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 July 31, 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.)
|
|
|
|
104 Coleman Boulevard
|
|
|
Savannah, Georgia
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|
31408
|
(Address
of principal executive offices)
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|
(Zip
Code)
|
(
912) 236-1561
Registrants telephone number, including area code
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
(Do not check if a smaller reporting company)
|
|
Smaller
Reporting Company
o
|
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 August 13, 2010
|
Common
Stock, $.01 par value
|
|
14,836,037
shares
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Table
of Contents
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
Citi Trends, Inc.
Condensed
Consolidated Balance Sheets
July 31, 2010 and January 30, 2010
(Unaudited)
(in thousands, except share data)
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|
July 31,
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January 30,
|
|
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|
2010
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2010
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Assets
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|
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|
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|
Current assets:
|
|
|
|
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Cash and cash equivalents
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$
|
84,636
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|
$
|
62,993
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|
Short-term investment securities
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|
3,148
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|
33,025
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|
Inventory
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107,556
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100,874
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Prepaid and other current assets
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9,294
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10,409
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Income tax receivable
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2,741
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|
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Deferred tax asset
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4,707
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4,518
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|
Total current assets
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|
212,082
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211,819
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|
Property and equipment, net of accumulated
depreciation and amortization of $85,069 and $76,247 as of July 31, 2010
and January 30, 2010, respectively
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|
73,434
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|
63,791
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|
Goodwill
|
|
1,371
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|
1,371
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|
Deferred tax asset
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2,916
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2,488
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|
Other assets
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|
562
|
|
517
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|
Total assets
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$
|
290,365
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$
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279,986
|
|
Liabilities
and Stockholders Equity
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|
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Current liabilities:
|
|
|
|
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|
Accounts payable
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$
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58,942
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$
|
62,706
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|
Accrued expenses
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|
15,517
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|
12,773
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|
Accrued compensation
|
|
9,168
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9,500
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|
Income tax payable
|
|
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3,024
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|
Layaway deposits
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|
1,909
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|
645
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|
Total current liabilities
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85,536
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|
88,648
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|
Other long-term liabilities
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9,253
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9,995
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|
Total liabilities
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94,789
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|
98,643
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|
Stockholders equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
32,000,000 shares; 15,002,218 shares issued as of July 31, 2010 and
14,899,577 shares issued as of January 30, 2010; 14,836,468 shares outstanding
as of July 31, 2010 and 14,733,827 outstanding as of January 30,
2010
|
|
147
|
|
146
|
|
Paid-in-capital
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|
76,718
|
|
74,368
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|
Retained earnings
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118,876
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106,994
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|
Treasury stock, at cost; 165,750 shares as of
July 31, 2010 and January 30, 2010
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|
(165
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)
|
(165
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)
|
Total stockholders equity
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|
195,576
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|
181,343
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|
Commitments and contingencies (note 7)
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|
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Total liabilities and stockholders equity
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$
|
290,365
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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 Operations
Twenty-six Weeks Ended July 31, 2010 and August 1,
2009
(Unaudited)
(in thousands, except per share data)
|
|
Twenty-six Weeks Ended
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July 31,
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August 1,
|
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2010
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2009
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|
Net sales
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$
|
310,448
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|
$
|
254,702
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|
Cost of sales
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|
189,778
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|
154,920
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|
Gross profit
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|
120,670
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|
99,782
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|
Selling, general and administrative expenses
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|
92,876
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|
79,127
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|
Depreciation and amortization
|
|
9,519
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|
8,828
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|
Income from operations
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|
18,275
|
|
11,827
|
|
Interest income
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|
99
|
|
244
|
|
Interest expense
|
|
(9
|
)
|
(69
|
)
|
Unrealized loss on investment securities
|
|
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(57
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)
|
Income before income tax expense
|
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18,365
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|
11,945
|
|
Income tax expense
|
|
6,483
|
|
4,085
|
|
Net income
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|
$
|
11,882
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|
$
|
7,860
|
|
|
|
|
|
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Basic net income per common share
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|
$
|
0.82
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|
$
|
0.54
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|
Diluted net income per common share
|
|
$
|
0.82
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|
$
|
0.54
|
|
|
|
|
|
|
|
Net income attributable to common shares
|
|
|
|
|
|
Basic
|
|
$
|
11,882
|
|
$
|
7,700
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|
Diluted
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|
$
|
11,882
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|
$
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7,700
|
|
|
|
|
|
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|
Weighted average number of shares outstanding
|
|
|
|
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Basic
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|
14,486
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|
14,342
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|
Diluted
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|
14,510
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|
14,370
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|
Citi Trends, Inc.
Condensed
Consolidated Statements of Operations
Thirteen Weeks Ended July 31, 2010 and August 1,
2009
(Unaudited)
(in thousands, except per share data)
|
|
Thirteen Weeks Ended
|
|
|
|
July 31,
|
|
August 1,
|
|
|
|
2010
|
|
2009
|
|
Net sales
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|
$
|
129,042
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|
$
|
111,605
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|
Cost of sales
|
|
80,762
|
|
69,011
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|
Gross profit
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|
48,280
|
|
42,594
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|
Selling, general and administrative expenses
|
|
44,426
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|
38,994
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|
Depreciation and amortization
|
|
4,769
|
|
4,455
|
|
Loss from operations
|
|
(915
|
)
|
(855
|
)
|
Interest income
|
|
44
|
|
105
|
|
Interest expense
|
|
(5
|
)
|
(28
|
)
|
Unrealized gain on investment securities
|
|
|
|
671
|
|
Loss before income tax benefit
|
|
(876
|
)
|
(107
|
)
|
Income tax benefit
|
|
(309
|
)
|
(38
|
)
|
Net loss
|
|
$
|
(567
|
)
|
$
|
(69
|
)
|
|
|
|
|
|
|
Basic net loss per common share
|
|
$
|
(0.04
|
)
|
$
|
(0.00
|
)
|
Diluted net loss per common share
|
|
$
|
(0.04
|
)
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
Net loss attributable to common shares
|
|
|
|
|
|
Basic
|
|
$
|
(567
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)
|
$
|
(69
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)
|
Diluted
|
|
$
|
(567
|
)
|
$
|
(69
|
)
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
Basic
|
|
14,515
|
|
14,365
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|
Diluted
|
|
14,515
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|
14,365
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|
See accompanying notes to
the condensed consolidated financial statements (unaudited).
4
Table of Contents
Citi Trends, Inc.
Condensed
Consolidated Statements of Cash Flows
Twenty-six Weeks Ended July 31, 2010 and August 1,
2009
(Unaudited)
(in thousands)
|
|
Twenty-six Weeks Ended
|
|
|
|
July 31,
|
|
August 1,
|
|
|
|
2010
|
|
2009
|
|
Operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
11,882
|
|
$
|
7,860
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
9,519
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|
8,828
|
|
Loss on disposal of property and equipment
|
|
143
|
|
254
|
|
Deferred income taxes
|
|
(617
|
)
|
(687
|
)
|
Noncash stock-based compensation expense
|
|
1,635
|
|
1,004
|
|
Excess tax benefits from stock-based payment
arrangements
|
|
(1,496
|
)
|
(685
|
)
|
Unrealized loss on investment securities
|
|
|
|
57
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Inventory
|
|
(6,682
|
)
|
(2,570
|
)
|
Prepaid and other current assets
|
|
1,115
|
|
1,652
|
|
Other assets
|
|
(45
|
)
|
(76
|
)
|
Accounts payable
|
|
(3,764
|
)
|
(6,166
|
)
|
Accrued expenses and other long-term liabilities
|
|
780
|
|
80
|
|
Accrued compensation
|
|
(332
|
)
|
750
|
|
Income tax receivable/payable
|
|
(4,269
|
)
|
(501
|
)
|
Layaway deposits
|
|
1,264
|
|
1,244
|
|
Net cash provided by operating activities
|
|
9,133
|
|
11,044
|
|
Investing activities:
|
|
|
|
|
|
Sales/redemptions of investment securities
|
|
33,025
|
|
1,300
|
|
Purchases of investment securities
|
|
(3,148
|
)
|
|
|
Purchases of property and equipment
|
|
(18,083
|
)
|
(9,258
|
)
|
Net cash provided by (used in) investing
activities
|
|
11,794
|
|
(7,958
|
)
|
Financing activities:
|
|
|
|
|
|
Repayments on capital lease obligations
|
|
|
|
(841
|
)
|
Excess tax benefits from stock-based payment
arrangements
|
|
1,496
|
|
685
|
|
Proceeds from the exercise of stock options
|
|
216
|
|
268
|
|
Cash used to settle withholding taxes on stock
option exercises
|
|
(996
|
)
|
(353
|
)
|
Net cash provided by (used in) financing
activities
|
|
716
|
|
(241
|
)
|
Net increase in cash and cash equivalents
|
|
21,643
|
|
2,845
|
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
|
62,993
|
|
33,516
|
|
End of period
|
|
$
|
84,636
|
|
$
|
36,361
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
$
|
59
|
|
Cash paid for income taxes
|
|
$
|
11,369
|
|
$
|
5,273
|
|
Supplemental disclosures of noncash investing
activities:
|
|
|
|
|
|
Increase in accrual for purchases of property and
equipment
|
|
$
|
1,222
|
|
$
|
704
|
|
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)
July 31,
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 July 31, 2010, the Company
operated 425 stores in 24 states.
The condensed consolidated
balance sheet as of July 31, 2010, the condensed consolidated statements
of operations for the twenty-six and thirteen-week periods ended July 31,
2010 and August 1, 2009, and the condensed consolidated statements of cash
flows for the twenty-six week periods ended July 31, 2010 and August 1,
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 July 31, 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 interim periods ended July 31,
2010 are not necessarily indicative of the results that may be expected for the
fiscal year ending January 29, 2011.
Certain prior year amounts
in the consolidated statement of cash flows have been revised to conform to the
current year presentation. The amount by
which an accrual for purchases of property and equipment changed had previously
been included in the line items for changes in accrued expenses (operating
activities) and purchases of property and equipment (investing
activities). The revision removed the
accrual change from both line items by offsetting amounts, and a supplemental
disclosure of noncash investing activities has been added to the consolidated
statement of cash flows for such amount.
This revision caused net cash provided by operating activities to
decrease and net cash used in investing activities to decrease by $704,000 in
the twenty-six weeks ended August 1, 2009 from that previously reported.
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,
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 July 31, 2010 and August 1,
2009, there were 51,000 and 67,000 options outstanding, respectively, to
purchase shares of common stock excluded from the calculation of diluted
earnings per share because of antidilution. For the twenty-six weeks
ended July 31, 2010 and August 1, 2009, there were 55,000 and 68,000
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.
6
Table of
Contents
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.
The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
|
|
Twenty-six Weeks Ended
|
|
|
|
July 31, 2010
|
|
August 1, 2009
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
11,882
|
|
$
|
7,860
|
|
Net income allocated to participating securities
|
|
|
|
(160
|
)
|
Net income attributable to common
stockholders-basic
|
|
11,882
|
|
7,700
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares
|
|
14,486
|
|
14,342
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-basic
|
|
$
|
0.82
|
|
$
|
0.54
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
11,882
|
|
$
|
7,860
|
|
Net income allocated to participating securities
|
|
|
|
(160
|
)
|
Net income attributable to common
stockholders-diluted
|
|
11,882
|
|
7,700
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic calculation
|
|
14,486
|
|
14,342
|
|
Effect of dilutive securities
|
|
24
|
|
28
|
|
Denominator for diluted calculation
|
|
14,510
|
|
14,370
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per
share-diluted
|
|
$
|
0.82
|
|
$
|
0.54
|
|
|
|
Thirteen
Weeks Ended
|
|
|
|
July 31,
2010
|
|
August 1,
2009
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net loss
|
|
$
|
(567
|
)
|
$
|
(69
|
)
|
Net income allocated to participating securities
|
|
|
|
|
|
Net loss attributable to common stockholders-basic
|
|
(567
|
)
|
(69
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares
|
|
14,515
|
|
14,365
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per
share-basic
|
|
$
|
(0.04
|
)
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net loss
|
|
$
|
(567
|
)
|
$
|
(69
|
)
|
Net income allocated to participating securities
|
|
|
|
|
|
Net loss attributable to common stockholders-diluted
|
|
(567
|
)
|
(69
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic calculation
|
|
14,515
|
|
14,365
|
|
Effect of dilutive securities
|
|
|
|
|
|
Denominator for diluted calculation
|
|
14,515
|
|
14,365
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per share-diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.00
|
)
|
7
Table of Contents
4.
Fair Value Measurement
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants in the principal or most
advantageous market at the measurement date. Fair value is established
according to a hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are described below:
Level 1: Unadjusted quoted prices in active markets
that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level
2: Observable prices that are based on
inputs not quoted on active markets, but corroborated by market data.
Level
3: Unobservable inputs are used when
little or no market data is available. Level 3 inputs are given the lowest
priority in the fair value hierarchy.
The Company held investments
in municipal auction rate securities (ARS) issued by student loan funding
organizations at the time the ARS market experienced a disruption in liquidity in
February 2008. Since that time, all
of the ARS have been redeemed at par value by the original issuers and the
Companys investment banks, with the final redemptions occurring on June 30,
2010 in connection with the Companys exercise of a put option offered by one
of the investment banks. There were no
losses incurred as the result of any of the ARS redemptions.
The following table provides
a summary of activity for the Companys ARS and related put option measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the twenty-six weeks ended July 31, 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
|
|
(3,369
|
)
|
(29,656
|
)
|
Balance as of July 31, 2010
|
|
$
|
|
|
$
|
|
|
The Companys short-term
investment securities as of July 31, 2010 consist of pre-refunded
municipal bonds which are bonds that have been refinanced by the issuer and
remain outstanding in the marketplace until a specific call date is
reached. Pre-refunded municipal bonds
are secured by U.S. Treasury securities placed in an irrevocable escrow account. All of the Companys pre-refunded municipal
bonds have call dates of less than one year, therefore, are classified as
current assets. As of July 31,
2010, these available-for-sale securities have fair values that are essentially
equal to the original cost of $3,148,000.
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 July 31, 2010 and January 30, 2010 are as
follows (in thousands):
|
|
July 31,
2010
|
|
January 30,
2010
|
|
Deferred rent
|
|
$
|
3,529
|
|
$
|
3,528
|
|
Tenant improvement allowances
|
|
4,970
|
|
5,600
|
|
Other
|
|
754
|
|
867
|
|
|
|
$
|
9,253
|
|
$
|
9,995
|
|
8
Table of Contents
7.
Commitments and
Contingencies
The Company from time to
time is involved in various legal proceedings incidental to the conduct of its
business, including claims by customers, employees or former employees.
While litigation is subject to uncertainties and the outcome of any litigated
matter is not predictable, the Company is not aware of any legal proceedings
pending or threatened against it that it expects to have a material adverse
effect on its financial condition, results of operations or liquidity.
8.
Recent Accounting
Pronouncements
In 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; 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 425 stores in both urban and rural markets in 24 states as of July 31,
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.
Provided below is a reconciliation of EBITDA to net income for the twenty-six
and thirteen week periods ended July 31, 2010 and August 1, 2009:
10
Table of Contents
|
|
Twenty-Six Weeks Ended
|
|
Thirteen Weeks Ended
|
|
|
|
July 31, 2010
|
|
August 1, 2009
|
|
July 31, 2010
|
|
August 1, 2009
|
|
Net income (loss)
|
|
$
|
11,882
|
|
$
|
7,860
|
|
$
|
(567
|
)
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
9
|
|
69
|
|
5
|
|
28
|
|
Income tax expense
|
|
6,483
|
|
4,085
|
|
|
|
|
|
Depreciation and amortization
|
|
9,519
|
|
8,828
|
|
4,769
|
|
4,455
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(99
|
)
|
(244
|
)
|
(44
|
)
|
(105
|
)
|
Income tax benefit
|
|
|
|
|
|
(309
|
)
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
27,794
|
|
$
|
20,598
|
|
$
|
3,854
|
|
$
|
4,271
|
|
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.
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.
Twenty-six
Weeks Ended July 31, 2010 and August 1, 2009
Net
Sales.
Net sales increased $55.7 million, or 21.9%, to
$310.4 million in the twenty-six weeks ended July 31, 2010 from $254.7
million in the twenty-six weeks ended August 1, 2009. The increase in
net sales was due primarily to the opening of 57 new stores since last years
second quarter, together with a 5.1% increase in comparable store sales,
partially offset by the effect of closing two stores since last years second
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 thirteen stores
relocated or expanded since last years second quarter, all of which impacted
comparable store sales. Sales in comparable relocated and expanded stores
increased 11.1% in the first half of 2010, while sales in all other comparable
stores increased 4.8%. Substantially all
of the 5.1% overall increase in comparable store sales was due to an increase
in the number of customer transactions, with only a minor amount resulting from
a higher average ticket. Comparable store sales changes by major merchandise
class were as follows in the first half of 2010: Accessories +18%; Home +15%; Mens +3%; Womens
+3%; and Childrens 0%.
The new stores opened in
2009 and 2010, net of the closed stores, accounted for $43.0 million of the
increase in total sales, while the 5.1% sales increase in the 352 comparable
stores totaled $12.7 million.
Gross
Profit.
Gross profit increased $20.9 million, or 20.9%, to
$120.7 million in the first half of 2010 from $99.8 million in last years
first half. The increase in gross profit is a result of the increase in
sales, partially offset by a slight decline in the gross margin to 38.9% from
39.2% in last years first half. The
decrease in gross margin was due primarily to an increase of 50 basis points in
markdowns as a percentage of sales, partially offset by a decrease of 20 basis
points in inventory shrinkage.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses increased $13.8 million, or 17.4%, to $92.9
million in the first half of 2010 from $79.1 million in last years first
half. The increase in these expenses was due primarily to additional
store level, distribution and corporate costs arising from the opening of 57
new stores since last years second quarter.
As a percentage of sales, selling, general and administrative expenses
improved to 29.9% in the first half of fiscal 2010 from 31.1% in the first half
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 and due to strong payroll controls. In particular, payroll expenses, which have a
sizable fixed component
11
Table of Contents
associated with store
management and corporate overhead, decreased 80 basis points as a percentage of
sales, and occupancy expenses, which tend to be highly fixed in nature,
decreased 30 basis points.
Depreciation and
Amortization.
Depreciation
and amortization expense increased $0.7 million, or 7.8%, to $9.5 million in
the first half of 2010 from $8.8 million in the first half of 2009, as the
result of capital expenditures incurred for new and relocated/expanded stores.
Interest
Income.
Interest income decreased to $0.1 million in the
first half of 2010 from $0.2 million in the first half of 2009 due to a
declining interest rate environment.
Interest
Expense.
Interest expense decreased to $9,000 in the first
half of 2010 from $69,000 in the first half of 2009 due to the final liquidation
of our capital lease obligations.
Unrealized
Loss on Investment Securities.
An impairment loss of $57,000 on our investments in auction rate
securities and a related put option was reflected in the first half of fiscal
2009.
Income Tax
Expense.
Income tax expense increased $2.4 million, or
58.7%, to $6.5 million in this years first half from $4.1 million in the first
half 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
decreasing slightly while pretax income was increasing.
Net
Income.
Net income increased 51.2% to $11.9 million in the
first half of 2010 from $7.9 million in the first half of 2009 due to the
factors discussed above.
Thirteen Weeks Ended July 31,
2010 and August 1, 2009
Net
Sales.
Net sales increased $17.4 million, or 15.6%, to
$129.0 million in the thirteen weeks ended July 31, 2010 from $111.6
million in the thirteen weeks ended August 1, 2009. The increase in
net sales was due primarily to the opening of 57 new stores since last years
second quarter, partially offset by a 0.6% decrease in comparable store sales
and the effect of closing two stores since last years second quarter. Comparable stores include locations that have
been relocated or expanded. There were thirteen stores relocated or expanded
since last years second quarter, all of which impacted comparable store sales.
Sales in comparable relocated and expanded stores increased 5.4% in the second
quarter of 2010, while sales in all other comparable stores decreased
1.0%. The 0.6% overall decrease in
comparable store sales was due to an approximately 3% decrease in the average
ticket, partially offset by an increase in the number of customer
transactions. Comparable store sales
changes by major merchandise class were as follows in the second quarter of
2010: Home +15%; Accessories +11%; Mens
-2%; Womens -4%; and Childrens -6%.
The new stores opened in
2009 and 2010, net of closed stores, accounted for an increase of $18.1 million
in total sales, while the 0.6% sales decrease in the 352 comparable stores
totaled $0.7 million.
Gross
Profit.
Gross profit increased $5.7 million, or 13.3%, to
$48.3 million in the second quarter of 2010 from $42.6 million in last years
second quarter. The increase in gross profit is a result of the increase
in sales, partially offset by a decline in the gross margin to 37.4% from 38.2%
in last years second quarter. The
decrease in the gross margin was due primarily to more merchandise clearance
markdowns resulting from the negative comparable store sales during the
quarter.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses increased $5.4 million, or 13.9%, to $44.4
million in the second quarter of 2010 from $39.0 million in last years second
quarter. The increase in these expenses was due primarily to additional
store level, distribution and corporate costs arising from the opening of 57
new stores since last years second quarter.
As a percentage of sales, selling, general and administrative expenses
decreased to 34.4% in the second quarter of fiscal 2010 from 34.9% in the
second quarter of fiscal 2009, due primarily to strong controls over payroll.
Depreciation and Amortization.
Depreciation and
amortization expense increased $0.3 million, or 7.0%, to $4.8 million in the
second quarter of 2010 from $4.5 million in the second quarter of 2009, as the
result of capital expenditures incurred for new and relocated/expanded stores.
Interest
Income.
Interest income decreased to $44,000 in the second
quarter of 2010 from $105,000 in the second quarter of 2009 due to a declining
interest rate environment.
Interest
Expense.
Interest expense decreased to $5,000 in the second
quarter of 2010 from $28,000 in the second quarter of 2009 due to the final
liquidation of our capital lease obligations.
Unrealized
Gain on Investment Securities.
An unrealized gain of $671,000 on our investments in auction rate
securities and a related put option was reflected in the second quarter of
fiscal 2009 due primarily to an improvement in the credit spreads and liquidity
associated with the auction rate securities market.
Income Tax
Benefit.
Income tax benefit increased to $309,000 in this
years second quarter from $38,000 in the second quarter of 2009 due to a
higher pretax loss.
Net
Loss.
Net loss increased to $567,000 in the second
quarter of 2010 from $69,000 in the second quarter of 2009 due to the factors
discussed above.
12
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 July 31,
2010, we had total cash and cash equivalents of $84.6 million compared with
total cash and cash equivalents of $63.0 million as of January 30,
2010. Inventory represented 37.0% of our total assets as of July 31,
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 second quarter of 2010 were up $18.7 million, or
21.1%, compared to the second quarter of fiscal 2009, while store selling square
footage increased 17.3%. Inventory in
comparable stores was 4.0% higher than at the end of the second quarter of
fiscal 2009, but only after significant reductions of comparable store
inventories of 10.2% and 18.0% in the second quarters of 2009 and 2008,
respectively.
Cash Flows
From Operating Activities
. Net cash provided by operating activities
was $9.1 million in the first half of fiscal 2010 compared to $11.0
million in the first half of fiscal 2009.
The main source of cash provided during the first half 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 $22.6 million (compared to
$17.3 million in last years first half).
Other significant sources of cash in the first half of fiscal 2010 were (1) a
$1.3 million increase in layaway deposits (compared to $1.2 million in the
first half of fiscal 2009) due to the seasonality of layaway transactions which
are low at the end of our fiscal year, because all balances have to be redeemed
by customers or they are cancelled by the middle of December each year,
and (2) a $1.1 million decrease in prepaid and other current assets
(compared to $1.7 million in the first half of fiscal 2009) due to lower
receivables from landlords for tenant improvement reimbursements as a result of
there being fewer store openings in the second quarter of 2010 than the fourth
quarter of 2009. Significant uses of
cash included (1) a $6.7 million increase in inventory (compared to $2.6
million in the first half of fiscal 2009) as the result of opening 24 new
stores in the first half of 2010, partially offset by two store closings, (2) a
$4.3 million change in income tax receivable/payable (compared to $0.5 million
in the first half of fiscal 2009) due to the timing of quarterly estimated
payments and because the payment in July 2010 was unusually high based on
our record first quarter earnings, and (3) a $3.8 million decrease in
accounts payable (compared to $6.2 million in the first half of fiscal 2009)
due primarily to seasonality, as a larger portion of inventory is still
included in accounts payable at the end of January than the end of July,
because January inventory includes recent purchases for the upcoming spring
season which are more significant than the recent purchases of merchandise in July for
the upcoming back-to-school season.
Cash Flows
From Investing Activities.
Cash provided by investing
activities was $11.8 million in the first half of fiscal 2010 compared to cash
used in investing activities of $8.0 million in the first half of fiscal
2009. Redemptions of investment
securities provided cash of $33.0 million in the first half of 2010 and $1.3
million in the first half of 2009, as our investment bank repurchased our
remaining auction rate securities in June 2010 in connection with our
exercise of a put option that had been offered to us in November 2008
after the auction rate securities market became illiquid. Cash used for purchases of investment
securities totaled $3.1 million in the first half of 2010. Cash used for purchases of property and
equipment totaled $18.1 million and $9.3 million in the first half of fiscal
2010 and 2009, respectively, with the increase resulting from the acquisition of
a new distribution center in Roland, Oklahoma and the opening of 24 new stores
in the first half of fiscal 2010 compared with 16 in the first half of fiscal
2009.
Cash Flows
From Financing Activities.
Cash flows from financing
activities were insignificant in the first half of both fiscal 2010 and 2009.
Cash
Requirements
Our principal sources of
liquidity consist of: (i) cash and cash equivalents (which equaled
$84.6 million as of July 31, 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.
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.
13
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
There have been no material
changes in our market risk during the twenty-six weeks ended July 31, 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, except that our
risk related to the illiquid auction rate securities market was eliminated when
our investment bank redeemed our remaining securities on June 30, 2010 in
connection with our exercise of a put option that had been offered to us by the
investment bank in November 2008.
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 July 31, 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 July 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
14
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, except that our risk related to the illiquid auction rate securities
market was eliminated when our investment bank redeemed our remaining
securities on June 30, 2010 in connection with our exercise of a put
option that had been offered to us by the investment bank in November 2008.
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.
31.1
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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.*
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31.2
|
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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.*
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32.1
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Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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*
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.
15
Table
of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, and the undersigned also has signed this report in
his capacity as the Registrants Chief Financial Officer (Principal Financial
Officer).
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CITI TRENDS, INC.
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Date: August 27, 2010
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By:
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/s/ Bruce D. Smith
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Name:
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Bruce D. Smith
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Title:
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Executive Vice President,
Chief Financial Officer and Secretary
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16
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