# Citi Trends Inc: Form 10-Q for the period ended May 5, 2018

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2018-06-11
- Accepted by EDGAR: Jun 11, 2018, 10:05 ET
- Period: 2018-05-05
- Accession: 0001558370-18-005206
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000155837018005206/ctrl-20180505x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000155837018005206/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-05-05.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-02-04 to 2018-05-05 | $211.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2018-02-04 to 2018-05-05 | $63.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-02-04 to 2018-05-05 | $13.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-02-04 to 2018-05-05 | $37.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-02-04 to 2018-05-05 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-02-04 to 2018-05-05 | $11.3m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2018-02-04 to 2018-05-05 | $0.83 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-02-04 to 2018-05-05 | $0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-02-04 to 2018-05-05 | 13,631,266 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-02-04 to 2018-05-05 | $10.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-02-04 to 2018-05-05 | $2.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2018-02-04 to 2018-05-05 | $1.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2018-02-04 to 2018-05-05 | $2.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-05-05 | $54.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-05-05 | $229.2m | us-gaap:AssetsCurrent |
| Total assets | at 2018-05-05 | $316.3m | us-gaap:Assets |
| Current liabilities | at 2018-05-05 | $91.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-05-05 | $99.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-05-05 | $216.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,727 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, capital allocation expectations 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; the results of pending or threatened litigation; 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 3, 2018 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 fashion preferences of value-conscious consumers, particularly African-Americans. We operated 553 stores in both urban and rural markets in 31 states as of May 5, 2018.

### Accounting Periods

The following discussion contains references to fiscal years 2018 and 2017, which represent fiscal years ending or ended on February 2, 2019 and February 3, 2018, respectively. Fiscal 2018 has a 52-week accounting period and fiscal 2017 had a 53-week accounting period. 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.

### Key Operating Statistics

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 2017 and fiscal 2018 are not considered comparable stores in fiscal 2018. 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 and expenses related to our proxy contest), which are considered our most important operating statistics. We believe that excluding proxy contest expenses from our financial results reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior and future periods, and as such, provides an enhanced understanding of our past financial performance and prospects for the future.

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 thirteen week periods ended May 5, 2018 and April 29, 2017 (in thousands):

|  | Thirteen Weeks Ended May 5, 2018 | April 29, 2017 |
| --- | ---: | ---: |
| Net income | $11,297 | $8,890 |
| Plus: |  |  |
| Interest expense | 37 | 37 |
| Income tax expense | 2,601 | 4,039 |
| Depreciation | 4,974 | 4,298 |
| Less: |  |  |
| Interest income | (295) | (186) |
| EBITDA | 18,614 | 17,078 |
| Asset impairment | — | — |
| Proxy contest expenses | — | 1,590 |
| Adjusted EBITDA | $18,614 | $18,668 |

13

### Thirteen Weeks Ended May 5, 2018 and April 29, 2017

*Net Sales.* Net sales increased $11.0 million, or 5.5%, to $211.0 million in the thirteen weeks ended May 5, 2018 from $200.0 million in the thirteen weeks ended April 29, 2017. Sales comparisons to the prior year for each quarter of fiscal 2018 are affected by the calendar shift caused by last year having 53 weeks. Each of the first three quarters in fiscal 2018 begins and ends one week later than the same quarter of fiscal 2017, which can have an impact on quarterly sales comparisons if the beginning and ending weeks of the quarter have different levels of sales volumes. The increase in sales was due to the opening of 19 new stores since last year’s first quarter and a 3.3% increase in comparable store sales (2.1% increase on a comparable weeks basis), partially offset by the impact of closing four stores since last year’s first quarter. The increase in comparable store sales on a comparable weeks basis was reflected in a 3% increase in the average number of items per transaction, partially offset by a decrease in customer transactions of less than 1%, while the average unit sale remained flat. Comparable store sales changes by major merchandise class were as follows in the first quarter of 2018: Home +19%; Ladies’ +3%; Accessories +2%; Men’s +2%; and Children’s -1%.

Store opening and closing activity resulted in a net sales increase of $4.7 million, the 2.1% increase in comparable store sales on a comparable weeks basis totaled $4.2 million, and the aforementioned calendar shift contributed $2.1 million to the sales increase.

*Cost of sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) increased $7.0 million, or 5.7%, to $129.4 million in the first quarter of 2018 from $122.4 million in last year’s first quarter. Cost of sales as a percentage of sales increased to 61.3% in the first quarter of 2018 from 61.2% in last year’s first quarter, due primarily to an increase in freight costs.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses increased $2.5 million, or 4.2%, to $63.0 million in the first quarter of 2018 from $60.5 million in last year’s first quarter due primarily to normal inflationary pressure on expenses such as rent and payroll, the impact on expenses of opening 19 new stores since last year’s first quarter, and a $0.5 million increase in stock compensation expense, partially offset by $1.6 million of expenses incurred last year in connection with our proxy contest. As a percentage of sales, selling, general and administrative expenses decreased to 29.9% in the first quarter of 2018 from 30.3% in the first quarter of 2017.

*Depreciation.* Depreciation expense increased $0.7 million, or 15.7%, to $5.0 million in the first quarter of 2018 from $4.3 million in the first quarter of 2017, due to the acceleration of our store opening pace in relation to previous years, along with the completion of an expansion of our Roland, Oklahoma distribution center.

*Income Tax Expense.* Income tax expense decreased $1.4 million, or 35.6%, to $2.6 million in this year’s first quarter from $4.0 million in the first quarter of 2017 due to a decrease in the effective income tax rate from 31.2% to 18.7%. This decrease was a result of the reduction in the federal income tax rate from 35% to 21% included in the Tax Cuts and Jobs Act enacted in December 2017.

*Net Income.* Net income increased $2.4 million, or 27.1%, to $11.3 million in the first quarter of 2018 from $8.9 million in the first quarter of 2017 due to the factors discussed above.

### Liquidity and Capital Resources

Our cash requirements are primarily for working capital and capital expenditures for new and existing stores, distribution infrastructure and information systems. In addition, in the first quarter of 2018, we initiated a share repurchase program of up to $25 million and repurchased shares of our common stock at an aggregate cost of $2.7 million. 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 described in Note 6 to the condensed consolidated financial statements included in Part I, Item1 of this report.

*Current Financial Condition.* As of May 5, 2018, we had total cash and cash equivalents of $54.0 million compared to $48.5 million as of February 3, 2018. Additionally, we had $33.5 million and $21.7 million of short-term and long-term investment securities, respectively, as of May 5, 2018, compared with $31.5 million and $25.5 million, respectively, as of February 3, 2018. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 39.6% of our total assets as of May 5, 2018, compared to 42.1% as of February 3, 2018. 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 $10.5 million in the thirteen weeks ended May 5, 2018 compared to $25.7 million in the same period of 2017. Sources of cash provided during the first quarter of 2018 included net income adjusted for non-cash expenses such as depreciation, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $17.2 million (compared to $15.0 million in the first quarter of 2017). Other significant sources of cash in the first quarter of 2018 were (1) a $12.4 million decrease in inventory (compared to a $10.1 million decrease in the first quarter of 2017) due to apparel retail seasonality which typically results in having more inventory at the beginning of the spring selling season than at the end, and (2) a $2.3 million change in the income tax payable/receivable (compared to a $2.6 million change in the first quarter of 2017) due to income tax expense being accrued on first quarter pre-tax income while no estimated tax payments were due during the quarter.

Significant uses of cash from operating activities in the first quarter of 2018 were (1) a $12.2 million decrease in accounts payable (compared to a $4.0 million decrease in the first quarter of 2017) due primarily to the decline in inventory discussed above, and (2) a $7.9 million decrease in accrued compensation (compared to a $1.5 million increase in the first quarter of 2017) due to payment in the first quarter of 2018 of incentive compensation accrued in fiscal 2017, together with our balance sheet as of the end of the first quarter of 2018 including accrued payroll for only one week, while our 2017 year-end balance sheet included accrued payroll for two weeks due to the timing of our bi-weekly payroll.

*Cash Flows From Investing Activities.* Cash used in investing activities was $0.2 million in the first quarter of 2018 and $0.1 million in the first quarter of 2017. Cash used for purchases of property and equipment totaled $2.0 million and $4.8 million in the first quarter of 2018 and 2017, respectively. Sales/redemptions of investment securities, net of purchases, provided cash of $1.7 million and $4.6 million in the first quarter of 2018 and 2017, respectively.

*Cash Flows From Financing Activities.* Cash used in financing activities was $4.7 million and $1.7 million in the first quarter of 2018 and 2017, respectively, with the increase due primarily to the repurchase of common stock for an aggregate purchase price of $2.7 million during the first quarter of 2018.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $54.0 million as of May 5, 2018); (ii) short-term and long-term investment securities (which equaled $33.5 million and $21.7 million, respectively, as of May 5, 2018); (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 11 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 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 3, 2018.

## Market risk

As filed, 217 characters.

There have been no material changes in our market risk during the thirteen weeks ended May 5, 2018 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 3, 2018.

## Controls and procedures

As filed, 1,538 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 May 5, 2018 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 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 May 5, 2018 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 February 3, 2018.

Filed Jun 11, 2018.
Source: SEC EDGAR, the filing index for accession 0001558370-18-005206. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.