
Deductions
|
|
(7,885
|
)
|
Balance
as of January 31, 2009
|
|
1,980
|
|
Additions
charged to costs and expenses
|
|
5,849
|
|
Deductions
|
|
(5,562
|
)
|
Balance
as of January 30, 2010
|
|
$
|
2,267
|
|
Additions charged to costs and expenses are the result
of estimated inventory shrinkage. Deductions represent actual inventory
shrinkage incurred from physical inventories taken during the fiscal year.
F-19
Table of
Contents
(12) Unaudited Quarterly Results of Operations
|
|
Quarter Ended
|
|
|
|
Jan. 30
|
|
Oct. 31
|
|
Aug. 1
|
|
May 2
|
|
Jan. 31
|
|
Nov. 1
|
|
Aug. 2
|
|
May 3
|
|
|
|
2010
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
2008
|
|
|
|
(in thousands, except per share
and share amounts)
|
|
Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
169,811
|
|
$
|
127,356
|
|
$
|
111,605
|
|
$
|
143,097
|
|
$
|
146,603
|
|
$
|
104,948
|
|
$
|
115,655
|
|
$
|
120,996
|
|
Cost of sales
|
|
104,258
|
|
79,720
|
|
69,011
|
|
85,909
|
|
90,695
|
|
66,208
|
|
70,731
|
|
74,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
65,553
|
|
47,636
|
|
42,594
|
|
57,188
|
|
55,908
|
|
38,740
|
|
44,924
|
|
46,763
|
|
Selling, general and
administrative expenses
|
|
44,050
|
|
41,989
|
|
38,994
|
|
40,133
|
|
37,409
|
|
36,482
|
|
36,877
|
|
36,241
|
|
Depreciation and
amortization
|
|
4,752
|
|
4,851
|
|
4,455
|
|
4,373
|
|
4,346
|
|
4,134
|
|
4,078
|
|
3,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
16,751
|
|
796
|
|
(855
|
)
|
12,682
|
|
14,153
|
|
(1,876
|
)
|
3,969
|
|
6,819
|
|
Interest, net
|
|
69
|
|
68
|
|
77
|
|
98
|
|
229
|
|
696
|
|
482
|
|
781
|
|
Unrealized gain (loss)
on investment securities
|
|
|
|
57
|
|
671
|
|
(728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes
|
|
16,820
|
|
921
|
|
(107
|
)
|
12,052
|
|
14,382
|
|
(1,180
|
)
|
4,451
|
|
7,600
|
|
Income tax expense
(benefit)
|
|
5,569
|
|
315
|
|
(38
|
)
|
4,123
|
|
4,326
|
|
(493
|
)
|
1,605
|
|
2,432
|
|
Net income (loss)
|
|
$
|
11,251
|
|
$
|
606
|
|
$
|
(69
|
)
|
$
|
7,929
|
|
$
|
10,056
|
|
$
|
(687
|
)
|
$
|
2,846
|
|
$
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
11,251
|
|
$
|
593
|
|
$
|
(69
|
)
|
$
|
7,780
|
|
$
|
9,908
|
|
$
|
(687
|
)
|
$
|
2,807
|
|
$
|
5,126
|
|
Diluted
|
|
$
|
11,251
|
|
$
|
593
|
|
$
|
(69
|
)
|
$
|
7,780
|
|
$
|
9,908
|
|
$
|
(687
|
)
|
$
|
2,808
|
|
$
|
5,127
|
|
Net income (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
$
|
0.78
|
|
$
|
0.04
|
|
$
|
(0.00
|
)
|
$
|
0.54
|
|
$
|
0.70
|
|
$
|
(0.05
|
)
|
$
|
0.20
|
|
$
|
0.36
|
|
Diluted (1)
|
|
$
|
0.78
|
|
$
|
0.04
|
|
$
|
(0.00
|
)
|
$
|
0.54
|
|
$
|
0.69
|
|
$
|
(0.05
|
)
|
$
|
0.20
|
|
$
|
0.36
|
|
Weighted average shares
used to compute net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,402,156
|
|
14,369,987
|
|
14,365,024
|
|
14,318,406
|
|
14,240,602
|
|
14,141,132
|
|
14,095,135
|
|
14,047,841
|
|
Diluted
|
|
14,447,318
|
|
14,409,443
|
|
14,365,024
|
|
14,339,270
|
|
14,289,848
|
|
14,141,132
|
|
14,278,985
|
|
14,216,580
|
|
(1)
Net income (loss) per share is computed independently
for each period presented. As a result, the total of the per share earnings for
the four quarters may not equal the annual amount.
F-20
Citi Trends (NASDAQ:CTRN)
Historical Stock Chart
From Jun 2024 to Jul 2024
Citi Trends (NASDAQ:CTRN)
Historical Stock Chart
From Jul 2023 to Jul 2024