# Citi Trends Inc: Form 10-Q for the period ended Aug 2, 2014

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2014-09-03
- Accepted by EDGAR: Sep 3, 2014, 10:00 ET
- Period: 2014-08-02
- Accession: 0001104659-14-064406
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465914064406/a14-17426_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465914064406/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-08-02.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-05-04 to 2014-08-02 | $145.0m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 6 months, 2014-02-02 to 2014-08-02 | $333.0m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2014-05-04 to 2014-08-02 | $91.5m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2014-02-02 to 2014-08-02 | $206.3m | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2014-05-04 to 2014-08-02 | $53.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2014-02-02 to 2014-08-02 | $107.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-05-04 to 2014-08-02 | −$4.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-02-02 to 2014-08-02 | $9.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-05-04 to 2014-08-02 | $56.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2014-02-02 to 2014-08-02 | $104.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-05-04 to 2014-08-02 | −$2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2014-02-02 to 2014-08-02 | $2.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-05-04 to 2014-08-02 | −$2.6m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 6 months, 2014-02-02 to 2014-08-02 | $6.5m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2014-05-04 to 2014-08-02 | −$0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-02-02 to 2014-08-02 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-05-04 to 2014-08-02 | −$0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-02-02 to 2014-08-02 | $0.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-05-04 to 2014-08-02 | 14,972,186 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-02-02 to 2014-08-02 | 14,945,542 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-02-02 to 2014-08-02 | $23.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2014-02-02 to 2014-08-02 | $5.6m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2014-08-02 | $70.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-08-02 | $223.3m | us-gaap:AssetsCurrent |
| Total assets | at 2014-08-02 | $301.1m | us-gaap:Assets |
| Current liabilities | at 2014-08-02 | $88.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-08-02 | $94.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-08-02 | $206.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,990 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,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such words. 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 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 February 1, 2014 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 509 stores in both urban and rural markets in 29 states as of August 2, 2014.

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 2013 and fiscal 2014 are not considered comparable stores in fiscal 2014. 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.

In addition to sales, we measure cost of sales 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”) and Adjusted EBITDA (comprised of EBITDA plus non-cash asset impairment expense), which are considered our most important operating statistics. Although non-GAAP measures such as EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense. Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under U.S. GAAP and should not be used as a singular measure of operating performance or as a substitute for U.S. GAAP results.

Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the twenty-six and thirteen week periods ended August 2, 2014 and August 3, 2013:

|  | Twenty-Six Weeks Ended August 2, 2014 | August 3, 2013 | Thirteen Weeks Ended August 2, 2014 | August 3, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $6,500 | $671 | $(2,579) | $(5,493) |
| Plus: |  |  |  |  |
| Interest expense | 104 | 96 | 56 | 49 |
| Income tax expense | 2,661 | 442 | — | — |
| Depreciation | 10,268 | 11,262 | 5,108 | 5,667 |
| Less: |  |  |  |  |
| Interest income | (92) | (135) | (39) | (67) |
| Income tax benefit | — | — | (2,379) | (3,208) |
| EBITDA | 19,441 | 12,336 | 167 | (3,052) |
| Asset impairment | 83 | 681 | 83 | 654 |
| Adjusted EBITDA | $19,524 | $13,017 | $250 | $(2,398) |

### Accounting Periods

The following discussion contains references to fiscal years 2014 and 2013, which represent fiscal years ending or ended on January 31, 2015 and February 1, 2014, respectively. Fiscal 2014 and fiscal 2013 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto that are contained herein.

### 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 August 2, 2014 and August 3, 2013

*Net Sales.* Net sales increased $13.4 million, or 4.2%, to $333.0 million in the first half of 2014 from $319.6 million in the first half of 2013, consisting of a 4.7% increase in comparable store sales, net of the impact of closing nine stores in 2013. The increase in comparable store sales was reflected in a 6% increase in the number of customer transactions and a 1% increase in the average number of items per transaction, partially offset by an average unit sale that declined by more than 2%. Comparable store sales changes by major merchandise class were as follows in the first half of 2014: Home +25%; Accessories +23%; Children’s 0%; Men’s -1%; and Ladies’ -6%.

The 4.7% comparable store sales increase in the 504 comparable stores totaled $14.7 million, while store closing and opening activity resulted in a decrease of $1.3 million in sales.

*Cost of Sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $3.5 million, or 1.7%, to $206.3 million in the first half of 2014 from $202.8 million in last year’s first half due to the effect of the increase in sales discussed above, partially offset by an improvement in cost of sales as a percentage of sales to 62.0% in the first half of 2014 from 63.4% in the first half of 2013. The decrease in cost of sales as a percentage of sales was due entirely to an increase in the core merchandise margin (initial mark-up, net of markdowns) as the result of improved sales and the resulting need for fewer merchandise markdowns in this year’s first half. A more conservative inventory position as we entered 2014 also contributed to the reduction in merchandise markdowns.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $3.4 million, or 3.2%, to $107.2 million in the first half of 2014 from $103.8 million in last year’s first half due primarily to normal inflationary pressure on expenses such as rent, payroll, utilities and employee medical claims. As a percentage of sales, selling, general and administrative expenses decreased to 32.2% in the first half of 2014 from 32.5% in the first half of 2013, due primarily to the leveraging effect associated with the 4.7% increase in comparable store sales discussed above.

*Depreciation.* Depreciation expense decreased $1.0 million, or 8.8%, to $10.3 million in the first half of 2014 from $11.3 million in the first half of 2013 due to the slowing of our store opening pace in relation to previous years.

*Asset Impairment.* Impairment charges for property and equipment at certain underperforming stores decreased $0.6 million to $0.1 million in the first half of 2014 from $0.7 million in the first half of 2013 due to the improvement in the Company’s operating results.

*Income Tax Expense.* Income tax expense increased $2.3 million to $2.7 million in this year’s first half from $0.4 million in the first half of 2013 due to an improvement in pretax income, partially offset by a decrease in the effective income tax rate to 29.0% from 39.7%. The income tax expense rate for the first half of 2014 was lower than the rate for last year’s first half, because a valuation allowance was established in the second quarter of 2013 when the Company concluded that its ability to utilize certain tax credits in one state was no longer more likely than not. The effect of the 2013 valuation allowance was to increase income tax expense by $0.4 million.

*Net Income.* Net income increased to $6.5 million in the first half of 2014 from $0.7 million in the first half of 2013 due to the factors discussed above.

### Thirteen Weeks Ended August 2, 2014 and August 3, 2013

*Net Sales.* Net sales increased $7.2 million, or 5.2%, to $145.0 million in the second quarter of 2014 from $137.8 million in the second quarter of 2013, consisting of a 5.3% increase in comparable store sales, net of the impact of closing three stores during or after the second quarter of 2013. The increase in comparable store sales was reflected in an increase of more than 7% in the number of customer transactions, partially offset by an average unit sale that was 2% lower. Comparable store sales changes by major merchandise class were as follows in the second quarter of 2014: Home + 28%; Accessories +24%; Men’s +1%; Children’s -1%; and Ladies’ -4%.

The 5.3% comparable store sales increase in the 504 comparable stores totaled $7.2 million, while store closing and opening activity resulted in a decrease of less than $0.1 million in sales.

*Cost of sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $3.2 million, or 3.7%, to $91.5 million in the second quarter of 2014 from $88.3 million in last year’s second quarter due to the effect of the increase in sales discussed above, partially offset by an improvement in cost of sales as a percentage of sales to 63.1% in the second quarter of 2014 from 64.1% in the second quarter of 2013. The decrease in cost of sales as a percentage of sales was due to an improvement of 110 basis points in the core merchandise margin (initial mark-up, net of markdowns) as the result of improved sales and the resulting need for fewer merchandise markdowns in this year’s second quarter.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $1.3 million, or 2.5%, to $53.2 million in the second quarter of 2014 from $51.9 million in last year’s second quarter. As a percentage of sales, selling, general and administrative expenses decreased to 36.7% in the second quarter of 2014 from 37.7% in the second quarter of 2013, due to the leveraging effect associated with the 5.3% increase in comparable store sales discussed above.

*Depreciation.* Depreciation expense decreased $0.6 million, or 9.9%, to $5.1 million in the second quarter of 2014 from $5.7 million in the second quarter of 2013, due to the slowing of our store opening pace in relation to previous years.

*Asset Impairment.* Impairment charges for property and equipment at certain underperforming stores decreased $0.6 million to $0.1 million in the second quarter of 2014 from $0.7 million in the second quarter of 2013 due to the improvement in the Company’s operating results.

*Income Tax Benefit.* Income tax benefit decreased $0.8 million to $2.4 million in this year’s second quarter from $3.2 million in the second quarter of 2013 due to a decrease in pretax loss, partially offset by an increase in the effective income tax rate to 48.0% from 36.9%. The income tax benefit rate for the second quarter of 2014 was higher than the rate for last year’s second quarter, because a valuation allowance was established in the second quarter of 2013 when the Company concluded that its ability to utilize certain tax credits in one state was no longer more likely than not. The effect of the 2013 valuation allowance was to decrease income tax benefit by $0.4 million.

*Net Loss.* Net loss decreased to $2.6 million in the second quarter of 2014 from $5.5 million in the second quarter of 2013 due to the factors discussed above.

### Liquidity and Capital Resources

Our cash requirements are primarily for working capital, 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 using 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 balances of cash and investment securities and, if necessary, borrowings under our revolving credit facility.

*Current Financial Condition.* As of August 2, 2014, we had total cash and cash equivalents of $70.7 million compared to $58.9 million as of February 1, 2014. Additionally, we had $13.0 million and $18.1 million of short-term and long-term investment securities, respectively, as of

August 2, 2014, compared to $6.0 million and $19.8 million, respectively, as of February 1, 2014. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 40.0% of our total assets as of August 2, 2014. 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.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $23.9 million in the first half of 2014 compared to $36.4 million in the same period of 2013. Sources of cash provided during the first half of 2014 included net income adjusted for noncash expenses such as depreciation, asset impairment, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $19.1 million (compared to $14.3 million in the first half of 2013). The other significant source of cash in the first half of 2014 was a $6.0 million decrease in inventory (compared to a $21.1 million decrease in the first half of 2013, partially reflecting for 2013, management efforts to tightly control inventory in a challenging sales environment) due to seasonality in our business which necessitates that we have more inventory at the beginning of the spring season than at the beginning of the back-to-school season, based on sales volumes during those periods of time.

Significant uses of cash during the first half of 2014 consisted of a $3.6 million increase in prepaid and other current assets (compared to a $2.9 million increase in the first half of 2013) due primarily to a higher level of charge card receivables at the end of the second quarter than at year end. Charge card receivables are comprised of charge card sales during the last three days of a quarter that are not funded until after quarter end. Since sales are typically much higher at the end of the second quarter than at a fiscal year end, the related charge card receivables are also higher.

*Cash Flows From Investing Activities.* Cash used in investing activities was $11.0 million in the first half of 2014 compared to $11.5 million in the first half of 2013. Cash used for purchases of property and equipment totaled $5.6 million and $5.8 million in the first half of 2014 and 2013, respectively. Purchases of investment securities, net of sales/redemptions, used cash of $5.4 million and $5.7 million in the first half of 2014 and 2013, respectively.

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first twenty-six weeks of both 2014 and 2013.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $70.7 million as of August 2, 2014); (ii) short-term and long-term investment securities (which equaled $13.0 million and $18.1 million, respectively, as of August 2, 2014); (iii) short-term trade credit; (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) a $50 million revolving credit facility (under which the Company has no borrowings outstanding). 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 February 1, 2014.

## Market risk

As filed, 222 characters.

There have been no material changes in our market risk during the twenty-six weeks ended August 2, 2014 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 1, 2014.

## 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 August 2, 2014 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 August 2, 2014 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 February 1, 2014.

Filed Sep 3, 2014.
Source: SEC EDGAR, the filing index for accession 0001104659-14-064406. Last ingested by Listed: Nov 10, 2026, 06:46 ET. No prices; not investment advice.