# Citi Trends Inc: Form 10-Q for the period ended Aug 1, 2015

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2015-08-31
- Accepted by EDGAR: Aug 31, 2015, 10:00 ET
- Period: 2015-08-01
- Accession: 0001104659-15-062649
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000110465915062649/a15-14856_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000110465915062649/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-08-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-05-03 to 2015-08-01 | $153.9m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 6 months, 2015-02-01 to 2015-08-01 | $348.8m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2015-05-03 to 2015-08-01 | $93.2m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2015-02-01 to 2015-08-01 | $210.7m | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2015-05-03 to 2015-08-01 | $55.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2015-02-01 to 2015-08-01 | $111.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-05-03 to 2015-08-01 | $376.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-02-01 to 2015-08-01 | $17.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-05-03 to 2015-08-01 | $47.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-02-01 to 2015-08-01 | $94.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-05-03 to 2015-08-01 | $226.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-02-01 to 2015-08-01 | $5.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-05-03 to 2015-08-01 | $162.0k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 6 months, 2015-02-01 to 2015-08-01 | $11.4m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2015-05-03 to 2015-08-01 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-02-01 to 2015-08-01 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-05-03 to 2015-08-01 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-02-01 to 2015-08-01 | $0.76 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-05-03 to 2015-08-01 | 15,203,692 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-02-01 to 2015-08-01 | 15,192,515 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-02-01 to 2015-08-01 | $12.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2015-02-01 to 2015-08-01 | $8.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2015-08-01 | $54.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-08-01 | $224.4m | us-gaap:AssetsCurrent |
| Total assets | at 2015-08-01 | $316.0m | us-gaap:Assets |
| Current liabilities | at 2015-08-01 | $86.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-08-01 | $92.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-08-01 | $223.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,997 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 language. 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 January 31, 2015 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 518 stores in both urban and rural markets in 31 states as of August 1, 2015.

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 2014 and fiscal 2015 are not considered comparable stores in fiscal 2015. 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, as adjusted for 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. Furthermore, such non-GAAP measures may not be comparable to similarly titled measures of other companies.

Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the twenty-six and thirteen week periods ended August 1, 2015 and August 2, 2014:

|  | Twenty-Six Weeks Ended August 1, 2015 | August 2, 2014 | Thirteen Weeks Ended August 1, 2015 | August 2, 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $11,441 | $6,500 | $162 | $(2,579) |
| Plus: |  |  |  |  |
| Interest expense | 94 | 104 | 47 | 56 |
| Income tax expense | 5,735 | 2,661 | 226 | — |
| Depreciation | 9,433 | 10,268 | 4,620 | 5,108 |
| Less: |  |  |  |  |
| Interest income | (115) | (92) | (59) | (39) |
| Income tax benefit | — | — | — | (2,379) |
| EBITDA | 26,588 | 19,441 | 4,996 | 167 |
| Asset impairment | — | 83 | — | 83 |
| Adjusted EBITDA | $26,588 | $19,524 | $4,996 | $250 |

### Accounting Periods

The following discussion contains references to fiscal years 2015 and 2014, which represent fiscal years ending or ended on January 30, 2016 and January 31, 2015, respectively. Fiscal 2015 and fiscal 2014 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto.

### Results of Operations

The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. The nature of the Company’s business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of the Company’s business may affect comparisons between periods.

### Twenty-Six Weeks Ended August 1, 2015 and August 2, 2014

*Net Sales.* Net sales increased $15.8 million, or 4.7%, to $348.8 million in the first half of 2015 from $333.0 million in the first half of 2014. The increase in sales was due to a 2.7% increase in comparable store sales and the opening of 13 new stores since last year’s second quarter, partially offset by the impact of closing four stores since last year’s second quarter. The increase in comparable store sales was reflected in an increase of 4% in the number of customer transactions, partially offset by an average unit sale that declined by 1% and a slight decrease in the average number of items per transaction. Comparable store sales changes by major merchandise class were as follows in the first half of 2015: Home +17%; Ladies’ +7%; Accessories +3%; Men’s -1%; and Children’s -2%.

The 2.7% comparable store sales increase in the 501 comparable stores resulted in a net increase of $9.0 million in sales, while store opening and closing activity resulted in a net increase of $6.8 million.

*Cost of Sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $4.4 million, or 2.1%, to $210.7 million in the first half of 2015 from $206.3 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 60.4% in the first half of 2015 from 62.0% in last year’s first half. The decrease in cost of sales as a percentage of sales was due primarily to a 140 basis points improvement in the core merchandise margin (initial mark-up, net of markdowns) as a result of improved inventory management and the resulting need for fewer merchandise markdowns in this year’s first half.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $4.3 million, or 4.1%, to $111.5 million in the first half of 2015 from $107.2 million in last year’s first half due to the opening of 13 new stores since last year’s second quarter, together with normal inflationary pressure on expenses such as payroll, rent, and employee medical claims. As a percentage of sales, selling, general and administrative expenses decreased slightly to 32.0% in the first half of fiscal 2015 from 32.2% in the first half of fiscal 2014.

*Depreciation.* Depreciation expense decreased $0.9 million, or 8.1%, to $9.4 million in the first half of 2015 from $10.3 million in the first half of 2014 due to the slowing of our store opening pace in relation to previous years.

*Income Tax Expense.* Income tax expense increased $3.0 million, to $5.7 million in this year’s first half from $2.7 million in the first half of 2014 due to an increase in pretax income, accompanied by an increase in the effective income tax rate to 33.4% from 29.0%. The increase in the effective tax rate from last year resulted from tax credits being lower as a percentage of pretax income in fiscal 2015 due to the significant increase in pretax income this year.

*Net Income.* Net income increased 76.0% to $11.4 million in the first half of 2015 from $6.5 million in the first half of 2014 due to the factors discussed above.

### Thirteen Weeks Ended August 1, 2015 and August 2, 2014

*Net Sales.* Net sales increased $8.9 million, or 6.1%, to $153.9 million in the second quarter of 2015 from $145.0 million in the second quarter of 2014, consisting of a 3.9% increase in comparable store sales and the effect of opening 13 new stores since last year’s second quarter, partially offset by the impact of closing four stores after the second quarter of 2014. The increase in comparable store sales was reflected almost entirely in an increase in the number of customer transactions, as the average number of items per transaction and the average unit sale were virtually unchanged. Comparable store sales changes by major merchandise class were as follows in the second quarter of 2015: Home + 17%; Ladies’ +7%; Accessories +6%; Children’s -1%; and Men’s -1%.

The 3.9% comparable store sales increase in the 501 comparable stores totaled $5.6 million, while store opening and closing activity resulted in an increase of $3.3 million in sales.

*Cost of sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $1.7 million, or 1.8%, to $93.2 million in the second quarter of 2015 from $91.5 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 60.6% in the second quarter of 2015 from 63.1% in the second quarter of 2014. The decrease in cost of sales as a percentage of sales was due to an improvement of 220 basis points in the core merchandise margin (initial mark-up, net of markdowns) as a result of improved inventory management 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 $2.5 million, or 4.7%, to $55.7 million in the second quarter of 2015 from $53.2 million in last year’s second quarter. As a percentage of sales, selling, general and administrative expenses decreased to 36.2% in the second quarter of 2015 from 36.7% in the second quarter of 2014, due to the leveraging effect associated with the 3.9% increase in comparable store sales discussed above.

*Depreciation.* Depreciation expense decreased $0.5 million, or 9.6%, to $4.6 million in the second quarter of 2015 from $5.1 million in the second quarter of 2014, due to the slowing of our store opening pace in relation to previous years.

*Income Tax (Expense) Benefit.* Income tax expense increased $2.6 million, to $0.2 million in this year’s second quarter from a benefit of $2.4 million in the second quarter of 2014 due to having pretax income in the second quarter of 2015 versus a pretax loss in the second quarter of 2014.

*Net Income (Loss).* Net income increased to $0.2 million in the second quarter of 2015 from a net loss of $2.6 million in the second quarter of 2014 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 addition, on August 19, 2015, the Company announced that its board of directors had approved a share repurchase program of up to $15 million and a quarterly cash dividend on our common stock of $0.06 per share to be paid on September 15, 2015, to stockholders of record as of September 1, 2015. In recent years, we have met our 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 1, 2015, we had total cash and cash equivalents of $54.4 million compared to $74.5 million as of January 31, 2015. Additionally, we had $24.8 million and $36.5 million of short-term and long-term investment securities, respectively, as of August 1, 2015, compared with $15.9 million and $22.4 million, respectively, as of January 31, 2015. 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 1, 2015, compared to 41.2% as of January 31, 2015. 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 $12.8 million in the first half of 2015 compared to $23.9 million in the same period of 2014. Sources of cash provided during the first half of 2015 included net income adjusted for noncash expenses such as depreciation, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling

$23.2 million (compared to $19.1 million in the first half of 2014). Other significant sources of cash in the first half of 2015 were (1) a $4.7 million decrease in inventory (compared to a $6.0 million decrease in the first half of fiscal 2014) due to apparel retail seasonality which typically results in having more inventory at the beginning of the spring selling season than at the beginning of the back-to-school season, and (2) a $2.6 million change in the income tax receivable/payable (compared to a $2.2 million change in the first half of fiscal 2014) due to income tax expense being accrued on first half pretax income while no estimated tax payments were due during the first half. Significant uses of cash from operating activities were (1) a $12.9 million decrease in accounts payable (compared to a $1.2 million decrease in the first half of 2014) due to the payable balance at January 31, 2015 being unusually high as the result of a significant increase in the amount of purchases necessary in January 2015 to replenish merchandise levels when comparable store sales increased at a very high rate of 13.9% in the fourth quarter; since this higher level of purchases occurred in the last month of fiscal 2014, all such purchases were still in accounts payable as of January 31, 2015, and (2) a $5.0 million decrease in accrued compensation (compared to a $0.1 million increase in the first half of 2014) due to payment in the first half of 2015 of incentive compensation accrued in fiscal 2014.

*Cash Flows From Investing Activities.* Cash used in investing activities was $31.8 million in the first half of 2015 compared to $11.0 million in the first half of 2014. Purchases of investment securities, net of sales/redemptions, used cash of $23.0 million and $5.4 million in the first half of 2015 and 2014, respectively. Cash used for purchases of property and equipment totaled $8.8 million and $5.6 million in the first half of 2015 and 2014, respectively. The increase in capital expenditures was a result of opening nine new stores and relocating or expanding ten stores in the first half of 2015, compared with opening four new stores and relocating or expanding three stores in the first half of 2014.

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first twenty-six weeks of both 2015 and 2014.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $54.4 million as of August 1, 2015); (ii) short-term and long-term investment securities (which equaled $24.8 million and $36.5 million, respectively, as of August 1, 2015); (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 we have 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 January 31, 2015.

## Market risk

As filed, 222 characters.

There have been no material changes in our market risk during the twenty-six weeks ended August 1, 2015 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 31, 2015.

## 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 1, 2015 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 1, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,313 characters.

***We cannot provide any guaranty of future cash dividend payments or that we will be able to actively repurchase our common stock pursuant to a share repurchase program.***

We recently announced a quarterly cash dividend on our common stock. However, any determination to declare and pay cash dividends on our common stock in the future (quarterly or otherwise) will be based, among other things, upon our financial condition, results of operations, business requirements and our board of directors’ conclusion in each instance that the declaration and payment of a cash dividend is in the best interest of our shareholders and is in compliance with all laws and agreements applicable to the dividend. We also recently announced that our board of directors has approved a share repurchase program, pursuant to which we may repurchase up to $15 million of our common stock on the open market, in privately negotiated transactions or otherwise. However, there can be no assurance that we will be able to actively repurchase our common stock and we may suspend or discontinue the stock repurchase program at any time.

There are no other 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 31, 2015.

Filed Aug 31, 2015.
Source: SEC EDGAR, the filing index for accession 0001104659-15-062649. Last ingested by Listed: Nov 10, 2026, 06:46 ET. No prices; not investment advice.