# Citi Trends Inc: Form 10-Q for the period ended Jul 31, 2010

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2010-08-27
- Accepted by EDGAR: Aug 27, 2010, 19:45 ET
- Period: 2010-07-31
- Accession: 0001104659-10-046329
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465910046329/a10-13089_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465910046329/

## Management's discussion and analysis

As filed, 22,326 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; 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 30, 2010 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 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:

|  | Twenty-Six Weeks Ended July 31, 2010 | August 1, 2009 | Thirteen Weeks Ended 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 Company’s financial performance is based on the unaudited condensed consolidated 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.

### 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 year’s second quarter, together with a 5.1% increase in comparable store sales, partially offset by the effect of closing two stores since last year’s 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 year’s 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%; Men’s +3%; Women’s +3%; and Children’s 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 year’s 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 year’s 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 year’s 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 year’s 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 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 year’s 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 year’s second quarter, partially offset by a 0.6% decrease in comparable store sales and the effect of closing two stores since last year’s second quarter. Comparable stores include locations that have been relocated or expanded. There were thirteen stores relocated or expanded since last year’s 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%; Men’s -2%; Women’s -4%; and Children’s -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 year’s 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 year’s 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 year’s 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 year’s 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 year’s 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.

### 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. 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 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 year’s 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 Company’s Annual Report on Form 10-K for the year ended January 30, 2010.

## Market risk

As filed, 505 characters.

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.

## Controls and procedures

As filed, 1,547 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 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 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.

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.

## Risk factors

As filed, 473 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 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.

Filed Aug 27, 2010.
Source: SEC EDGAR, the filing index for accession 0001104659-10-046329. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.