# Citi Trends Inc: Form 10-Q for the period ended Oct 29, 2011

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2011-12-06
- Accepted by EDGAR: Dec 6, 2011, 10:02 ET
- Period: 2011-10-29
- Accession: 0001104659-11-067772
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465911067772/a11-28294_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465911067772/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-10-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-31 to 2011-10-29 | $143.1m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2011-01-30 to 2011-10-29 | $462.5m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2011-07-31 to 2011-10-29 | $94.9m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2011-01-30 to 2011-10-29 | $295.8m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2011-07-31 to 2011-10-29 | $48.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2011-01-30 to 2011-10-29 | $166.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-07-31 to 2011-10-29 | $53.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2011-01-30 to 2011-10-29 | $154.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-07-31 to 2011-10-29 | −$12.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-30 to 2011-10-29 | −$8.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-07-31 to 2011-10-29 | $17.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-01-30 to 2011-10-29 | $27.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-07-31 to 2011-10-29 | −$5.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-30 to 2011-10-29 | −$4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-31 to 2011-10-29 | −$6.8m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2011-01-30 to 2011-10-29 | −$4.7m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2011-07-31 to 2011-10-29 | −$0.46 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-01-30 to 2011-10-29 | −$0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-31 to 2011-10-29 | −$0.46 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-01-30 to 2011-10-29 | −$0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-31 to 2011-10-29 | 14,602,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-01-30 to 2011-10-29 | 14,584,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-01-30 to 2011-10-29 | $7.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-01-30 to 2011-10-29 | $33.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2011-10-29 | $33.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-10-29 | $189.6m | us-gaap:AssetsCurrent |
| Total assets | at 2011-10-29 | $308.1m | us-gaap:Assets |
| Current liabilities | at 2011-10-29 | $92.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-10-29 | $105.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-10-29 | $202.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,712 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, including the possibility of a prolonged period of limited economic growth in the United States, and 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 or expanding 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 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 507 stores in both urban and rural markets in 28 states as of October 29, 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 and is, therefore, the key financial metric used to determine annual cash incentives for our named executive officers and certain other levels of management. EBITDA is considered to be an important statistic because it provides greater transparency into our operating results and is a supplemental measure that is useful to investors, institutional lenders and management. Adjusted EBITDA is considered important for the same reasons as mentioned above for EBITDA, as it is comprised of EBITDA plus impairment charges, a non-cash expense similar in certain respects to depreciation and amortization.

Although EBITDA and Adjusted EBITDA provide useful information regarding operating results and operating cash flow, they are limited measures in that they exclude the impact of cash requirements for interest expense, income taxes and capital expenditures. Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under GAAP and should not be used as a singular measure of operating performance or as a substitute for GAAP results. Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the thirty-nine and thirteen week periods ended October 29, 2011 and October 30, 2010:

|  | Thirty-Nine Weeks Ended October 29, 2011 | October 30, 2010 | Thirteen Weeks Ended October 29, 2011 | October 30, 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(4,699) | $11,488 | $(6,761) | $(394) |
| Plus: |  |  |  |  |
| Interest expense | 27 | 17 | 17 | 8 |
| Income tax expense | — | 6,024 | — | — |
| Depreciation and amortization | 18,389 | 14,653 | 6,454 | 5,134 |
| Less: |  |  |  |  |
| Interest income | (180) | (140) | (61) | (41) |
| Income tax benefit | (3,982) | — | (5,246) | (459) |
| (Loss) earnings before interest, taxes, depreciation and amortization | 9,555 | 32,042 | (5,597) | 4,248 |
| Asset impairment | 2,305 | 190 | 696 | 190 |
| Adjusted (loss) earnings before interest, taxes, depreciation and amortization | $11,860 | $32,232 | $(4,901) | $4,438 |

### 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.

### Thirty-nine Weeks Ended October 29, 2011 and October 30, 2010

*Net Sales.* Net sales increased $12.0 million, or 2.7%, to $462.5 million in the thirty-nine weeks ended October 29, 2011 from $450.5 million in the thirty-nine weeks ended October 30, 2010. The increase in net sales was due primarily to the opening of 53 new stores since last year’s third quarter, partially offset by a 9.1% decrease in comparable store sales and the effect of closing four stores since last year’s third quarter. The decline in comparable store sales has resulted primarily from a weakness in sales of recognized national brands and challenging economic conditions for our customer base, including high unemployment and a reduction in discretionary spending due to rising food and gasoline prices. Comparable stores include locations that have been relocated or expanded. There were fourteen 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 1.8% in the first thirty-nine weeks of 2011, while sales in all other comparable stores decreased 9.9%. The 9.1% overall decrease in comparable store sales was reflected entirely in a decline in customer transactions, as the average ticket was slightly higher. Comparable store sales changes by major merchandise class were as follows in the first thirty-nine weeks of 2011: Accessories 0%; Home -2%; Children’s -8%; Women’s -10%; and Men’s -13%.

The new stores opened in 2010 and 2011, net of the closed stores, accounted for an increase of $50.4 million in total sales, while the 9.1% sales decrease in the 397 comparable stores totaled $38.4 million.

*Gross Profit.* Gross profit decreased $5.7 million, or 3.3%, to $166.7 million in the first thirty-nine weeks of 2011 from $172.4 million in last year’s first thirty-nine weeks. The decrease in gross profit is the result of a decline in the gross margin to 36.0% from 38.3% in last year’s first thirty-nine weeks, partially offset by the effect of the increase in total sales discussed above. The decrease in gross margin was due primarily to a decline in the core merchandise margin (initial mark-up, net of markdowns) of 210 basis points, resulting from the need for clearance markdowns in the declining sales environment.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $14.7 million, or 10.5%, to $154.8 million in the first thirty-nine weeks of 2011 from $140.1 million in last year’s first thirty-nine weeks. The increase in these expenses was due primarily to additional store level, distribution and corporate costs arising from the opening of 53 new stores since last year’s third quarter. As a percentage of sales, selling, general and administrative expenses increased to 33.5% in the first thirty-nine weeks of fiscal 2011 from 31.1% in the first thirty-nine weeks of fiscal 2010, due primarily to the deleveraging effect on expenses as a percentage of sales when comparable store sales decline 9.1%. In particular, rent, utilities and other occupancy expenses, which tend to be highly fixed in nature, increased 110 basis points as a percentage of sales, and payroll expenses, which have a sizable fixed component associated with store management and corporate overhead, increased 40 basis points as a percentage of sales. The remaining 90 basis points of increase included 30 basis points ($1.2 million) associated with severance expense, primarily related to the elimination of 40 positions in our corporate offices, distribution centers and store organization, 10 basis points ($0.6 million) related to expenses incurred in connection with closing the Savannah, Georgia distribution center and 40 basis points spread over numerous other categories of expense as a result of the comparable store sales deleverage described above.

*Depreciation and Amortization.* Depreciation and amortization expense increased $3.7 million, or 25.5%, to $18.4 million in the first thirty-nine weeks of 2011 from $14.7 million in the first thirty-nine weeks of 2010, as the result of capital expenditures incurred for a new distribution center in Roland, Oklahoma and for stores that are new or were converted to the new Citi Lights concept, relocated or expanded.

*Asset Impairment.* Impairment charges for property and equipment at certain underperforming stores totaled $2.3 million and $0.2 million in the first thirty-nine weeks of 2011 and 2010, respectively. The year-over-year increase was a result of the decline in sales and gross margin as discussed above.

*Income Tax (Benefit) Expense.* Income tax benefit was $4.0 million in this year’s first thirty-nine weeks, while income tax expense was $6.0 million in the same period of 2010, with the change due primarily to having a pretax loss this year and pretax income last year. The effective income tax rate was 45.9% in the first thirty-nine weeks of 2011 compared with 34.4% last year because income tax credits have the effect of increasing income tax benefit and decreasing income tax expense. The effective rate on this year’s benefit would have been even higher from such credits if not for a second quarter charge of $0.7 million related to the establishment of a valuation allowance for certain state tax credits that are no longer more likely than not to be utilized.

*Net (Loss) Income.* Net loss was $4.7 million in the thirty-nine weeks ended October 29, 2011, while net income was $11.5 million in the thirty-nine weeks ended October 30, 2010, due to the factors discussed above.

### Thirteen Weeks Ended October 29, 2011 and October 30, 2010

*Net Sales.* Net sales increased $3.1 million, or 2.2%, to $143.1 million in the thirteen weeks ended October 29, 2011 from $140.0 million in the thirteen weeks ended October 30, 2010. The increase in net sales was due primarily to the opening of 53 new stores since last year’s third quarter, partially offset by a 9.3% decrease in comparable store sales and the effect of closing four stores since last year’s third quarter. The decline in comparable store sales has resulted primarily from a weakness in sales of recognized national brands and challenging economic conditions for our customer base, including high unemployment and a reduction in discretionary spending due to rising food and gasoline prices. Comparable stores include locations that have been relocated or expanded. There were fourteen 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 1.4% in the third quarter of 2011, while sales in all other comparable stores decreased 10.2%. The 9.3% overall decrease in comparable store sales was reflected almost entirely in a decline in customer transactions, as the average ticket was down only 1% compared with last year’s third quarter. Comparable store sales changes by major merchandise class were as follows in the third quarter of 2011: Home +3%; Accessories +1%; Children’s -8%; Women’s -11%; and Men’s -13%.

The new stores opened in 2010 and 2011, net of closed stores, accounted for an increase of $14.9 million in total sales, while the 9.3% sales decrease in the 397 comparable stores totaled $11.8 million.

*Gross Profit.* Gross profit decreased $3.5 million, or 6.8%, to $48.2 million in the third quarter of 2011 from $51.7 million in last year’s third quarter. The decrease in gross profit is the result of a decline in the gross margin to 33.7% from 36.9% in last year’s third quarter, partially offset by the effect of the increase in total sales discussed above. The decrease in gross margin was due primarily to a decline in the core merchandise margin (initial mark-up, net of markdowns) of 290 basis points, resulting from the need for clearance markdowns in the declining sales environment.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $5.9 million, or 12.3%, to $53.1 million in the third quarter of 2011 from $47.2 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 53 new stores since last year’s third quarter. As a percentage of sales, selling, general and administrative expenses increased to 37.1% in the third quarter of fiscal 2011 from 33.7% in the third quarter of fiscal 2010, due primarily to the deleveraging effect on expenses as a percentage of sales when comparable store sales decline 9.3%. In particular, rent, utilities and other occupancy expenses, which tend to be highly fixed in nature, increased 140 basis points as a percentage of sales. Severance expense, primarily related to the elimination of 40 positions in our corporate offices, distribution centers and store organization, caused a 90 basis point increase ($1.2 million) in expense as a percentage of sales. The remaining 110 basis points of increase included payroll expense, which has a sizable fixed component associated with store management and corporate overhead, and numerous other categories of expense as a result of the comparable store sales deleverage described above.

*Depreciation and Amortization.* Depreciation and amortization expense increased $1.4 million, or 25.7%, to $6.5 million in the third quarter of 2011 from $5.1 million in the third quarter of 2010, as the result of capital expenditures incurred for a new distribution center in Roland, Oklahoma and for stores that are new or were converted to the new Citi Lights concept, relocated or expanded.

*Asset Impairment.* Impairment charges for property and equipment at certain underperforming stores totaled $0.7 million and $0.2 million in the third quarter of 2011 and 2010, respectively. The year-over-year increase was a result of the decline in sales and gross margin as discussed above.

*Income Tax Benefit.* Income tax benefit increased $4.7 million to $5.2 million in this year’s third quarter from $0.5 million in the third quarter of 2010 due primarily to an increase in pretax loss.

*Net Loss.* Net loss increased to $6.8 million in the third quarter of 2011 from $0.4 million in the third 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 October 29, 2011, we had total cash and cash equivalents of $33.2 million compared with $69.2 million as of January 29, 2011. Inventory represented 41.3% of our total assets as of October 29, 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 third quarter of 2011 were up $11.9 million, or 10.3%, compared to the third quarter of fiscal 2010, while store selling square footage increased 11.8% year-over-year as of the end of the quarter.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $7.5 million in the first thirty-nine weeks of fiscal 2011 compared to $6.3 million in the same period of fiscal 2010. The main source of cash provided during the first thirty-nine weeks of fiscal 2011 was net income adjusted for noncash expenses such as depreciation and amortization, asset impairment, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $18.4 million (compared to $27.8 million in the first thirty-nine weeks of fiscal 2010). Other significant sources of cash in the first thirty-nine weeks of fiscal 2011 were (1) a $5.9 million increase in accrued expenses and other long-term liabilities (compared to $1.8 million in the first thirty-nine weeks of fiscal 2010) due, in the case of accrued expenses, to our store growth and, in the case of other long-term liabilities, to our increasing tendency to take responsibility for the leasehold improvements in new stores in return for tenant improvement reimbursements from landlords; and (2) a $2.9 million increase in layaway deposits (compared to $2.6 million in the first thirty-nine weeks of fiscal 2010) due to the seasonality of layaway transactions which are low at the end of January, 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 (1) an $8.2 million change in income tax receivable/payable (compared to $6.8 million in the first thirty-nine weeks of fiscal 2010) due to a year-to-date pretax loss, including losses incurred after first quarter tax estimated payments had already been made; (2) a $5.7 million increase in inventory (compared to $14.4 million in the first thirty-nine weeks of fiscal 2010) due to new store growth; (3) a $3.8 million decrease in accounts payable (compared to $1.4 million in the first thirty-nine weeks of fiscal 2010), which occurred despite the increase in inventory due to a decline in inventory turns as evidenced by the 9.1% decrease in comparable store sales in the first thirty-nine weeks of fiscal 2011; and (4) a $1.2 million increase in prepaid and other current assets (compared to $0.3 million in the first thirty-nine weeks of fiscal 2010) due to higher receivables from landlords for tenant improvement reimbursements as noted above in the discussion of other long-term liabilities.

*Cash Flows From Investing Activities.* Cash used in investing activities was $43.7 million in the first thirty-nine weeks of fiscal 2011 compared to $0.4 million in the first thirty-nine weeks of fiscal 2010. Cash used for purchases of property and equipment totaled $33.8 million and $28.6 million in the first thirty-nine weeks of fiscal 2011 and 2010, respectively. Capital expenditures in the first thirty-nine weeks of 2011 included the equipping of the new distribution center in Roland, Oklahoma, while the first thirty-nine weeks of 2010 included the acquisition of the distribution center. Other capital expenditures in the first thirty-nine weeks of 2011 included 50 new stores, 13 store relocations/expansions and 10 store conversions to the new Citi Lights format. In the first thirty-nine weeks of 2010, other capital expenditures included 57 new stores and 12 store relocations/expansions. Investing activities in the first thirty-nine weeks of 2011 and 2010, respectively, included $9.9 million of net purchases of investment securities and $28.3 million of net redemptions of investment securities.

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

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $33.2 million as of October 29, 2011); (ii) short-term trade credit; (iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (iv) a $50 million 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.

#### Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but instead tested for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value. In our case, there is only one reporting unit, therefore, fair value and carrying value used in the test are at the consolidated level. Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the Company’s fair value with its carrying amount, including goodwill. If such fair value exceeds the carrying amount, the goodwill is not considered to have a potential impairment and the second step of the impairment test is not necessary.

During 2011, there has been a significant decline in our earnings and, therefore, the market price of our stock. These factors indicated potential impairment, thus requiring an interim impairment test. Based on the testing performed, we determined that the Company’s fair value, including a reasonable control premium, exceeded the carrying value of assets (including goodwill) by approximately 17% as of October 29, 2011. Accordingly, the second step of the impairment testing was not required and no impairment charges were recorded. Due to the uncertainty of the Company’s future results, it is possible that goodwill could be impaired in future periods; however, the potential impairment charges are limited to the carrying value of goodwill on the condensed consolidated balance sheet, which was $1.4 million as of October 29, 2011.

#### Impairment of Long-Lived Assets

If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Non-cash impairment losses related to leasehold improvements and fixtures and equipment at 30 underperforming stores totaled $2.3 million in the thirty-nine weeks ended October 29, 2011, including $0.7 million in the thirteen weeks ended October 29, 2011 related to 9 stores. Impairment losses totaled $0.2 million in the thirty-nine and thirteen week periods ended October 30, 2010. There are an additional 25 stores with asset carrying values totaling $4.3 million that will require close monitoring in future quarters. Impairment losses in the future are dependent on a number of factors such as site selection and general economic trends on a localized, regional or national basis, and thus could be significantly different from historical results. To the extent our estimates for net sales, gross profit and store expenses are not realized, future assessments of recoverability could result in additional impairment charges.

#### Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. Losses incurred during the second quarter of 2011 caused us to conclude that our ability to utilize certain tax credits in one state was no longer more likely than not, necessitating a charge to income tax expense and a reduction in deferred tax assets of $0.7 million in connection with the establishment of a valuation allowance. Deferred tax assets as of October 29, 2011 still include the portion of such tax credits that are expected to be utilized in the future. However, if operating results deteriorate in the future, these tax credits may also require a valuation allowance, which would result in a charge to income tax expense and a reduction in deferred tax assets of $0.5 million.

## Market risk

As filed, 225 characters.

There have been no material changes in our market risk during the thirty-nine weeks ended October 29, 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, 1,553 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 29, 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 October 29, 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 Dec 6, 2011.
Source: SEC EDGAR, the filing index for accession 0001104659-11-067772. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.