# Citi Trends Inc: Form 10-Q for the period ended Apr 30, 2011

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2011-05-27
- Accepted by EDGAR: May 27, 2011, 10:00 ET
- Period: 2011-04-30
- Accession: 0001104659-11-031888
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465911031888/a11-12804_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465911031888/

## Management's discussion and analysis

As filed, 17,029 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; 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 29, 2011 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 473 stores in both urban and rural markets in 27 states as of April 30, 2011.

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 2010 and fiscal 2011 are not considered comparable stores in fiscal 2011. 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 2010. 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 net income to EBITDA for the thirteen week periods ended April 30, 2011 and May 1, 2010:

|  | Thirteen Weeks Ended April 30, 2011 | May 1, 2010 |
| --- | ---: | ---: |
| Net income | $12,093 | $12,449 |
| Plus: |  |  |
| Interest expense | 4 | 4 |
| Income tax expense | 6,370 | 6,792 |
| Depreciation and amortization | 5,584 | 4,750 |
| Less: |  |  |
| Interest income | (54) | (55) |
| EBITDA | $23,997 | $23,940 |

### Accounting Periods

The following discussion contains references to fiscal years 2011 and 2010, which represent fiscal years ending or ended on January 28, 2012 (fiscal 2011) and January 29, 2011 (fiscal 2010), respectively. Fiscal 2011 and fiscal 2010 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.

### Thirteen Weeks Ended April 30, 2011 and May 1, 2010

*Net Sales.* Net sales increased $7.8 million, or 4.3%, to $189.2 million in the thirteen weeks ended April 30, 2011 from $181.4 million in the thirteen weeks ended May 1, 2010. The increase in net sales was due primarily to the opening of 56 new stores since last year’s first quarter, partially offset by a 6.9% decrease in comparable store sales and the effect of closing three stores since last year’s first quarter. Comparable stores include locations that have been relocated or expanded. There were thirteen stores relocated or expanded since last year’s first quarter, all of which impacted comparable store sales. Sales in comparable relocated and expanded stores increased 5.4% in the first quarter of 2011, while sales in all other comparable stores decreased 7.5%. The 6.9% overall decrease in comparable store sales was reflected in an 8.3% decline in customer transactions, partially offset by a higher average ticket. Comparable store sales changes by major merchandise class were as follows in the first quarter of 2011: Accessories +2%; Home -4%; Children’s -6%; Women’s -8%; and Men’s -12%.

The new stores opened in 2010 and 2011, net of closed stores, accounted for an increase of $19.8 million in total sales, while the 6.9% sales decrease in the 398 comparable stores totaled $12.0 million.

*Gross Profit.* Gross profit increased $2.7 million, or 3.7%, to $75.1 million in the first quarter of 2011 from $72.4 million in last year’s first quarter. The increase in gross profit is a result of the increase in sales, partially offset by a slight decline in the gross margin to 39.7% from 39.9% in last year’s first quarter. The decrease in gross margin was due to a decline in the core merchandise margin (initial mark-up, net of markdowns) of 40 basis points, partially offset by a 20 basis point improvement in inventory shrinkage.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $2.6 million, or 5.4%, to $51.1 million in the first quarter of 2011 from $48.5 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 56 new stores since last year’s first quarter. As a percentage of sales, selling, general and administrative expenses increased to 27.0% in the first quarter of fiscal 2011 from 26.7% in the first quarter of fiscal 2010, due to the deleveraging effect on expenses as a percentage of sales (particularly costs that are largely fixed, such as rent) when comparable store sales decline 6.9%.

*Depreciation and Amortization.* Depreciation and amortization expense increased $0.8 million, or 17.6%, to $5.6 million in the first quarter of 2011 from $4.8 million in the first quarter of 2010, as the result of capital expenditures incurred for new and relocated/expanded stores and the new distribution center in Roland, Oklahoma.

*Income Tax Expense.* Income tax expense decreased $0.4 million, or 6.2%, to $6.4 million in this year’s first quarter from $6.8 million in the first quarter of 2010 due to a decrease in pretax income, together with a slight decrease in the effective income tax rate to 34.5% from 35.3%.

*Net Income.* Net income decreased 2.9% to $12.1 million in the first quarter of 2011 from $12.4 million in the first quarter of 2010 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. In recent years, we have met these cash requirements from cash flow from operations and short-term trade credit. 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 April 30, 2011, we had total cash and cash equivalents of $76.8 million compared with $69.2 million as of January 29, 2011. Inventory represented 35.7% of our total assets as of April 30, 2011. 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 2011 were up $17.7 million, or 18.5%, compared to the first quarter of fiscal 2010, while store selling square footage increased 14.4% year-over-year 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 make more opportunistic purchases of next-season-buy merchandise in order to lock-in costs in advance of anticipated 2011 merchandise cost inflation.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $26.4 million in the first thirteen weeks of fiscal 2011 compared to $23.7 million in the same period of fiscal 2010. The main source of cash provided during the first thirteen weeks of fiscal 2011 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 $19.2 million (compared to $18.7 million in the first thirteen weeks of fiscal 2010). Other significant sources of cash in the first thirteen weeks of fiscal 2011 were (1) an $8.1 million decrease in inventory (compared to $5.2 million in the first thirteen weeks of fiscal 2010) due to apparel retail seasonality which typically results in having more inventory at the beginning of the spring selling season than at the end; (2) a $5.6 million change in the income tax receivable/payable (compared to $2.3 million in the first thirteen weeks of fiscal 2010) due to income tax expense being accrued on first quarter pretax income, while first quarter estimated tax payments are not due until after the end of the quarter; (3) a $2.9 million increase in accrued expenses and other long-term liabilities (compared to $0.8 million in the first thirteen weeks of fiscal 2010), due to higher sales tax accruals at the end of the first quarter than at year-end because sales in the month of April are much higher than in the month of January, and due to an increase in deferred rent and tenant improvement allowances in other long-term liabilities due to our continued store growth; and (4) a $1.5 million increase in layaway deposits (compared to $1.3 million in the first thirteen weeks of fiscal 2010) 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. Significant uses of cash consisted primarily of an $8.9 million decrease in accounts payable (compared to $1.4 million in the first thirteen weeks of fiscal 2010) as the result of the inventory reduction discussed above. The decrease in accounts payable was more than would typically be expected in relation to an $8.1 million decrease in inventory because, as discussed above, a greater portion of inventory is invested in next-season-buy merchandise, and much of the trade payable balance related to such inventory had been paid prior to the end of the first quarter. In addition, uses of cash included a $1.6 million decrease in accrued compensation (compared to $2.5 million in the first thirteen weeks of fiscal 2010), as our year-end balance sheet included accrued payroll for two weeks and our first quarter balance sheet included accrued payroll for only one week due to the timing of paying our bi-weekly payroll.

*Cash Flows From Investing Activities.* Cash used in investing activities was $18.9 million in the first thirteen weeks of fiscal 2011 compared to $3.9 million in the first thirteen weeks of fiscal 2010. Cash used for purchases of property and equipment totaled $11.9 million and $6.9 million in the first thirteen weeks of fiscal 2011 and 2010, respectively, with the increase resulting from the equipping of the new distribution center in Roland, Oklahoma. Purchases, net of sales/redemptions, of investment securities used cash of $7.0 million in the first thirteen weeks of 2011, whereas sales/redemptions provided cash of $3.0 million in the same period of 2010.

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first thirteen weeks of both fiscal 2011 and 2010.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $76.8 million as of April 30, 2011); (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 29, 2011.

## Market risk

As filed, 220 characters.

There have been no material changes in our market risk during the thirteen weeks ended April 30, 2011 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 29, 2011.

## Controls and procedures

As filed, 1,549 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 April 30, 2011 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 April 30, 2011 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 29, 2011.

Filed May 27, 2011.
Source: SEC EDGAR, the filing index for accession 0001104659-11-031888. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.