# Citi Trends Inc: Form 10-Q for the period ended May 2, 2020

- Company: [Citi Trends Inc](/companies/ctrn.md) (CIK 1318484)
- Form: 10-Q
- Filed: 2020-06-11
- Accepted by EDGAR: Jun 11, 2020, 10:42 ET
- Period: 2020-05-02
- Accession: 0001558370-20-007443
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1318484/000155837020007443/ctrn-20200502x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1318484/000155837020007443/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-05-02.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-02-02 to 2020-05-02 | $116.1m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2020-02-02 to 2020-05-02 | $54.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-02-02 to 2020-05-02 | −$27.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-02-02 to 2020-05-02 | $163.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-02-02 to 2020-05-02 | −$6.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-02-02 to 2020-05-02 | −$20.9m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2020-02-02 to 2020-05-02 | −$2.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-02-02 to 2020-05-02 | −$2.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-02-02 to 2020-05-02 | 10,442,636 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-02-02 to 2020-05-02 | $12.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-02-02 to 2020-05-02 | $4.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2020-02-02 to 2020-05-02 | $831.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2020-02-02 to 2020-05-02 | $6.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2020-05-02 | $240.2m | us-gaap:AssetsCurrent |
| Total assets | at 2020-05-02 | $486.8m | us-gaap:Assets |
| Current liabilities | at 2020-05-02 | $165.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-05-02 | $343.8m | us-gaap:Liabilities |
| Long-term debt | at 2020-05-02 | $43.7m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2020-05-02 | $143.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 23,226 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: the ongoing COVID-19 pandemic and associated containment and remediation efforts; the potential negative impacts of COVID-19 on the global economy and foreign sourcing; the impacts of COVID-19 on the Company’s financial condition, business operation and liquidity, including the reopening of the Company’s retail stores; 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, whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory), 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 1, 2020 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 fashion apparel, accessories and home goods for the entire family. Our merchandise offerings are designed to appeal to the fashion preferences of value-conscious consumers, particularly African-Americans. We operated 574 stores in both urban and rural markets in 33 states as of May 2, 2020, including temporarily closed stores.

### Current Material Development

In December 2019, a novel coronavirus (“COVID-19”) emerged and spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. After closely monitoring and taking into consideration the guidance from federal, state and local governments, we temporarily closed all of our retail store locations and distribution centers effective March 20, 2020. The temporary closure of our stores has had and, as some stores remain closed or are closed again in the future, may continue to have an adverse impact on our financial condition, results of operations and liquidity. We have taken several steps to increase our cash position and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit facility. Other measures taken to mitigate the operating and financial impact of the pandemic, included (i) furloughing substantially all store and distribution center personnel, and a significant portion of the corporate staff starting as of April 3, 2020, with employee benefits for eligible employees continuing through the temporary furlough; (ii) implementing temporary tiered salary reductions for management level corporate employees and reducing the cash portion of non-employee director fees; (iii) extending payment terms with vendors and suppliers; (iv) abating payments of rent as appropriate; (v) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs, including through reduced inventory purchases and eliminating the 401(k) plan match; (vi) suspending any repurchases of shares and payment of dividends; and (vii) amending the revolving credit facility to extend the term to August 2021.

Beginning April 24, 2020, we started to reopen stores in select states in accordance with state and local government guidelines. As of June 9, 2020, we have reopened more than 530 of our 574 stores, while also opening 4 new stores. Starting in late May 2020, there have been demonstrations in cities throughout the United States. While they have generally been peaceful, in some locations demonstrations have become violent and resulted in governmental restrictions. We plan to continue to reopen our closed stores in a phased approach as more states reopen for retail businesses and conditions permit. As we reopen stores, we have taken numerous measures to protect the health of our associates, customers and communities we serve. Such measures include implementing occupancy limits, providing personal protective equipment for our associates and customers, encouraging social distancing, adjusting our processes for merchandise returns and implementing new cleaning procedures. We are planning to incur incremental costs going forward for personal protective equipment, including masks, gloves and hand sanitizer for our associates and customers, as well as additional cleaning supplies.

### Accounting Periods

The following discussion contains references to fiscal years 2020 and 2019, which represent fiscal years ending or ended on January 30, 2021 and February 1, 2020, respectively. Fiscal 2020 and fiscal 2019 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part 1, Item 1 of this report.

### 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, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic. Furthermore, as a result of the closure of our stores for at least five weeks related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the thirteen weeks ended May 2, 2020.

### 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 2019 and fiscal 2020 are not considered comparable stores in fiscal 2020. 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 below are critical components of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, excluding non-cash asset impairment expense, CEO transition expenses and expenses related to proxy contests), which are considered our most important operating statistics. We believe that excluding these 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 and should not be regarded as comparable to similarly titled measures used by other companies. 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 (loss) to EBITDA and to Adjusted EBITDA for the thirteen week periods ended May 2, 2020 and May 4, 2019 (in thousands):

|  | Thirteen Weeks Ended May 2, 2020 | May 4, 2019 |
| --- | ---: | ---: |
| Net (loss) income | $(20,892) | $7,788 |
| Plus: |  |  |
| Interest expense | 163 | 38 |
| Income tax expense | — | 1,286 |
| Depreciation | 4,946 | 4,614 |
| Less: |  |  |
| Interest income | (217) | (379) |
| Income tax benefit | (6,608) | — |
| EBITDA | (22,608) | 13,347 |
| Plus: |  |  |
| Asset impairment | 286 | — |
| CEO transition expenses | 560 | — |
| Proxy contest expenses | — | 1,042 |
| Adjusted EBITDA | $(21,762) | $14,389 |

15

Provided below is a reconciliation of net income (loss), the closest comparable GAAP measure, to (i) net income (loss) adjusted for non-cash asset impairment expenses, CEO transition related expenses and proxy contest expenses (“Adjusted net income (loss)”) and (ii) diluted Adjusted net income (loss) per common share. We believe that excluding these expenses and their related tax effects from our financial results reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior periods, and as such, may provide investors with an enhanced understanding of our past financial performance and prospects for the future. These non-GAAP measures should be used as a supplement to net income (loss) and diluted net income (loss) per common share as reported under GAAP and should not be used as the only measures of operating performance or as a substitute for GAAP results.

|  | Thirteen Weeks Ended May 2, 2020 | May 4, 2019 |
| --- | ---: | ---: |
| Net (loss) income | $(20,892) | $7,788 |
| Asset impairment and related tax effects | 217 | — |
| CEO transition expenses and related tax effects | 426 | — |
| Proxy contest expenses and related tax effects | — | 894 |
| Adjusted net (loss) income | $(20,249) | $8,682 |
| Diluted adjusted net (loss) income per share | $(1.94) | $0.72 |
| Diluted shares outstanding | 10,443 | 12,006 |

### Thirteen Weeks Ended May 2, 2020 and May 4, 2019

*Net Sales.* Net sales decreased $88.9 million, or 43.4%, to $116.1 million in the thirteen weeks ended May 2, 2020 from $205.0 million in the thirteen weeks ended May 4, 2019. The decrease in sales was due to a 44.5% decrease in comparable store sales and the impact of closing seven stores since the end of the first quarter last year, partially offset by the opening of 15 new stores since the end of the first quarter last year. The decrease in comparable store sales was due to closing all 574 of our stores as a result of the COVID-19 pandemic from March 20 until April 23, at which point we began to gradually reopen certain stores. Prior to the onset of the COVID-19 pandemic, comparable store sales increased 3.1% from the beginning of the first quarter through March 7, 2020.

*Cost of sales (exclusive of depreciation).* Cost of sales (exclusive of depreciation) decreased $43.9 million, or 34.2%, to $84.4 million in the first quarter of 2020 from $128.2 million in the first quarter of 2019. Cost of sales as a percentage of sales increased to 72.7% in the first quarter of 2020 from 62.5% in last year’s first quarter, due primarily to a 1000 basis points increase in merchandise markdowns, as more markdowns were needed on transitional or seasonal merchandise due to our store closures during the COVID-19 pandemic.

*Selling, General and Administrative Expenses.* Selling, general and administrative expenses decreased $9.4 million, or 14.8%, to $54.1 million in the first quarter of 2020 from $63.4 million in the first quarter of 2019. The decrease was due primarily to lower payroll costs as a result of furloughing substantially all of our store and distribution center personnel and a significant portion of the corporate staff, combined with a decrease in other variable costs such as credit card processing fees and travel expenses, as well as $1.0 million of expenses incurred in the first quarter of 2019 in connection with a proxy contest. As a percentage of sales, selling, general and administrative expenses increased to 46.6% in the first quarter of 2020 from 30.9% in the first quarter of 2019.

*Depreciation.* Depreciation expense increased $0.3 million, or 7.2%, to $4.9 million in the first quarter of 2020 from $4.6 million in the first quarter of 2019.

*Asset Impairment.* Impairment charges related to an underperforming store totaled $0.3 million in the first quarter of 2020, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment. There was no impairment expense recorded in the first quarter of 2019.

*Income Tax Benefit/Expense.* Income tax benefit was $6.6 million in the first quarter of 2020 compared to income tax expense of $1.3 million in the first quarter of 2019, as a result of a pretax loss in the first quarter of 2020. For the first quarter of 2020, we utilized the discrete effective tax rate method to determine tax expense based upon interim period results, as the full-year tax rate is not reliably predictable.

*Net Loss/Income.* Net loss was $20.9 million in the first quarter of 2020 compared to net income of $7.8 million in the first quarter of 2019 due to the factors discussed above.

### Liquidity and Capital Resources

Our cash requirements are primarily for working capital and capital expenditures for stores, distribution infrastructure and information systems. We also use cash to repurchase stock under our stock repurchase program and to pay dividends. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As further noted below, due to the COVID-19 pandemic and related economic disruptions, on March 20, 2020, we drew down $43.7 million on our revolving credit facility. We expect to be able to meet future cash requirements for at least the next 12 months with cash flow from operations, short-term trade credit, existing balances of cash and cash equivalents, and borrowings under our revolving credit facility. We intend to carefully monitor and manage our cash position in light of ongoing conditions and results of operations.

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $12.8 million in the thirteen weeks ended May 2, 2020 compared to $8.9 million in the same period of 2019. Significant sources of cash in the first quarter of 2020 were (1) a $16.4 million decrease in inventory (compared to an $8.6 million decrease in the first quarter of 2019) due to the suspension of purchases as we closed stores due to the COVID-19 pandemic; and (2) a $14.0 million increase in accounts payable (compared to a $9.6 million decrease in the first quarter of 2019) due to extending payment terms with vendors and suppliers as a result of the COVID-19 pandemic.

Significant uses of cash during the first quarter of 2020 included a net loss adjusted for non-cash expenses such as depreciation, amortization of operating lease right of use assets, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling ($11.1) million (compared to $25.0 million in the first quarter of 2019). Other significant uses of cash from operating activities in the first quarter of 2020 were (1) a $6.8 million decrease in accrued expenses and other long-term liabilities (compared with an $11.9 million decrease in the first quarter of 2019) due primarily to payments of operating lease liabilities; and (2) a $5.5 million decrease in accrued compensation (compared to a $4.6 million decrease in the first quarter of 2019) due to the furlough of substantially all of our store and distribution center personnel, along with a significant portion of our corporate staff, which resulted in lower payroll costs due at the end of the quarter.

*Cash Flows From Investing Activities.* Cash provided by investing activities was $39.3 million in the first quarter of 2020 compared to $6.0 million in the first quarter of 2019. Sales and redemptions of investment securities, net of purchases, provided cash of $43.2 million and $8.3 million in the first quarter of 2020 and 2019, respectively. Cash used for purchases of property and equipment totaled $4.0 million and $2.3 million in the first quarter of 2020 and 2019, respectively.

*Cash Flows From Financing Activities.* Cash provided by financing activities was $36.1 million in the first quarter of 2020 compared to cash used of $3.3 million in the first quarter of 2019. The principal source of cash in the first quarter of 2020 was a drawdown of $43.7 million on our revolving credit facility, partially offset by the repurchase of common stock for an aggregate purchase price of $6.3 million.

### Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $108.1 million as of May 2, 2020); (ii) short-term trade credit; (iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (iv) a revolving credit facility with a $50.0 million credit commitment (with borrowings of $43.7 million as of May 2, 2020). 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.

As part of the actions we have taken to increase our cash position and preserve financial flexibility in light of current uncertainties resulting from the COVID-19 pandemic, as described above in “Current Material Developments,” on March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit facility. In addition, on May 12, 2020, we entered into an amendment to our revolving credit facility to, among other things, extend the maturity date to August 18, 2021. See Note 7 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for more information. In addition to the drawdown on our credit facility, we have reduced our operating expenses, capital expenditure plans and inventory receipts, as appropriate. The Company previously announced a share repurchase program on March 13, 2020, but no repurchases have been made under such program as of the date of this filing and the Company does not intend to repurchase any shares for the time being. The Company has also suspended the payment of quarterly dividends.

We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Should the reopening of our stores and recovery of our sales fall materially below our expectations, we may be required to take other actions that could include material changes in our operations and seeking additional debt or equity capital. We plan to continue to monitor the rapidly developing situation and to take further action to reduce our expenses and preserve our financial flexibility, as necessary.

### Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 1 to the unaudited 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 other material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.

## Market risk

As filed, 217 characters.

There have been no material changes in our market risk during the thirteen weeks ended May 2, 2020 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 1, 2020.

## Controls and procedures

As filed, 1,554 characters.

We have carried out an evaluation under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of May 2, 2020 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the principal executive officer and the principal 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 2, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,141 characters.

Other than as set forth below, 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 1, 2020.

*Our sales could decline and our store operations could be disrupted as a result of general economic and other factors outside of our control, such as changes in consumer spending patterns and declines in employment levels.*

Downturns, or the expectation of a downturn, in general economic conditions, including the effects of unemployment levels, salaries and wage rates, interest rates, levels of consumer debt, inflation in food and energy prices, taxation (including delays in the distribution of tax refunds), government stimulus, consumer confidence, and other macroeconomic factors, could adversely affect consumer spending patterns, our sales and our results of operations. Consumer confidence may also be affected by domestic and international political or social unrest (including related protests or disturbances), acts of war or terrorism, natural disasters, public health emergencies like the COVID-19 pandemic, or other significant events outside of our control. These and other social, political and economic factors that contribute to consumer unease or damage to our stores, may lead to a decrease in spending by consumers or disrupt our store operations, which may negatively impact our business, financial condition and results of operations. Also, because apparel generally is a discretionary purchase, declines in consumer spending patterns may have a more negative effect on apparel retailers than some other retailers. In addition, since many of our stores are located in the southeastern United States, our operations are more susceptible to regional factors than the operations of our more geographically diversified competitors. Therefore, any adverse economic conditions that have a disproportionate effect on the southeastern United States could have a greater negative effect on our sales and results of operations than on retailers with a more geographically diversified store base.

Filed Jun 11, 2020.
Source: SEC EDGAR, the filing index for accession 0001558370-20-007443. Last ingested by Listed: Oct 27, 2026, 17:26 ET. No prices; not investment advice.