# Citi Trends Inc: Form 10-Q for the period ended Oct 29, 2016

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2016-12-05
- Accepted by EDGAR: Dec 5, 2016, 10:01 ET
- Period: 2016-10-29
- Accession: 0001558370-16-010383
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000155837016010383/ctrn-20161029x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000155837016010383/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-10-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-31 to 2016-10-29 | $160.7m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2016-01-31 to 2016-10-29 | $509.7m | us-gaap:SalesRevenueGoodsNet |
| Selling, general and administrative | 3 months, 2016-07-31 to 2016-10-29 | $57.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-31 to 2016-10-29 | $172.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-31 to 2016-10-29 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-31 to 2016-10-29 | $11.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-31 to 2016-10-29 | $39.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-31 to 2016-10-29 | $120.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-31 to 2016-10-29 | −$648.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-31 to 2016-10-29 | $3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-31 to 2016-10-29 | −$836.0k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2016-07-31 to 2016-10-29 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-31 to 2016-10-29 | $0.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-31 to 2016-10-29 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-31 to 2016-10-29 | $0.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-31 to 2016-10-29 | 14,676,990 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-31 to 2016-10-29 | 14,652,026 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2016-01-31 to 2016-10-29 | $16.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2016-01-31 to 2016-10-29 | $2.6m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2016-10-29 | $37.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-10-29 | $220.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-10-29 | $313.3m | us-gaap:Assets |
| Current liabilities | at 2016-10-29 | $86.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-10-29 | $94.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-10-29 | $218.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,075 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 30, 2016 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 an off-price retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the fashion preferences of value-conscious consumers, particularly African-Americans. We operated 533 stores in both urban and rural markets in 31 states as of October 29, 2016.

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 2015 and fiscal 2016 are not considered comparable stores in fiscal 2016. 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 (loss) to EBITDA and to Adjusted EBITDA for the thirty-nine and thirteen week periods ended October 29, 2016 and October 31, 2015 (in thousands):

|  | Thirty-Nine Weeks Ended October 29, 2016 | October 31, 2015 | Thirteen Weeks Ended October 29, 2016 | October 31, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $7,781 | $12,055 | $(836) | $614 |
| Plus: |  |  |  |  |
| Interest expense | 120 | 201 | 39 | 107 |
| Income tax expense | 3,510 | 6,288 | — | 553 |
| Depreciation | 12,961 | 14,022 | 4,223 | 4,589 |
| Less: |  |  |  |  |
| Interest income | (408) | (222) | (146) | (107) |
| Income tax benefit | — | — | (648) | — |
| EBITDA | 23,964 | 32,344 | 2,632 | 5,756 |
| Asset impairment | 282 | — | 61 | — |
| Adjusted EBITDA | $24,246 | $32,344 | $2,693 | $5,756 |

### Accounting Periods

The following discussion contains references to fiscal years 2016 and 2015, which represent fiscal years ending or ended on January 28, 2017 and January 30, 2016, respectively. Fiscal 2016 and fiscal 2015 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, 2016 and October 31, 2015

*Net Sales.* Net sales increased $2.0 million, or 0.4%, to $509.7 million in the thirty-nine weeks ended October 29, 2016 from $507.7 million in the thirty-nine weeks ended October 31, 2015. The increase in sales was due to the opening of 18 new stores since last year’s third quarter, partially offset by a 1.6% decrease in comparable store sales and the impact of closing five stores since last year’s third quarter. The decrease in comparable store sales was reflected in an average unit sale that declined by almost 6%, together with a slight decrease in the number of customer transactions, partially offset by a 4.5% increase in the average number of items per transaction. Comparable store sales changes by major merchandise class were as follows in the first thirty-nine weeks of fiscal 2016: Children’s -8%; Ladies’ -6%; Men’s -1%; Accessories +3%; and Home +28%.

Store opening and closing activity resulted in a net increase of $10.4 million, while the 1.6% comparable store sales decline in the 504 comparable stores resulted in a decrease of $8.4 million in sales.

*Cost of Sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $5.0 million, or 1.7%, to $313.3 million in the thirty-nine weeks ended October 29, 2016 from $308.3 million in the thirty-nine weeks ended October 31, 2015. Cost of sales as a percentage of sales increased to 61.5% in the thirty-nine weeks ended October 29, 2016 from 60.7% in the thirty-nine weeks ended October 31, 2015, due to a 30 basis points decrease in the core merchandise margin (initial mark-up, net of markdowns), and increases of 30 basis points in inventory shrinkage and 20 basis points in freight costs.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $5.0 million, or 3.0%, to $172.1 million in the thirty-nine weeks ended October 29, 2016 from $167.1 million in the thirty-nine weeks ended October 31, 2015 due primarily to the opening of 18 new stores since last year’s third quarter, together with normal inflationary pressure on expenses such as payroll and rent, and a $0.9 million benefit from a legal recovery last year. These factors that caused the increase in selling, general and administrative expenses were partially offset by a $3.3 million reduction in incentive compensation expense resulting from the decline in operating results in the first thirty-nine weeks of fiscal 2016. As a percentage of sales, selling, general and administrative expenses increased to 33.8% in the first thirty-nine weeks of fiscal 2016 from 32.9% in the first thirty-nine weeks of fiscal 2015, due primarily to the deleveraging effect associated with the decrease in comparable store sales discussed above.

*Depreciation.* Depreciation expense decreased $1.0 million, or 7.6%, to $13.0 million in the first thirty-nine weeks of fiscal 2016 from $14.0 million in the first thirty-nine weeks of fiscal 2015 due to the slowing of our store opening pace in relation to previous years.

*Asset Impairment.* Impairment charges for property and equipment at underperforming stores totaled $0.3 million in the first thirty-nine weeks of fiscal 2016 while there were no impairment charges recorded in the first thirty-nine weeks of fiscal 2015.

*Income Tax Expense.* Income tax expense decreased $2.8 million, to $3.5 million in the first thirty-nine weeks of fiscal 2016 from $6.3 million in the first thirty-nine weeks of fiscal 2015 due to a decrease in pretax income, accompanied by a decrease in the effective income tax rate to 31.1% from 34.3%.

*Net Income.* Net income decreased $4.3 million, or 35.5%, to $7.8 million in the first thirty-nine weeks of fiscal 2016 from $12.1 million in the first thirty-nine weeks of fiscal 2015 due to the factors discussed above.

### Thirteen Weeks Ended October 29, 2016 and October 31, 2015

*Net Sales.* Net sales increased $1.8 million, or 1.1%, to $160.7 million in the thirteen weeks ended October 29, 2016 from $158.9 million in the thirteen weeks ended October 31, 2015. The increase in sales was due to the opening of 18 new stores since last year’s third quarter, partially offset by a 1.0% decrease in comparable store sales and the impact of closing five stores since the third quarter of 2015. The decrease in comparable store sales was reflected in an average unit sale that declined almost 9%, partially offset by an increase in the average number of items per transaction of more than 6% and a 1.5% increase in customer transactions. Comparable store sales changes by major merchandise class were as follows in the third quarter of 2016: Children’s -7%; Ladies’ -2%; Men’s -1%; Accessories 0%; and Home +34%.

Store opening and closing activity resulted in a net increase of $3.5 million, while the 1.0% comparable store sales decline resulted in a decrease of $1.7 million in sales.

*Cost of sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $2.8 million, or 2.9%, to $100.4 million in the third quarter of 2016 from $97.6 million in last year’s third quarter. Cost of sales as a percentage of sales increased to 62.5% in the third quarter of 2016 from 61.4% in last year’s third quarter, due primarily to a 50 basis points decrease in the core merchandise margin (initial mark-up, net of markdowns), and increases of 30 basis points each in inventory shrinkage and freight costs.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $2.0 million, or 3.6%, to $57.6 million in the third quarter of 2016 from $55.6 million in last year’s third quarter due primarily to the opening of 18 new stores since last year’s third quarter, together with normal inflationary pressure on expenses such as payroll and rent, and a $0.9 million benefit from a legal recovery in last year’s third quarter. These factors that caused the increase in selling, general and administrative expenses were partially offset by a $0.9 million reduction in incentive compensation expense resulting from the decline in operating results in the third quarter of 2016. As a percentage of sales, selling, general and administrative expenses increased to 35.9% in the third quarter of 2016 from 35.0% in the third quarter of 2015, due primarily to the aforementioned legal recovery in last year’s third quarter and the deleveraging effect associated with the decrease in comparable store sales discussed above.

*Depreciation.* Depreciation expense decreased $0.4 million, or 8.0%, to $4.2 million in the third quarter of 2016 from $4.6 million in the third quarter of 2015, due to the slowing of our store opening pace in relation to previous years.

*Asset Impairment.* Impairment charges for property and equipment at underperforming stores totaled $0.1 million in the third quarter of 2016 while there were no impairment charges recorded in the third quarter of 2015.

*Income Tax Benefit (Expense).* Income tax expense decreased $1.2 million, to a $0.6 million benefit in this year’s third quarter from a $0.6 million expense in the third quarter of 2015 due to having a pretax loss this year and pretax income last year.

*Net (Loss) Income.* Net income decreased $1.4 million, to a $0.8 million loss in the third quarter of 2016 from $0.6 million of income in the third quarter of 2015 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 distribution infrastructure and 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 October 29, 2016, we had total cash and cash equivalents of $37.0 million compared to $39.1 million as of January 30, 2016. Additionally, we had $34.1 million and $29.2 million of short-term and long-term investment securities, respectively, as of October 29, 2016, compared with $32.7 million and $30.9 million, respectively, as of January 30, 2016. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 41.7% of our total assets as of October 29, 2016, compared to 43.6% as of January 30, 2016. 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 $18.3 million in the thirty-nine weeks ended October 29, 2016 compared to $16.7 million in the same period of 2015. Sources of cash provided during the first thirty-nine weeks of 2016 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 $25.1 million (compared to $27.2 million in the first thirty-nine weeks of fiscal 2015). Other significant sources of cash in the thirty-nine weeks ended October 29, 2016 were (1) a $6.3 million decrease in inventory (compared to a $1.6 million decrease in the first thirty-nine weeks of fiscal 2015) due to apparel retail seasonality which typically results in having more inventory at the beginning of the spring selling season than at the end of the back-to-school season and holding less next-season-buy merchandise than at January 30, 2016, and (2) a $1.5 million increase in layaway deposits (compared to a $1.7 million increase in the first thirty-nine weeks of fiscal 2015) 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 from operating activities in the thirty-nine weeks ended October 29, 2016 were (1) an $8.3 million decrease in accounts payable (compared to a $14.9 million decrease in the first thirty-nine weeks of fiscal 2015) due to the decrease in inventory and a decline in inventory turnover associated with the decrease in comparable store sales; (2) a $2.6 million change in the income tax receivable/payable (compared to cash provided of $2.1 million in the first thirty-nine weeks of fiscal 2015), which is comprised of net income tax payments totaling $4.6 million, net of the current portion of income tax expense of $2.0 million, in the first thirty-nine weeks of fiscal 2016; (3) a $2.4 million decrease in accrued compensation (compared to a $1.5 million decrease in the first thirty-nine weeks of fiscal 2015) primarily as a result of lower incentive compensation accruals this year due to diminished financial performance relative to budget in 2016; and (4) a $2.3 million increase in prepaid and other current assets (compared to a $1.1 million decrease in the first thirty-nine weeks of fiscal 2015) due primarily to a $1.8 million receivable for tenant improvement allowances on new stores opened near the end of the third quarter of fiscal 2016.

*Cash Flows From Investing Activities.* Cash used in investing activities was $16.4 million in the thirty-nine weeks ended October 29, 2016 compared to $40.3 million in the same period of 2015. Cash used for purchases of property and equipment totaled $16.7 million and $13.8 million in the first thirty-nine weeks of fiscal 2016 and 2015, respectively. Purchases of investment securities, net of sales/redemptions, provided cash of $0.3 million in the first thirty-nine weeks of fiscal 2016 and used cash of $26.5 million in the first thirty-nine weeks of fiscal 2015.

*Cash Flows From Financing Activities.* Cash used in financing activities was $4.0 million and $9.4 million in the thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively, with the decrease due primarily to the repurchase of common stock for an aggregate purchase price of $7.3 million during the third quarter of 2015.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $37.0 million as of October 29, 2016); (ii) short-term and long-term investment securities (which equaled $34.1 million and $29.2 million, respectively, as of October 29, 2016); (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.

### Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 12 to the condensed consolidated financial statements included in Part I, Item 1 of this report.

### Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended January 30, 2016.

## Market risk

As filed, 225 characters.

There have been no material changes in our market risk during the thirty-nine weeks ended October 29, 2016 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2016.

## 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, 2016 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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 195 characters.

There have been no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

Filed Dec 5, 2016.
Source: SEC EDGAR, the filing index for accession 0001558370-16-010383. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.