# Citi Trends Inc: Form 10-Q for the period ended Oct 30, 2010

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2010-12-06
- Accepted by EDGAR: Dec 6, 2010, 17:34 ET
- Period: 2010-10-30
- Accession: 0001104659-10-061303
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465910061303/a10-17679_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465910061303/

## Management's discussion and analysis

As filed, 21,198 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. We operated 458 stores in both urban and rural markets in 27 states as of October 30, 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 thirty-nine and thirteen week periods ended October 30, 2010 and October 31, 2009:

|  | Thirty-nine Weeks Ended October 30, 2010 | October 31, 2009 | Thirteen Weeks Ended October 30, 2010 | October 31, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $11,488 | $8,466 | $(394) | $606 |
| Plus: |  |  |  |  |
| Interest expense | 17 | 86 | 8 | 17 |
| Income tax expense | 6,024 | 4,400 | — | 315 |
| Depreciation and amortization | 14,843 | 13,679 | 5,324 | 4,851 |
| Less: |  |  |  |  |
| Interest income | (140) | (329) | (41) | (85) |
| Income tax benefit | — | — | (459) | — |
| EBITDA | $32,232 | $26,302 | $4,438 | $5,704 |

### 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.

### Thirty-nine Weeks Ended October 30, 2010 and October 31, 2009

*Net Sales.* Net sales increased $68.4 million, or 17.9%, to $450.5 million in the thirty-nine weeks ended October 30, 2010 from $382.1 million in the thirty-nine weeks ended October 31, 2009. The increase in net sales was due primarily to the opening of 68 new stores since last year’s third quarter, together with a 2.2% increase in comparable store sales, partially offset by the effect of closing two stores since last year’s third quarter. Comparable stores include locations that have been relocated or expanded. There were thirteen stores relocated or expanded since last year’s third quarter, all of which impacted comparable store sales. Sales in comparable relocated and expanded stores increased 5.2% in the first thirty-nine weeks of 2010, while sales in all other comparable stores increased 1.9%. The 2.2% overall increase in comparable store sales was due to a 2.9% increase in the number of customer transactions, partially offset by a lower average ticket. Comparable store sales changes by major merchandise class were as follows in the first thirty-nine weeks of 2010: Accessories +17%; Home +14%; Men’s -1%; Women’s -1%; and Children’s -2%.

The new stores opened in 2009 and 2010, net of the closed stores, accounted for $60.6 million of the increase in total sales, while the 2.2% sales increase in the 352 comparable stores totaled $7.8 million.

*Gross Profit.* Gross profit increased $25.0 million, or 16.9%, to $172.4 million in the first thirty-nine weeks of 2010 from $147.4 million in last year’s first thirty-nine weeks. The increase in gross profit is a result of the increase in sales, partially offset by a decline in the gross margin to 38.3% from 38.6% in last year’s first thirty-nine weeks. The decrease in gross margin was due to a decline of 40 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an increase in freight costs of 10 basis points, partially offset by a decrease of 20 basis points in inventory shrinkage.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $19.0 million, or 15.7%, to $140.1 million in the first thirty-nine weeks of 2010 from $121.1 million in the same period of last year. The increase in these expenses was due primarily to additional store level, distribution and corporate costs arising from the opening of 68 new stores since last year’s third quarter. As a percentage of sales, selling, general and administrative expenses improved to 31.1% in the first thirty-nine weeks of fiscal 2010 from 31.7% in the first thirty-nine weeks of fiscal 2009, due to labor efficiencies and strong payroll control in the stores and distribution centers, together with corporate payroll leverage arising from the increase in sales.

*Depreciation and Amortization.* Depreciation and amortization expense increased $1.1 million, or 8.5%, to $14.8 million in the first thirty-nine weeks of 2010 from $13.7 million in the first thirty-nine weeks 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 thirty-nine weeks of 2010 from $0.3 million in the same period of 2009 due to a declining interest rate environment.

*Interest Expense.* Interest expense decreased to $17,000 in the first thirty-nine weeks of 2010 from $86,000 in the first thirty-nine weeks of 2009 due to the final liquidation of our capital lease obligations.

*Income Tax Expense.* Income tax expense increased $1.6 million, or 36.9%, to $6.0 million in this year’s first thirty-nine weeks from $4.4 million in the first thirty-nine weeks of 2009 due to an increase in pretax income, together with a slight increase in the effective income tax rate to 34.4% from 34.2%.

*Net Income.* Net income increased 35.7% to $11.5 million in the first thirty-nine weeks of 2010 from $8.5 million in the first thirty-nine weeks of 2009 due to the factors discussed above.

### Thirteen Weeks Ended October 30, 2010 and October 31, 2009

*Net Sales.* Net sales increased $12.6 million, or 10.0%, to $140.0 million in the thirteen weeks ended October 30, 2010 from $127.4 million in the thirteen weeks ended October 31, 2009. The increase in net sales was due primarily to the opening of 68 new stores since last year’s third quarter, partially offset by a 4.2% decrease in comparable store sales and the effect of closing two stores since last year’s third quarter. Comparable stores include locations that have been relocated or expanded. There were thirteen stores relocated or expanded since last year’s third quarter, all of which impacted comparable store sales. Sales in comparable relocated and expanded stores decreased 0.3% in the third quarter of 2010, while sales in all other comparable stores decreased 4.5%. Approximately 90% of the 4.2% overall decrease in comparable store sales was due to a decrease in the average ticket, with the remainder resulting from fewer customer transactions. Comparable store sales changes by major merchandise class were as follows in the third quarter of 2010: Accessories +14%; Home +10%; Children’s -6%; Men’s -9%; and Women’s -10%.

The new stores opened in 2009 and 2010, net of closed stores, accounted for an increase of $17.4 million in total sales, while the 4.2% sales decrease in the 352 comparable stores totaled $4.8 million.

*Gross Profit.* Gross profit increased $4.1 million, or 8.5%, to $51.7 million in the third quarter of 2010 from $47.6 million in last year’s third quarter. The increase in gross profit is a result of the increase in sales, partially offset by a decline in the gross margin to 36.9% from 37.4% in last year’s third quarter. The decrease in the gross margin was due to a 70 basis points decline in the core merchandise margin (initial mark-up, net of markdowns), partially offset by reductions of 10 basis points each in freight costs and shrinkage.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $5.2 million, or 12.5%, to $47.2 million in the third quarter of 2010 from $42.0 million in last year’s third quarter. The increase in these expenses was due primarily to additional store level, distribution and corporate costs arising from the opening of 68 new stores since last year’s third quarter. As a percentage of sales, selling, general and administrative expenses increased to 33.7% in the third quarter of fiscal 2010 from 33.0% in the third quarter of fiscal 2009, due to the deleveraging effect on expenses as a percentage of sales when comparable store sales decline 4.2%.

*Depreciation and Amortization.* Depreciation and amortization expense increased $0.4 million, or 9.8%, to $5.3 million in the third quarter of 2010 from $4.9 million in the third quarter of 2009, as the result of capital expenditures incurred for new and relocated/expanded stores.

*Interest Income.* Interest income decreased to $41,000 in the third quarter of 2010 from $85,000 in the third quarter of 2009 due to a declining interest rate environment.

*Interest Expense.* Interest expense decreased to $8,000 in the third quarter of 2010 from $17,000 in the third quarter of 2009 due to the final liquidation of our capital lease obligations.

*Unrealized Gain on Investment Securities.* An unrealized gain of $57,000 on our investments in auction rate securities and a related put option was reflected in the third quarter of fiscal 2009, reversing a $57,000 impairment loss recorded in the first half of 2009.

*Income Tax (Benefit) Expense.* In the third quarter of 2010, an income tax benefit of $0.5 million was recorded due to a pretax loss in the quarter, while, in last year’s third quarter, income tax expense of $0.3 million was recorded due to pretax income.

*Net (Loss) Income.* Net loss was $394,000 in the third quarter of 2010 versus net income of $606,000 in the third 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 October 30, 2010, we had total cash and cash equivalents of $69.6 million compared with total cash and cash equivalents of $63.0 million as of January 30, 2010. Inventory represented 39.3% of our total assets as of October 30, 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 third quarter of 2010 were up $10.0 million, or 9.5%, compared to the third quarter of fiscal 2009, while store selling square footage increased approximately 19% as of the end of the quarter. The gap between the inventory increase and the square footage increase reflects an effort on our part to maintain conservative inventory levels in this difficult sales environment.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $6.6 million in the first thirty-nine weeks of fiscal 2010 compared to $15.1 million in the same period of fiscal 2009. The main source of cash provided during the first thirty-nine weeks of fiscal 2010 was net income adjusted for noncash expenses such as depreciation and amortization, loss on disposal of property and equipment, gain on insurance claims, deferred income taxes and stock-based compensation expense, totaling $27.8 million (compared to $23.2 million in last year’s first thirty-nine weeks). Other significant sources of cash in the first thirty-nine weeks of fiscal 2010 were (1) a $2.6 million increase in layaway deposits (compared to $2.8 million in the first thirty-nine weeks 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 $1.8 million increase in accrued expenses and other long-term liabilities (compared to $1.7 million in the first thirty-nine weeks of fiscal 2009) due primarily to our store growth. Significant uses of cash included (1) a $14.4 million increase in inventory (compared to $19.1 million in the first thirty-nine weeks of fiscal 2009) as the result of opening 57 new stores in the first thirty-nine weeks of 2010, partially offset by two store closings, and (2) a $6.8 million change in income tax receivable/payable (compared to $2.6 million in the first thirty-nine weeks of fiscal 2009) due to the timing of quarterly estimated payments.

*Cash Flows From Investing Activities.* Cash used in investing activities was $0.7 million in the first thirty-nine weeks of fiscal 2010 compared to $15.5 million in the first thirty-nine weeks of fiscal 2009. Redemptions of investment securities provided cash of $33.0 million in the first thirty-nine weeks of 2010 and $1.6 million in the same period 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 $4.7 million in the first thirty-nine weeks of 2010. Cash used for purchases of property and equipment totaled $29.0 million and $17.1 million in the first thirty-nine weeks 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 57 new stores in the first thirty-nine weeks of fiscal 2010 compared with 38 in the first thirty-nine weeks of fiscal 2009.

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first thirty-nine weeks of both fiscal 2010 and 2009.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $69.6 million as of October 30, 2010); (ii) short-term trade credit; (iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (iv) a $20 million revolving credit facility. Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors. Historically, our principal liquidity requirements have been for working capital and capital expenditure needs.

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, 509 characters.

There have been no material changes in our market risk during the thirty-nine weeks ended October 30, 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, 1,553 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 October 30, 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 October 30, 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 Dec 6, 2010.
Source: SEC EDGAR, the filing index for accession 0001104659-10-061303. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.