# Citi Trends Inc: Form 10-Q for the period ended May 2, 2009

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2009-05-29
- Accepted by EDGAR: May 29, 2009, 15:04 ET
- Period: 2009-05-02
- Accession: 0001104659-09-035624
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465909035624/a09-14397_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465909035624/

## Management's discussion and analysis

As filed, 19,034 characters.

### 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 Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s 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 Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 and in Part II, “Item 1A. Risk Factors,” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the Securities and Exchange Commission (“SEC”), including reports on Form 8-K.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC.

### Overview

We are a rapidly growing, value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. Originally our stores were located in the Southeast, and in recent years we expanded into the Mid-Atlantic and Midwest regions and Texas. We operated 365 stores in both urban and rural markets in 22 states as of May 2, 2009.

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been opened for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13th month of operation at the earliest or until its 24th month at the latest. As an example, stores opened in fiscal 2008 and fiscal 2009 are not considered comparable stores in fiscal 2009. Relocated and expanded stores are included in the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability. The average sales per store has increased over the years, as we have increased comparable store sales and opened new stores that are generally larger than our historical store base. Average sales per store increased from $0.8 million in fiscal 2000 to $1.4 million in fiscal 2008. In addition to sales, we measure gross profit as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts.

### Accounting Periods

The following discussion contains references to fiscal years 2009 and 2008, which represent fiscal years ending or ended on January 30, 2010 (fiscal 2009) and January 31, 2009 (fiscal 2008), respectively. Fiscal 2009 and fiscal 2008 both have 52-week accounting periods. This discussion and analysis should be read with the condensed financial statements and the notes thereto.

### Results of Operations

The following discussion of the Company’s financial performance is based on the condensed financial statements set forth herein. The nature of the Company’s 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 Company’s business may affect comparisons between periods.

### Thirteen Weeks Ended May 2, 2009 and May 3, 2008

*Net Sales.* Net sales increased $22.1 million, or 18.3%, to $143.1 million in the thirteen weeks ended May 2, 2009 from $121.0 million in the thirteen weeks ended May 3, 2008. The increase in net sales was due primarily to 35 new stores opened since last year’s first quarter, together with a 7.4% increase in comparable store sales, partially offset by the effect of closing one store. Comparable stores include locations that have been relocated or expanded. There were four stores relocated or expanded in the first quarter of 2009 and nine stores relocated or expanded in fiscal 2008, all of which impacted comparable store sales. Sales in comparable relocated and expanded stores increased 25.1% in the first quarter of 2009, while sales in all other comparable stores increased 6.6%. Approximately two-thirds of the 7.4% overall increase in comparable store sales was due to a higher average unit retail, with the other one-third being the result of an increase in the number of customer transactions. Comparable store sales changes by major merchandise class were as follows in the first quarter of 2009: Home +14%; Children’s +13%; Accessories +8%; Men’s +7%; Women’s +4%.

The new stores opened in 2008 and 2009, net of the closed store, accounted for a $13.5 million increase in total sales, while the 7.4% sales increase in the 318 comparable stores totaled $8.6 million.

*Gross Profit.* Gross profit increased $10.4 million, or 22.3%, to $57.2 million in the first quarter of 2009 from $46.8 million in last year’s first quarter. The increase in gross profit is a result of the increase in sales, together with an improvement in the gross margin from 38.6% in last year’s first quarter to 40.0% this year. Approximately 50 basis points of the gross margin improvement was related to lower freight costs as a percentage of sales that resulted from a reduction in fuel surcharges due to lower gasoline prices. Another 40 basis points of improvement was a result of the steps taken to better control inventory shrinkage, including a greater focus on problem stores by the store operations and loss prevention departments, the addition of sophisticated surveillance systems in high shrinkage stores, and lower inventory levels. The initial markup on merchandise was 30 basis points higher in this year’s first quarter, and markdowns as a percentage of sales were lower by 20 basis points due to our continued efforts to closely manage inventory, combined with the strong comparable store sales results.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $3.9 million, or 10.7%, to $40.1 million in the first quarter of 2009 from $36.2 million in last year’s first quarter. The increase in these expenses was due primarily to additional store level, distribution and corporate costs arising from the opening of 35 new stores since last year’s first quarter. As a percentage of sales, selling, general and administrative expenses improved to 28.0% in the first quarter of fiscal 2009 from 30.0% in the first quarter of fiscal 2008, 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 addition, store and distribution payroll costs were managed closely, resulting in a 70 basis point improvement in total payroll expense as a percentage of sales.

*Depreciation and Amortization.* Depreciation and amortization expense increased $670,000, or 18.1%, to $4.4 million in the first quarter of 2009 from $3.7 million in the first quarter of 2008, as the result of capital expenditures incurred for new and relocated/expanded stores and the expansion of the Darlington distribution center.

*Interest Income.* Interest income decreased to $139,000 in the first quarter of 2009 from $868,000 in the first quarter of 2008 due to a declining interest rate environment which affected our returns on auction rate securities as well as cash and cash equivalents.

*Interest Expense.* Interest expense decreased to $41,000 in the first quarter of 2009 from $87,000 in the first quarter of 2008 due to the normal decline in the interest portion of payments on our capital lease obligations as the principal portion of such obligations is reduced.

*Unrealized Loss on Auction Rate Securities.* An impairment loss of $728,000 on our investments in auction rate securities and a related put option is 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 69.5% to $4.1 million in this year’s first quarter from $2.4 million in the first quarter of 2008 due to an increase in pretax income, together with an increase in the effective income tax rate to 34.2% versus 32.0% last year as a result of the reduction in tax-exempt interest income, as discussed above.

*Net Income.* Net income increased 53.4% to $7.9 million in the first quarter of 2009 from $5.2 million in the first quarter of 2008 due to the factors discussed above.

### Liquidity and Capital Resources

Our cash requirements are primarily for working capital, expansion of our distribution infrastructure, construction of new stores, remodeling of our existing stores and the improvement of our information systems. Historically, we have met these cash requirements from cash flow from operations, short-term trade credit, borrowings under our revolving lines of credit, long-term debt, capital leases, and cash proceeds from our initial public offering. We expect to be able to meet future cash requirements with cash flow from operations, short-term trade credit, existing cash balances and, if necessary, borrowings under our revolving credit facility.

*Current Financial Condition.* As of May 2, 2009, we had total cash and cash equivalents of $44.7 million compared with total cash and cash equivalents of $33.5 million as of January 31, 2009. Inventory represented 34.1% of our total assets as of May 2, 2009. Management’s 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 2009 were up $1.4 million, or 1.6%, compared to the first quarter of fiscal 2008, despite an increase in store selling square footage of 13%. Inventory in comparable stores was 7.6% lower than the first quarter of fiscal 2008, due to our efforts to conservatively control our investment in inventory.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $15.1 million in the first quarter of fiscal 2009 compared to $6.4 million in the first quarter of fiscal 2008. The main source of cash provided during the first quarter of this year was net income adjusted for noncash expenses such as depreciation and amortization, deferred income taxes, stock-based compensation expense, and the unrealized loss on auction rate securities, totaling $12.7 million (compared to $8.4 million in last year’s first quarter). Other significant sources of cash in the first quarter of fiscal 2009 were (1) a $3.9 million increase in income tax payable (compared to $2.3 million in the first quarter of fiscal 2008), resulting from an increase in pretax income, (2) a $2.0 million decrease in prepaid and other current assets (compared to a $0.4 million increase in the first quarter of fiscal 2008) due primarily to the timing of collecting credit card receivables and receivables from landlords for tenant improvement reimbursements, and (3) a $1.6 million decrease in inventory (compared to a $0.8 million increase in the first quarter of fiscal 2008) as a result of efforts to conservatively manage inventory. Significant uses of cash included a $4.4 million decrease in accounts payable (compared to $1.3 million in last year’s first quarter) due to the timing of payments made for spring merchandise purchases.

*Cash Flows From Investing Activities.* Cash used in investing activities was $3.9 million in the first quarter of fiscal 2009 compared to $7.8 million in the first quarter of fiscal 2008. Purchases of property and equipment included in cash flows from investing activities totaled $3.9 million and $7.1 million in the first quarter of fiscal 2009 and 2008, respectively, with the decrease being a result of capital expenditures in the first quarter last year related to the expansion of the Darlington distribution center. Such capital expenditures in both years included routine amounts for new stores, relocated and expanded stores and other general corporate purposes. Purchases of municipal auction rate securities, net of sales, used cash of $0.7 million in the first quarter of fiscal 2008.

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first quarter of fiscal 2009 and 2008.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $44.7 million as of May 2, 2009); (ii) short-term trade credit; (iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (iv) a $20 million revolving credit facility. Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors. Historically, our principal liquidity requirements have been for working capital and capital expenditure needs.

As of May 2, 2009, we had $38.3 million ($43.8 million at par value) of investments in municipal auction rate securities (“ARS”) issued by student loan funding organizations. These securities are high-grade (at least AA-rated with one or more rating agencies) and approximately 79% are either guaranteed by the Department of Education under the Federal Family Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance Corporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidity for investors in ARS was provided via an auction process that reset the interest rate every 35 days, allowing investors to either roll over their investments or sell them at par value. Beginning in February 2008, there was insufficient demand for these types of investments during the auctions and, as a result, these securities became illiquid. Although the auctions for the securities have failed, we have not experienced any defaults and continue to earn and receive interest on all of the investments that we still own.

In November 2008, we accepted an offer (the “Right”) from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012. In accepting the Right, we granted UBS the authority to sell or auction the ARS at par value at any time up until the expiration date of the Right and released UBS from any claims relating to the marketing and sale of ARS. We will continue to earn interest on the ARS until they are liquidated. The obligations of UBS under the Right are not secured by its assets and do not require UBS to obtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Right. If UBS does not have sufficient funding to buy back the ARS and no alternative buyers are located either through the auction process, issuer redemptions or other means, then we may not be able to access cash by selling these securities without incurring a loss of principal. The Right was valued at $4.8 million as of May 2, 2009.

We believe that our existing sources of liquidity will be sufficient to fund our operations and anticipated capital expenditures for at least the next 12 months.

### Critical Accounting Policies

The preparation of our 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 Company’s Annual Report on Form 10-K for fiscal 2008.

## Market risk

As filed, 3,530 characters.

We are exposed to financial market risks related to changes in interest rates connected with our revolving line of credit, which bears interest at variable rates. We cannot predict market fluctuations in interest rates. As a result, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability. A hypothetical 100 basis point increase in prevailing market interest rates would not have materially impacted our financial position, results of operations or cash flows for the thirteen weeks ended May 2, 2009, because we did not borrow during this period of time. We do not engage in financial transactions for trading or speculative purposes and have not entered into any interest rate hedging contracts.

We source all of our product from apparel markets in the United States in U.S. Dollars and, therefore, are not directly subject to fluctuations in foreign currency exchange rates. However, fluctuations in foreign currency exchange rates could affect our purchasing power with vendors that import merchandise to sell to us. We have not entered into forward contracts to hedge against fluctuations in foreign currency prices.

As of May 2, 2009, we had $38.3 million ($43.8 million at par value) of investments in municipal auction rate securities (“ARS”) issued by student loan funding organizations. These securities are high-grade (at least AA-rated with one or more rating agencies) and approximately 79% are either guaranteed by the Department of Education under the Federal Family Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance Corporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidity for investors in ARS was provided via an auction process that reset the interest rate every 35 days, allowing investors to either roll over their investments or sell them at par value. Beginning in February 2008, there was insufficient demand for these types of investments during the auctions and, as a result, these securities became illiquid. Although the auctions for the securities have failed, we have not experienced any defaults and continue to earn and receive interest on all of the investments that we still own. However, interest rates have declined to levels that are much lower than in most of fiscal 2008. As a result, interest income is expected to be significantly lower in fiscal 2009 than in fiscal 2008.

In November 2008, we accepted an offer (the “Right”) from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012. In accepting the Right, we granted UBS the authority to sell or auction the ARS at par value at any time up until the expiration date of the Right and released UBS from any claims relating to the marketing and sale of ARS. We will continue to earn interest on the ARS until they are liquidated. The obligations of UBS under the Right are not secured by its assets and do not require UBS to obtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Right. If UBS does not have sufficient funding to buy back the ARS and no alternative buyers are located either through the auction process, issuer redemptions or other means, then we may not be able to access cash by selling these securities without incurring a loss of principal. The Right was valued at $4.8 million as of May 2, 2009.

## Controls and procedures

As filed, 1,195 characters.

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 2, 2009 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended May 2, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 189 characters.

There are no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Filed May 29, 2009.
Source: SEC EDGAR, the filing index for accession 0001104659-09-035624. Last ingested by Listed: Nov 10, 2026, 06:46 ET. No prices; not investment advice.