Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended May 1, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 000-51315
CITI
TRENDS, INC.
(Exact name of registrant
as specified in its charter)
DELAWARE
|
|
52-2150697
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification No.)
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104
Coleman Boulevard
|
|
|
Savannah,
Georgia
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|
31408
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
Registrants
telephone number, including area code
(
912) 236-1561
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o
Yes
o
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
|
|
Accelerated Filer
x
|
|
|
|
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
Indicate the number of shares outstanding of each of
the registrants classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding
at May 17, 2010
|
Common Stock,
$.01 par value
|
|
14,835,285
shares
|
Table of Contents
PART I
- FINANCIAL INFORMATION
Item 1. Financial Statements.
Citi
Trends, Inc.
Condensed Consolidated Balance Sheets
May 1,
2010 and January 30, 2010
(Unaudited)
(in
thousands, except share data)
|
|
May 1,
|
|
January 30,
|
|
|
|
2010
|
|
2010
|
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Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
83,390
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|
$
|
62,993
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|
Short-term
investment securities
|
|
30,025
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|
33,025
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|
Inventory
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|
95,685
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100,874
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|
Prepaid
and other current assets
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|
9,671
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|
10,409
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Deferred
tax asset
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|
4,460
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|
4,518
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|
Total
current assets
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|
223,231
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211,819
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|
Property
and equipment, net of accumulated depreciation and amortization of $80,300
and $76,247 as of May 1, 2010 and January 30, 2010, respectively
|
|
64,300
|
|
63,791
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|
Goodwill
|
|
1,371
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|
1,371
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|
Deferred
tax asset
|
|
2,094
|
|
2,488
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|
Other
assets
|
|
595
|
|
517
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|
Total
assets
|
|
$
|
291,591
|
|
$
|
279,986
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
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Accounts
payable
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$
|
61,289
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|
$
|
62,706
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|
Accrued
expenses
|
|
12,046
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|
12,773
|
|
Accrued
compensation
|
|
7,033
|
|
9,500
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|
Income
tax payable
|
|
3,949
|
|
3,024
|
|
Layaway
deposits
|
|
1,937
|
|
645
|
|
Total
current liabilities
|
|
86,254
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|
88,648
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Other
long-term liabilities
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10,024
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|
9,995
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|
Total
liabilities
|
|
96,278
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|
98,643
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|
Stockholders
equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
32,000,000 shares; 15,001,169 shares issued as of May 1, 2010 and
14,899,577 shares issued as of January 30, 2010; 14,835,419 shares outstanding
as of May 1, 2010 and 14,733,827 outstanding as of January 30, 2010
|
|
147
|
|
146
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|
Paid-in-capital
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|
75,888
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74,368
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Retained
earnings
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119,443
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106,994
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|
Treasury
stock, at cost; 165,750 shares as of May 1, 2010 and January 30,
2010
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|
(165
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)
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(165
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)
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Total
stockholders equity
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|
195,313
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181,343
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|
Commitments
and contingencies (note 7)
|
|
|
|
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Total
liabilities and stockholders equity
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$
|
291,591
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|
$
|
279,986
|
|
See accompanying notes to the condensed consolidated
financial statements (unaudited).
3
Table of Contents
Citi Trends, Inc.
Condensed
Consolidated Statements of Income
Thirteen Weeks Ended May 1, 2010 and May 2,
2009
(Unaudited)
(in thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
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May 1,
|
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May 2,
|
|
|
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2010
|
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2009
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|
Net sales
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|
$
|
181,406
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|
$
|
143,097
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|
Cost of sales
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109,016
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|
85,909
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|
Gross profit
|
|
72,390
|
|
57,188
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|
Selling, general and administrative expenses
|
|
48,450
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|
40,133
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|
Depreciation and amortization
|
|
4,750
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4,373
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|
Income from operations
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|
19,190
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|
12,682
|
|
Interest income
|
|
55
|
|
139
|
|
Interest expense
|
|
(4
|
)
|
(41
|
)
|
Unrealized loss on investment securities
|
|
|
|
(728
|
)
|
Income before income tax expense
|
|
19,241
|
|
12,052
|
|
Income tax expense
|
|
6,792
|
|
4,123
|
|
Net income
|
|
$
|
12,449
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|
$
|
7,929
|
|
|
|
|
|
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|
Basic net income per common share
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$
|
0.86
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|
$
|
0.54
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|
Diluted net income per common share
|
|
$
|
0.86
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|
$
|
0.54
|
|
|
|
|
|
|
|
Net income attributable to common shares
|
|
|
|
|
|
Basic
|
|
$
|
12,449
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|
$
|
7,780
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|
Diluted
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|
$
|
12,449
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|
$
|
7,780
|
|
|
|
|
|
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|
Weighted average number of shares outstanding
|
|
|
|
|
|
Basic
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|
14,458
|
|
14,318
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|
Diluted
|
|
14,489
|
|
14,339
|
|
See accompanying notes to the condensed
consolidated financial statements (unaudited).
4
Table of Contents
Citi
Trends, Inc.
Condensed Consolidated Statements of
Cash Flows
Thirteen
Weeks Ended May 1, 2010 and May 2, 2009
(Unaudited)
(in
thousands)
|
|
Thirteen
Weeks Ended
|
|
|
|
May 1,
|
|
May 2,
|
|
|
|
2010
|
|
2009
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
12,449
|
|
$
|
7,929
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
4,750
|
|
4,373
|
|
Loss
on disposal of property and equipment
|
|
143
|
|
|
|
Deferred
income taxes
|
|
452
|
|
(649
|
)
|
Noncash
stock-based compensation expense
|
|
914
|
|
355
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
(1,410
|
)
|
(622
|
)
|
Unrealized
loss on investment securities
|
|
|
|
728
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
Inventory
|
|
5,189
|
|
1,646
|
|
Prepaid
and other current assets
|
|
738
|
|
2,027
|
|
Other
assets
|
|
(78
|
)
|
(45
|
)
|
Accounts
payable
|
|
(1,417
|
)
|
(4,396
|
)
|
Accrued
expenses and other long-term liabilities
|
|
(698
|
)
|
937
|
|
Accrued
compensation
|
|
(2,467
|
)
|
(2,187
|
)
|
Income
tax payable
|
|
2,335
|
|
3,917
|
|
Layaway
deposits
|
|
1,292
|
|
1,039
|
|
Net
cash provided by operating activities
|
|
22,192
|
|
15,052
|
|
Investing
activities:
|
|
|
|
|
|
Sales/redemptions
of investment securities
|
|
3,000
|
|
|
|
Purchases
of property and equipment
|
|
(5,402
|
)
|
(3,925
|
)
|
Net
cash used in investing activities
|
|
(2,402
|
)
|
(3,925
|
)
|
Financing
activities:
|
|
|
|
|
|
Repayments
on capital lease obligations
|
|
|
|
(415
|
)
|
Excess
tax benefits from stock-based payment arrangements
|
|
1,410
|
|
622
|
|
Proceeds
from the exercise of stock options
|
|
151
|
|
153
|
|
Cash
used to settle withholding taxes on stock option exercises
|
|
(954
|
)
|
(331
|
)
|
Net
cash provided by financing activities
|
|
607
|
|
29
|
|
Net
increase in cash and cash equivalents
|
|
20,397
|
|
11,156
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
Beginning
of period
|
|
62,993
|
|
33,516
|
|
End
of period
|
|
$
|
83,390
|
|
$
|
44,672
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
|
|
$
|
35
|
|
Cash
paid for income taxes
|
|
$
|
4,005
|
|
$
|
855
|
|
See accompanying notes to the condensed consolidated
financial statements (unaudited).
5
Table of Contents
Citi Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
May 1,
2010
1.
Basis of
Presentation
Citi Trends, Inc. and its subsidiary (the Company)
operate as a rapidly growing, value-priced retailer of urban fashion apparel
and accessories for the entire family.
As of May 1, 2010, the Company operated 420 stores in 24 states.
The condensed consolidated balance sheet as of May 1,
2010 and the condensed consolidated statements of income and cash flows for the
thirteen-week periods ended May 1, 2010 and May 2, 2009 have been
prepared by the Company without audit. The condensed consolidated balance sheet
as of January 30, 2010 has been derived from the audited financial
statements as of that date, but does not include all required year end
disclosures. In the opinion of management, such statements include all
adjustments considered necessary to present fairly the Companys financial position
as of May 1, 2010 and January 30, 2010, and its results of operations
and cash flows for all periods presented.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Companys latest Annual Report on Form 10-K for
the year ended January 30, 2010.
The accompanying unaudited condensed consolidated
financial statements are prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements. Operating results for the thirteen weeks ended May 1,
2010 are not necessarily indicative of the results that may be expected for the
fiscal year ending January 29, 2011.
The following contains references to years 2010 and
2009, which represent fiscal years ending or ended on January 29, 2011
(fiscal 2010) and January 30, 2010 (fiscal 2009), respectively. Fiscal 2010 and fiscal 2009 both have 52-week
accounting periods.
2.
Use of
Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and use assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The most significant estimates made by management
include those made in the valuation of inventory, investment securities,
stock-based compensation, property and equipment, and income taxes. Management
periodically evaluates estimates used in the preparation of the financial
statements for continued reasonableness. Appropriate adjustments, if any, to
the estimates used are made prospectively based on such periodic evaluations.
3.
Earnings per Share
Basic earnings per common share amounts are calculated
using the weighted average number of common shares outstanding for the period.
Diluted earnings per common share amounts are calculated using the weighted
average number of common shares outstanding plus the additional dilution for
all potentially dilutive securities, such as nonvested restricted stock and
stock options. During loss periods,
diluted earnings per share amounts are based on the weighted average number of
common shares outstanding.
The dilutive effect of stock-based compensation
arrangements is accounted for using the treasury stock method. This
method assumes that the proceeds the Company receives from the exercise of
stock options are used to repurchase common shares in the market. The
Company includes as assumed proceeds the amount of compensation cost attributed
to future services and not yet recognized, and the amount of tax benefits, if
any, that would be credited to additional paid-in capital assuming exercise of
outstanding options and vesting of nonvested restricted stock. For the
thirteen weeks ended May 1, 2010 and May 2, 2009, there were 58,000
and 69,000 options outstanding, respectively, to purchase shares of common
stock excluded from the calculation of diluted earnings per share because of
antidilution.
Nonvested restricted stock awards granted to employees
and non-employee directors contained nonforfeitable dividend rights prior to October 31,
2009, when amendments agreed to between the Company and its associates became
effective. Such amendments resulted in
the dividend rights being forfeitable in the event an associate leaves the
employ of the Company prior to the vesting of the restricted stock awards. Accordingly, such awards were considered
participating securities through the third quarter of 2009 and, therefore, were
included in the earnings allocation in computing earnings per share under the
required two-class method. However, such
awards will not be treated as participating securities after October 31,
2009 due to the aforementioned amendments.
6
Table of Contents
The following table sets forth the computation of
basic and diluted net income per share (in thousands, except per share
amounts):
|
|
Thirteen
Weeks Ended
|
|
|
|
May 1,
2010
|
|
May 2,
2009
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
12,449
|
|
$
|
7,929
|
|
Net income allocated to participating securities
|
|
|
|
(149
|
)
|
Net income attributable to common
stockholders-basic
|
|
12,449
|
|
7,780
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares
|
|
14,458
|
|
14,318
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-basic
|
|
$
|
0.86
|
|
$
|
0.54
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
12,449
|
|
$
|
7,929
|
|
Net income allocated to participating securities
|
|
|
|
(149
|
)
|
Net income attributable to common stockholders-diluted
|
|
12,449
|
|
7,780
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic calculation
|
|
14,458
|
|
14,318
|
|
Effect of dilutive securities
|
|
31
|
|
21
|
|
Denominator for diluted calculation
|
|
14,489
|
|
14,339
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-diluted
|
|
$
|
0.86
|
|
$
|
0.54
|
|
4.
Fair Value Measurement
Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal or most advantageous
market at the measurement date. Fair value is established according to a
hierarchy that prioritizes observable and unobservable inputs used to measure
fair value into three broad levels, which are described below:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs
not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or
no market data is available. Level 3 inputs are given the lowest priority in
the fair value hierarchy.
As of May 1, 2010, the Company had $26.8 million
($30.0 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 and are reflected at estimated fair value.
These securities are high-grade (at least AA-rated with one or more rating
agencies) and approximately 74% are either guaranteed by the Department of Education under the
Federal Family Education Loan Program (35%) or backed by insurance companies,
AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation (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, $26.0 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.
There was insufficient observable market information
available as of May 1, 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 $26.8 million as of May 1, 2010, representing a
$3.2 million decline from par value.
7
Table of Contents
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 $3.2 million as of May 1,
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. The ARS and the Right included in the May 1,
2010 condensed consolidated balance sheet are classified as current assets due
to the expectation that liquidity will occur during the next twelve months
through the Companys exercise of the Right.
The following table provides a summary of activity for
the Companys assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the thirteen weeks ended May 1,
2010 (in thousands):
|
|
Put
Option Related to ARS
|
|
Auction
Rate Securities
|
|
Balance as of January 30, 2010
|
|
$
|
3,307
|
|
$
|
29,718
|
|
Unrealized gains (losses) included in earnings
|
|
62
|
|
(62
|
)
|
Sales/redemptions of investment securities
|
|
(149
|
)
|
(2,851
|
)
|
Balance as of May 1, 2010
|
|
$
|
3,220
|
|
$
|
26,805
|
|
5.
Revolving Line of Credit
On March 22, 2010,
the Companys $20 million unsecured
revolving credit facility with Bank of
America was amended to extend the expiration date to March 22, 2012. The facility has an unused commitment fee of
0.25% and 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.
The Company has had no borrowings under this facility.
6.
Other Long-Term Liabilities
The components of other long-term liabilities as of May 1,
2010 and January 30, 2010 are as follows (in thousands):
|
|
May 1,
2010
|
|
January 30,
2010
|
|
Deferred
rent
|
|
$
|
3,644
|
|
$
|
3,528
|
|
Tenant
improvement allowances
|
|
5,551
|
|
5,600
|
|
Other
|
|
829
|
|
867
|
|
|
|
$
|
10,024
|
|
$
|
9,995
|
|
7.
Commitments and Contingencies
The Company from time to time is involved in various
legal proceedings incidental to the conduct of its business, including claims
by customers, employees or former employees. While litigation is subject to
uncertainties and the outcome of any litigated matter is not predictable, the
Company is not aware of any legal proceedings pending or threatened against it
that it expects to have a material adverse effect on its financial condition,
results of operations or liquidity.
8
Table of Contents
8.
Recent Accounting Pronouncements
In June 2009, the
Financial Accounting Standards Board (FASB) issued a new accounting standard
which established the Accounting Standards Codification (the Codification or ASC)
as the single source of authoritative nongovernmental generally accepted
accounting principles (GAAP). All
previously 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), were superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification became 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
impacted the Companys consolidated financial statements as all references to
authoritative accounting literature are now referenced in accordance with the
Codification. There have been no changes to the content of the Companys
consolidated financial statements as a result of adopting the Codification
during the third quarter of fiscal 2009.
On February 1, 2009, the Company adopted new
guidance (ASC Topic 260,
Earnings Per Share
)
which addressed 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
two-class method. The adoption of this
new guidance changed the way the Company calculated earnings per share. All prior period earnings per share
information had to be adjusted retrospectively.
Adoption of the new standard had the effect of retrospectively
decreasing basic and diluted earnings per share by $0.02 in fiscal 2008, and it
caused basic and diluted earnings per share to be $0.01 lower than each would
have otherwise been in fiscal 2009.
However, as discussed in Note 3, amendments to restricted stock awards
between the Company and its associates effective October 31, 2009
eliminated the impact of this standard for periods subsequent to the third
quarter of fiscal 2009.
In April 2009, the FASB issued guidance (ASC
Topic 825,
Financial Instruments
)
requiring additional interim disclosures about the fair
value of all financial instruments. This
standard was adopted by the Company during the second quarter of 2009 and there
was no material impact on the Companys consolidated financial statements. See Note 4 for these disclosures.
In January 2010, the FASB issued Accounting
Standards Update (ASU) No. 2010-06, Fair Value Measurements and
Disclosures Improving Disclosures about Fair Value Measurements (ASU
2010-06). This standard requires new
disclosures for significant transfers in
and out of Levels 1 and 2 of the fair value hierarchy
and the activity within Level 3 of the hierarchy, while also clarifying
existing disclosures regarding the level of disaggregation of assets or
liabilities and the valuation techniques and inputs used to measure fair
value. The standard is effective for
interim and annual reporting periods beginning after December 15, 2009,
with the exception of the new Level 3 activity disclosures, which are effective
for interim and annual reporting periods beginning after December 15,
2010. The adoption of the applicable
provisions of this standard in the first quarter of fiscal 2010 did not have a
material impact on the Companys consolidated financial statements and the
future adoption of the Level 3 activity disclosures is not expected to have a
material impact.
9
Table of Contents
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Except for specific historical information, many of
the matters discussed in this Form 10-Q may express or imply projections
of revenues or expenditures, statements of plans and objectives for future
operations, growth or initiatives, statements of future economic performance,
or statements regarding the outcome or impact of pending or threatened
litigation. These, and similar statements, are forward-looking statements
concerning matters that involve risks, uncertainties and other factors that may
cause the actual performance of the Company to differ materially from those
expressed or implied by these statements. All forward-looking information
should be evaluated in the context of these risks, uncertainties and other
factors. The words believe, anticipate, project, plan, expect, estimate,
objective, forecast, goal, intend, will likely result, or will
continue and similar words and expressions generally identify forward-looking
statements. The Company believes the assumptions underlying these
forward-looking statements are reasonable; however, any of the assumptions
could be inaccurate, and therefore, actual results may differ materially from
those projected in the forward-looking statements.
The factors that may result in actual results
differing from such forward-looking information include, but are not limited
to: transportation and distribution delays or interruptions; changes in freight
rates; the Companys ability to negotiate effectively the cost and purchase of
merchandise; inventory risks due to shifts in market demand; the Companys
ability to gauge fashion trends and changing consumer preferences; changes in
consumer spending on apparel; changes in product mix; interruptions in
suppliers businesses; interest rate fluctuations; a deterioration in general
economic conditions caused by acts of war or terrorism or other factors;
temporary changes in demand due to weather patterns; seasonality of the Companys
business; delays associated with building, opening and operating new stores;
delays associated with building, opening, expanding or converting new or
existing distribution centers; the future liquidity of auction rate securities;
and other factors described in the section titled Item 1A. Risk Factors and
elsewhere in the Companys Annual Report on Form 10-K for the fiscal year
ended January 30, 2010 and in Part II, Item 1A. Risk Factors and
elsewhere in the Companys Quarterly Reports on Form 10-Q and any amendments thereto and in the other
documents the Company files with the SEC, including reports on Form 8-K.
Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Form 10-Q.
Except as may be required by law, the Company undertakes no obligation to
update or revise publicly any forward-looking statements contained herein to
reflect events or circumstances occurring after the date of this Form 10-Q
or to reflect the occurrence of unanticipated events. Readers are advised,
however, to read any further disclosures the Company may make on related
subjects in its public disclosures or documents filed with the SEC, including
reports on Form 8-K.
Overview
We are a rapidly growing, value-priced retailer of
urban fashion apparel and accessories for the entire family. Our merchandise
offerings are designed to appeal to the preferences of fashion conscious
consumers, particularly African-Americans. Originally our stores were located
in the Southeast, and in recent years we expanded into the Mid-Atlantic and
Midwest regions and the states of Texas and California. We operated 420 stores
in both urban and rural markets in 24 states as of May 1, 2010.
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 2009 and fiscal 2010 are not
considered comparable stores in fiscal 2010. Relocated and expanded stores are
included in the comparable store sales results. We also use other operating
statistics, most notably average sales per store, to measure our performance.
As we typically occupy existing space in established shopping centers rather
than sites built specifically for our stores, store square footage (and
therefore sales per square foot) varies by store. We focus on overall store
sales volume as the critical driver of profitability. The average sales per
store has increased over the years, as we have increased comparable store sales
and opened new stores that are generally larger than our historical store base.
Average sales per store increased from $0.8 million in fiscal 2000 to $1.5
million in fiscal 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.
Accounting Periods
The following discussion contains references to fiscal
years 2010 and 2009, which represent fiscal years ending or ended on January 29,
2011 (fiscal 2010) and January 30, 2010 (fiscal 2009), respectively.
Fiscal 2010 and fiscal 2009 both have 52-week accounting periods. This
discussion and analysis should be read with the unaudited condensed
consolidated financial statements and the notes thereto.
10
Table of Contents
Results of Operations
The following discussion of the Companys financial
performance is based on the unaudited condensed consolidated financial
statements set forth herein. The nature of the Companys business is seasonal.
Historically, sales in the first and fourth quarters have been higher than
sales achieved in the second and third quarters of the fiscal year. Expenses
and, to a greater extent, operating income, vary by quarter. Results of a
period shorter than a full year may not be indicative of results expected for
the entire year. Furthermore, the seasonal nature of the Companys business may
affect comparisons between periods.
Thirteen Weeks Ended May 1, 2010
and May 2, 2009
Net Sales.
Net sales increased $38.3 million, or
26.8%, to $181.4 million in the thirteen weeks ended May 1, 2010 from
$143.1 million in the thirteen weeks ended May 2, 2009. The increase
in net sales was due primarily to the opening of 60 new stores since last years
first quarter, together with a 9.6% increase in comparable store sales,
partially offset by the effect of closing five stores since last years first
quarter. Comparable store sales benefited from a strong spring merchandise
assortment that resonated well with our customers. In addition, we believe that our customers
received their tax refunds later this year which caused a shift of sales from
January, the last month of fiscal 2009, to February, the first month of fiscal
2010. Comparable stores include
locations that have been relocated or expanded. There were twelve stores
relocated or expanded since last years first quarter, all of which impacted
comparable store sales. Sales in comparable relocated and expanded stores
increased 15.2% in the first quarter of 2010, while sales in all other
comparable stores increased 9.3%. Approximately two-thirds of the 9.6% overall
increase in comparable store sales was due to an increase in the number of
customer transactions, with the other one-third resulting from a higher average
ticket. Comparable store sales changes by major merchandise class were as
follows in the first quarter of 2010:
Accessories; +25%; Home +15%; Mens +8%; Womens +8%; and Childrens
+4%.
The new stores opened in 2009 and 2010, net of the
five closed stores, accounted for $24.9 million of the increase in total sales,
while the 9.6% sales increase in the 352 comparable stores totaled $13.4
million.
Gross Profit.
Gross profit increased $15.2 million, or
26.6%, to $72.4 million in the first quarter of 2010 from $57.2 million in last
years first quarter. The increase in gross profit is a result of the
increase in sales, partially offset by a slight decline in the gross margin to
39.9% from 40.0% in last years first quarter. None of the components of
gross margin (initial mark-up, markdowns, shrinkage and freight) individually
fluctuated by more than 30 basis points as a percentage of sales between the
first quarters of 2010 and 2009.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $8.3 million, or 20.7%, to $48.5 million in the first
quarter of 2010 from $40.1 million in last years first quarter. The
increase in these expenses was due primarily to additional store level,
distribution and corporate costs arising from the opening of 60 new stores
since last years first quarter. As a
percentage of sales, selling, general and administrative expenses improved to
26.7% in the first quarter of fiscal 2010 from 28.0% in the first quarter of
fiscal 2009, due primarily to the leveraging effect that occurs on expenses as
a percentage of sales when comparable store sales increase at a rate that is
higher than the rate of inflation on expenses.
In particular, payroll expenses, which have a sizable fixed component associated
with store management and corporate overhead, decreased 50 basis points as a
percentage of sales, and occupancy expenses, which tend to be more fixed in
nature than other expenses, decreased 40 basis points as a percentage of sales
due to the leverage provided by the strong comparable store sales
increase. Smaller amounts of expense
leverage were realized for items such as advertising, supplies and insurance.
Depreciation and Amortization.
Depreciation and amortization expense increased $0.4
million, or 8.6%, to $4.8 million in the first quarter of 2010 from $4.4
million in the first quarter of 2009, as the result of capital expenditures
incurred for new and relocated/expanded stores.
Interest Income.
Interest income decreased to $55,000 in
the first quarter of 2010 from $139,000 in the first quarter of 2009 due
primarily 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 $4,000 in
the first quarter of 2010 from $41,000 in the first quarter of 2009 due to the
final liquidation of our capital lease obligations.
Unrealized Loss on Investment
Securities.
An impairment
loss of $728,000 on our investments in auction rate securities and a related
put option was reflected in the first quarter of fiscal 2009 due primarily to
the declining interest rates on such securities.
Income Tax Expense.
Income tax expense increased $2.7
million, or 64.7%, to $6.8 million in this years first quarter from $4.1
million in the first quarter of 2009 due to an increase in pretax income,
together with an increase in the effective income tax rate to 35.3% from 34.2%
as the result of tax credits increasing at a lower rate than pretax income.
Net Income.
Net income increased 57.0% to $12.4
million in the first quarter of 2010 from $7.9 million in the first quarter of
2009 due to the factors discussed above.
11
Table of Contents
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, capital leases, and cash proceeds from our initial
public offering in 2005. We expect to be able to meet future cash
requirements with cash flow from operations, short-term trade credit, existing
cash balances and, if necessary, borrowings under our revolving credit
facility.
Current Financial Condition.
As of
May 1, 2010, we had total cash and cash equivalents of $83.4
million compared with total cash and cash equivalents of $63.0 million as
of January 30, 2010. Inventory represented 32.8% of our total assets as of
May 1, 2010. Managements ability to manage our inventory can have a
significant impact on our cash flows from operations during a given interim
period or fiscal year. In addition, inventory purchases can be seasonal in
nature, such as the purchase of warm-weather or Christmas-related merchandise. Total inventories at the end of the first
quarter of 2010 were up $11.1 million, or 13.1%, compared to the first quarter
of fiscal 2009, while store selling square footage increased 17.2%. Inventory in comparable stores was 3.5% lower
than the first quarter of fiscal 2009 due to our efforts to conservatively
control our investment in inventory.
Cash Flows From Operating Activities
. Net cash provided by operating
activities was $22.2 million in the first quarter of fiscal 2010 compared
to $15.1 million in the first quarter of fiscal 2009. The main source of cash provided during the
first quarter of fiscal 2010 was net income adjusted for noncash expenses such
as depreciation and amortization, loss on disposal of property and equipment,
deferred income taxes and stock-based compensation expense, totaling
$18.7 million (compared to $12.7 million in last years first
quarter). Other significant sources of
cash in the first quarter of fiscal 2010 were (1) a $5.2 million decrease
in inventory (compared to $1.6 million in the first quarter of fiscal 2009) due
to strong sales in the first quarter, including a shift in sales from January to
February as discussed in the Results of Operations section above, as
well as ongoing efforts to conservatively manage inventory, (2) a $2.3
million increase in income tax payable (compared to $3.9 million in the first
quarter of fiscal 2009) resulting primarily from an increase in pretax income,
and (3) a $1.3 million decrease in the liability for layaway deposits
(compared to $1.0 million in the first quarter of fiscal 2009) due to the
seasonality of layaway balances which are low at the end of our fiscal year,
because all balances have to be redeemed by customers or they are cancelled by
the middle of December each year.
Significant uses of cash included (1) a $2.5 million decrease in
accrued compensation (compared to $2.2 million in last years first quarter) as
a result of the payment of the prior years annual accrued incentive
compensation in the first quarter and due to the accrual for our bi-weekly
payroll including one week of payroll at the end of the first quarter compared
with two weeks at the end of the fiscal year, and (2) a $1.4 million
decrease in accounts payable (compared to $4.4 million in last years first
quarter) due to the timing of payments made for spring merchandise purchases.
Cash Flows From Investing
Activities.
Cash
used in investing activities was $2.4 million in the first quarter of fiscal
2010 compared to $3.9 million in the first quarter of fiscal 2009.
Purchases of property and equipment included in cash flows from investing
activities totaled $5.4 million and $3.9 million in the first quarter of fiscal
2010 and 2009, respectively, with the increase resulting from opening 19 new
stores in the first quarter of fiscal 2010 compared with 8 in the first quarter
of fiscal 2009. Capital expenditures in
both years included routine amounts for new stores, relocated and expanded
stores and other general corporate purposes. Redemptions of municipal auction
rate securities provided cash of $3.0 million in the first quarter of fiscal
2010.
Cash Flows From Financing
Activities.
Cash
flows from financing activities were insignificant in the first quarters of
both fiscal 2010 and 2009.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash
and cash equivalents (which equaled $83.4 million as of May 1, 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 May 1, 2010, we had $26.8 million ($30.0
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 74% are
either guaranteed by the Department of Education under the Federal Family
Education Loan Program (35%) or backed by insurance companies, AMBAC Assurance
Corporation (32%) or MBIA Insurance Corporation (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, $26.0 million of the Companys ARS have been redeemed
at par value by certain issuers and the Companys investment banks since February 2008. In addition, 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 May 1, 2010, the Right
was valued at $3.2 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
12
Table of Contents
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.
Critical
Accounting Policies
The preparation of our condensed consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. There
have been no material changes to the Critical Accounting Policies outlined in
the Companys Annual Report on Form 10-K for the year ended January 30,
2010.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk
during the three months ended May 1, 2010 compared to the disclosures in Part II,
Item 7A of our Annual Report on Form 10-K for the year ended January 30,
2010.
Item
4. Controls and Procedures.
We have carried out an evaluation under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of May 1,
2010 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.
There were no changes in our internal control over
financial reporting that occurred during the fiscal quarter ended May 1,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
13
Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time involved in various legal
proceedings incidental to the conduct of our business, including claims by
customers, employees or former employees. While litigation is subject to
uncertainties and the outcome of any litigated matter is not predictable, we
are not aware of any legal proceedings pending or threatened against us that we
expect to have a material adverse effect on our financial condition, results of
operations or liquidity.
Item 1A. Risk Factors.
There are no material changes to the Risk Factors
described under the section ITEM 1A. RISK FACTORS in the Companys Annual
Report on Form 10-K for the fiscal year ended January 30, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior
Securities.
Not applicable.
Item 4. (Removed and Reserved).
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
10.1
|
|
Second Amendment
to Credit Agreement, dated as of March 22, 2010, by and between Citi
Trends, Inc. and Bank of America, N.A. (incorporated by reference to
Exhibit 10.37 to the Companys Annual Report on Form 10-K for the
year ended January 30, 2010)
|
|
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31.1
|
|
Certification of
Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
31.2
|
|
Certification of
Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|
*
Filed herewith.
Pursuant to Securities and Exchange Commission Release
No. 33-8238, this certification will be treated as accompanying this
Quarterly Report on Form 10-Q and not filed as part of such report for
purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of Section 18 of the Securities
Exchange Act of 1934 and this certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates
it by reference.
14
Table of Contents
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, and the undersigned also has signed this report in his
capacity as the Registrants Chief Financial Officer (Principal Financial
Officer).
|
CITI TRENDS,
INC.
|
|
|
|
Date:
May 28, 2010
|
|
|
|
|
|
|
By:
|
/s/ Bruce D.
Smith
|
|
Name:
|
Bruce D. Smith
|
|
Title:
|
Executive Vice
President, Chief Financial Officer and Secretary
|
15
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