CTRN 10-Q
Citi Trends Inc (CTRN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | Non-Accelerated Filer ☐ |
Smaller Reporting Company | Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 16, 2021 the registrant had
CITI TRENDS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE | ||
NUMBER | ||
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
16 | ||
16 | ||
17 | ||
17 | ||
17 | ||
17 | ||
17 | ||
17 | ||
18 | ||
19 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Citi Trends, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
| July 31, |
| January 30, |
|
| |||
| 2021 |
| 2021 |
|
| |||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | | $ | | ||||
Short-term investment securities |
| |
| — | ||||
Inventory |
| |
| | ||||
Prepaid and other current assets |
| |
| | ||||
Total current assets |
| |
| | ||||
Property and equipment, net of accumulated depreciation of $ |
| |
| | ||||
Operating lease right of use assets | | | ||||||
Deferred income taxes |
| |
| | ||||
Other assets |
| |
| | ||||
Total assets | $ | | $ | |||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | | $ | | ||||
Operating lease liabilities | | | ||||||
Accrued expenses |
| |
| | ||||
Accrued compensation |
| |
| | ||||
Income tax payable | | | ||||||
Layaway deposits |
| |
| | ||||
Total current liabilities |
| |
| | ||||
Noncurrent operating lease liabilities |
| |
| | ||||
Other long-term liabilities |
| |
| | ||||
Total liabilities |
| |
| | ||||
Stockholders’ equity: | ||||||||
Common stock, $ |
| |
| | ||||
Paid in capital |
| |
| | ||||
Retained earnings |
| |
| | ||||
Treasury stock, at cost; |
| ( |
| ( | ||||
Total stockholders’ equity |
| |
| | ||||
Commitments and contingencies (Note 9) | ||||||||
Total liabilities and stockholders’ equity | $ | | $ | | ||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
3
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended | |||||||
July 31, | August 1, | ||||||
2021 | 2020 |
| |||||
$ | | $ | | ||||
Cost of sales (exclusive of depreciation) | ( | ( | |||||
Selling, general and administrative expenses | ( | ( | |||||
Depreciation | ( | ( | |||||
Income from operations | | | |||||
Interest income | | | |||||
Interest expense | ( | ( | |||||
Income before income taxes | | | |||||
Income tax provision | ( | ( | |||||
Net income | $ | | $ | | |||
Basic net income per common share | $ | | $ | | |||
Diluted net income per common share | $ | | $ | | |||
Weighted average number of shares outstanding | |||||||
Basic | | | |||||
Diluted | | | |||||
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
Twenty-Six Weeks Ended | ||||||
July 31, | August 1, | |||||
| 2021 |
| 2020 | |||
$ | | $ | | |||
Cost of sales (exclusive of depreciation) | ( | ( | ||||
Selling, general and administrative expenses | ( | ( | ||||
Depreciation | ( | ( | ||||
Asset impairment | — | ( | ||||
Income (loss) from operations | | ( | ||||
Interest income | | | ||||
Interest expense | ( | ( | ||||
Income (loss) before income taxes | | ( | ||||
Income tax (provision) benefit | ( | | ||||
Net income (loss) | $ | | $ | ( | ||
Basic net income (loss) per common share | $ | | $ | ( | ||
Diluted net income (loss) per common share | $ | | $ | ( | ||
Weighted average number of shares outstanding | ||||||
Basic | | | ||||
Diluted | | | ||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
4
Citi Trends, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Twenty-Six Weeks Ended | |||||||
July 31, | August 1, | ||||||
| 2021 |
| 2020 |
| |||
Operating activities: | |||||||
Net income (loss) | $ | | $ | ( | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation | | | |||||
Non-cash operating lease costs | | | |||||
Asset impairment | — | | |||||
Loss on disposal of property and equipment | | | |||||
Deferred income taxes | | ( | |||||
Insurance proceeds related to operating activities | | — | |||||
Non-cash stock-based compensation expense | | | |||||
Changes in assets and liabilities: | |||||||
Inventory | ( | | |||||
Prepaid and other current assets | ( | ( | |||||
Other assets | ( | ( | |||||
Accounts payable | | ( | |||||
Accrued expenses and other long-term liabilities | ( | ( | |||||
Accrued compensation | ( | | |||||
Income tax (receivable) payable | ( | | |||||
Layaway deposits | | | |||||
Net cash provided by operating activities | | | |||||
Investing activities: | |||||||
Sales/redemptions of investment securities | — | | |||||
Purchases of investment securities | ( | ( | |||||
Purchases of property and equipment | ( | ( | |||||
Insurance proceeds related to investing activities | | — | |||||
Net cash (used in) provided by investing activities | ( | | |||||
Financing activities: | |||||||
Borrowings under revolving credit facility | — | | |||||
Repayments of revolving credit facility | — | ( | |||||
Payments of debt issuance costs | ( | — | |||||
Cash used to settle withholding taxes on the vesting of nonvested restricted stock | ( | ( | |||||
Dividends paid to stockholders | — | ( | |||||
Repurchases of common stock | ( | ( | |||||
Net cash (used in) provided by financing activities | ( | | |||||
Net (decrease) increase in cash and cash equivalents | ( | | |||||
Cash and cash equivalents: | |||||||
Beginning of period | | | |||||
End of period | $ | | $ | | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid for interest | $ | | $ | | |||
Cash payments of income taxes | $ | | $ | | |||
Supplemental disclosures of non-cash investing activities: | |||||||
Accrual for purchases of property and equipment | $ | | $ | | |||
See accompanying notes to the condensed consolidated financial statements (unaudited).
5
Citi Trends, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share amounts)
Common Stock | Paid in | Retained | Treasury Stock | ||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Total | |||||||||||||
Balances — January 30, 2021 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Forfeiture of nonvested shares |
| ( | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | — | ( | — | — | — | ( | |||||||||||
Repurchase of common stock | — | — | — | — | | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — May 1, 2021 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Forfeiture of nonvested shares |
| ( | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | — | ( | — | — | — | ( | |||||||||||
Repurchase of common stock | — | — | — | — | | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — July 31, 2021 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Common Stock | Paid in | Retained | Treasury Stock | ||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Total | |||||||||||||
Balances — February 1, 2020 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Vesting of nonvested restricted stock units | — | | — | — | — | — | | ||||||||||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Forfeiture of nonvested shares |
| ( | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | — | ( | — | — | — | ( | |||||||||||
Repurchase of common stock | — | — | — | — | | ( | ( | ||||||||||||
Dividends to stockholders ($ | — | — | — | ( | — | — | ( | ||||||||||||
Net loss | — | — | — | ( | — | — | ( | ||||||||||||
Balances — May 2, 2020 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | — | ( | — | — | — | ( | |||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — August 1, 2020 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
6
Citi Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
July 31, 2021
1. Significant Accounting Policies
Basis of Presentation
Citi Trends, Inc. and its subsidiary (the “Company”) is a growing specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx families. As of July 31, 2021, the Company operated
The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The condensed consolidated balance sheet as of January 30, 2021 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the “2020 Form 10-K”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2020 Form 10-K. Operating results for the second quarter of 2021 are not necessarily indicative of the results that may be expected for the fiscal year as a result of the seasonality of the business and current uncertainty surrounding the economic impact of the novel coronavirus (“COVID-19”) pandemic and the duration and extent of any economic stimulus programs.
Fiscal Year
The following contains references to fiscal years 2021 and 2020, which represent fiscal years ending or ended on January 29, 2022 and January 30, 2021, respectively. Fiscal 2021 and 2020 both have
2. COVID-19 Pandemic
In March 2020, the World Health Organization declared the spread of the coronavirus (“COVID-19”) a global pandemic.
The pandemic has resulted in periods of disruption for the Company, including the temporary closure of stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products. The Company saw improvement in its financial results and positive trends during the latter half of 2020 and into the first half of 2021 as certain governments began to ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.
The Company expects continued uncertainty in its business and the global economy due to the COVID-19 pandemic, including potential volatility in employment trends and consumer confidence, current or future restrictive actions that may be imposed by governments or public health authorities, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs to maintain safe work and shopping environments. The impacts of the pandemic have had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity. The Company will continue to monitor the effects of COVID-19 and take the necessary actions to serve our associates, customers, communities and shareholders.
3. Cash and Cash Equivalents/Concentration of Credit Risk
For purposes of the condensed consolidated balance sheets and condensed consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds. The Company maintains cash accounts that exceed federally insured limits.
4. Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock. During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding, because the inclusion of common stock equivalents would be antidilutive.
7
The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized. For the thirteen weeks ended July 31, 2021 and August 1, 2020, there were
The following table provides a reconciliation of the weighted average number of common shares outstanding used to calculate basic earnings per share to the number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share:
Thirteen Weeks Ended | ||||
| July 31, 2021 |
| August 1, 2020 | |
Weighted average number of common shares outstanding | | | ||
Incremental shares from assumed vesting of nonvested restricted stock | | | ||
Weighted average number of common shares and common stock equivalents outstanding | | | ||
Twenty-Six Weeks Ended | ||||
| July 31, 2021 |
| August 1, 2020 | |
Weighted average number of common shares outstanding | | | ||
Incremental shares from assumed vesting of nonvested restricted stock | | — | ||
Weighted average number of common shares and common stock equivalents outstanding | | | ||
5. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date. Fair value is established according to a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. Level 3 inputs are given the lowest priority in the fair value hierarchy.
As of July 31, 2021, the Company’s investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):
|
| Gross |
| Gross |
|
| |||||||
Amortized | Unrealized | Unrealized | Fair Market |
| |||||||||
| Cost |
| Gains |
| Losses |
| Value |
| |||||
Short-term: | |||||||||||||
Corporate debt securities (Level 2) | $ | | $ | — | $ | ( | $ | | |||||
Obligations of states and municipalities (Level 2) | | — | ( | | |||||||||
$ | | $ | — | $ | ( | $ | | ||||||
8
The amortized cost and fair market value of investment securities as of July 31, 2021 by contractual maturity are as follows (in thousands):
|
| Fair |
| ||||
Amortized | Market |
| |||||
| Cost |
| Value |
| |||
Mature in one year or less | $ | | $ | | |||
6. Impairment of Assets
If facts and circumstances indicate that a long-lived asset or operating lease right-of-use asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. There was
7. Revolving Credit Facility
In October 2011, the Company entered into a
8. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. If there is a change in tax rates, the Company would recognize the impact of such change in income in the period that includes the enactment date.
For the first half of 2021, the Company utilized the annual effective tax rate method to calculate income taxes. For the first half of 2020, the Company utilized the discrete effective tax rate method based on the determination that the full-year tax rate was not reliably predictable. The tax rate was
9. Commitments and Contingencies
The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, landlords, employees or former employees. Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, the Company establishes appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.
9
10. Stock Repurchases
Repurchases of Common Stock
In November 2019, the Company’s board of directors approved a stock repurchase program that authorized the repurchase of up to $
In March 2020, the Company’s board of directors approved another $
In the first half of 2021, the Company repurchased
As of July 31, 2021, the Company had approximately $
11. Revenue
Revenue Recognition
The Company’s primary source of revenue is derived from the sale of apparel, accessories and home trends to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise. Sales taxes collected by the Company from customers are excluded from revenue. Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation. The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise.
Sales Returns
The Company allows customers to return merchandise for up to
Disaggregation of Revenue
The Company’s retail operations represent a single operating segment based on the way the Company manages its business. Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s retail stores sell similar products, use similar processes to sell those products and sell their products to similar classes of customers.
In the following table, the Company’s revenue is disaggregated by “CITI” or major merchandise category. The percentage of net sales for each CITI within the merchandise assortment was approximately:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||
July 31, |
| August 1, |
| July 31, |
| August 1, | ||||||
2021 |
| 2020 |
| 2021 |
| 2020 | ||||||
Women | % | % | % | % | ||||||||
Kids | % | % | % | % | ||||||||
Men | % | % | % | % | ||||||||
Beauty & Accessories | % | % | % | % | ||||||||
Home & Lifestyle | % | % | % | % | ||||||||
Footwear | % | % | % | % | ||||||||
10
12. Leases
The Company leases its retail store locations and certain office space and equipment. Leases for store locations are typically for a term of
Total lease cost is comprised of operating lease costs, short-term lease costs and variable lease costs, which include rent paid as a percentage of sales, common area maintenance, real estate taxes and insurance for the Company’s real estate leases.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||
July 31, 2021 | August 1, 2020 | July 31, 2021 | August 1, 2020 | |||||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Variable lease cost |
| |
| |
| |
| | ||||
Short term lease cost |
| |
| |
| |
| | ||||
Total lease cost | $ | | $ | | $ | | $ | | ||||
In response to the impact of the COVID-19 pandemic on the Company’s operations, the Company suspended certain lease payments in 2020 under its existing lease agreements. During the suspension of payments, the Company continued to recognize expenses and liabilities for lease obligations and corresponding right-of-use assets on the balance sheet in accordance with the applicable accounting guidance. The Company continues to engage in discussions with landlords regarding the potential restructuring of lease payments and rent concessions. As of July 31, 2021, the Company negotiated contractual rent concessions on many leases in the form of early renewals, rent deferrals and rent abatements. The Company elected to account for qualifying COVID-19 related rent concessions as if they were part of the enforceable rights and obligations under the existing lease agreements, as permitted by the updated guidance provided by the FASB in April 2020. As a result of this election, the Company recognized rent abatement credits of approximately $
Future minimum lease payments as of July 31, 2021 are as follows (in thousands):
Fiscal Year |
| Lease Costs |
| |
Remainder of 2021 |
| $ | | |
2022 | | |||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
Thereafter |
| | ||
Total future minimum lease payments | | |||
Less: imputed interest | ( | (1) | ||
Total present value of lease liabilities | $ | | (2) | |
| (1) | Calculated using the discount rate for each lease. |
| (2) | Includes short-term and long-term portions of operating lease liabilities. |
Certain operating leases provide for fixed monthly rents, while others provide for contingent rents computed as a percentage of net sales and others provide for a combination of both fixed monthly rents and contingent rents computed as a percentage of net sales.
11
| Twenty-Six Weeks Ended | |||||
July 31, 2021 | August 1, 2020 | |||||
Cash paid for operating leases |
| $ | | $ | | |
Right of use assets obtained in exchange for new operating lease liabilities | $ | | $ | | ||
|
| |||||
Weighted average remaining lease term (years) - operating leases |
|
| ||||
Weighted average discount rate - operating leases | ||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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: uncertainties relating to general economic conditions, including any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory); 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 operations and liquidity, including the re-closure of any or all of the Company’s retail stores and distribution centers; growth risks, consumer spending patterns; competition within the industry; competition in our markets; the ability to anticipate and respond to fashion trends; the duration and extent of any economic stimulus programs; transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to attract and retain workers; 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; 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 January 30, 2021, 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 growing specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of July 31, 2021, we operated 589 stores in urban, suburban and rural markets in 33 states.
12
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a global pandemic. Since that time, the global economy has been, and continues to be, affected by COVID-19. The pandemic has caused and may continue to cause significant disruptions in the U.S. economy as the virus continues to spread or has a resurgence in certain jurisdictions. In response to the COVID-19 pandemic, effective March 20, 2020, we temporarily closed all of our retail store locations and distribution centers. At the end of April 2020, we started to reopen stores in select states in accordance with government guidelines. As of July 18, 2020, we safely reopened all of our stores. The COVID-19 pandemic has resulted in periods of disruption for our business, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products. We saw improvement in our financial results and positive trends during the latter half of 2020 and into the first half of 2021 as certain governments began to ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.
We expect continued uncertainty in our business and the global economy due to the COVID-19 pandemic, including potential volatility in employment trends and consumer confidence, current or future restrictive actions that may be imposed by governments or public health authorities, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs to maintain safe work and shopping environments. Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways. The impacts of the pandemic have had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity. We will continue to monitor the effects of COVID-19 and take the necessary actions to safely serve our associates, customers, communities and shareholders.
For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see the section entitled "ITEM 1A. RISK FACTORS" in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
Accounting Periods
The following discussion contains references to fiscal years 2021 and 2020, which represent fiscal years ending or ended on January 29, 2022 and January 30, 2021, respectively. Fiscal 2021 and 2020 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 I, 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 fiscal 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 in 2020 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 twenty-six weeks ended July 31, 2021.
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 2020 and fiscal 2021 are not considered comparable stores in fiscal 2021. Relocated and expanded stores are included in the comparable store sales results. Stores that are closed permanently or for an extended period are excluded from 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. Finally, we monitor corporate expenses against budgeted amounts.
Thirteen Weeks Ended July 31, 2021 and August 1, 2020
Net Sales. Net sales increased $21.1 million, or 9.8%, to $237.3 million in the second quarter of 2021 from $216.2 million in the second quarter of 2020. The increase in sales was due to an 8.7% increase in comparable store sales and the opening of 16 new stores since the second quarter of last year, partially offset by the impact of closing six stores. The 8.7% increase in comparable store sales resulted in an increase of $18.4 million in sales, while store opening and closing activity resulted in a net increase of $2.7 million.
13
The increase in comparable store sales was reflected in an increase of 5% in customer transactions and an increase of 4% in the average basket size. Comparable store sales changes by “CITI” or major merchandise category were as follows: Beauty & Accessories +31%; Women +11%; Men +8%; Kids +5%; Home & Lifestyle +4%; and Footwear -1%.
Cost of sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $13.4 million, or 10.5%, to $140.5 million in the second quarter of 2021 from $127.1 million in the second quarter of 2020. Cost of sales as a percentage of sales increased slightly to 59.2% from 58.8% due to an increase of 250 basis points in freight costs, partially offset by an improvement of 130 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an improvement of 80 basis points in shrinkage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $17.8 million, or 30.8%, to $75.4 million in the second quarter of 2021 from $57.6 million in last year’s second quarter. The increase was due primarily to significant favorable one-time expense reductions in the second quarter of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents, and other COVID-19 cost credits. Also contributing to the increase was a $4.5 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year. As a percentage of sales, selling, general and administrative expenses increased to 31.8% in the second quarter of 2021 from 26.7% in the second quarter of 2020.
Depreciation. Depreciation expense increased $0.1 million, or 1.2%, to $5.0 million in the second quarter of 2021 from $4.9 million in the second quarter of 2020.
Income Tax Expense. Income tax expense was $3.8 million in the second quarter of 2021 compared to $6.2 million in the second quarter of 2020 due primarily to a decrease in pretax income.
Net Income. Net income decreased $7.4 million to $12.5 million in the second quarter of 2021 compared to $19.9 million in the second quarter of 2020 due to the factors discussed above.
Twenty-Six Weeks Ended July 31, 2021 and August 1, 2020
Net Sales. Net sales increased $190.4 million, or 57.3%, to $522.7 million in the first half of 2021 from $332.3 million in the first half of 2020. The increase in sales was due to a 55.5% increase in comparable store sales and the opening of 16 new stores since the end of the second quarter of last year, partially offset by the impact of closing six stores. The year-to-date increase in comparable store sales was primarily due to the temporary closure of all 574 of our stores in the first half of last year as a result of the COVID-19 pandemic.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $92.8 million, or 43.9%, to $304.3 million in the first half of 2021 from $211.5 million in the first half of 2020. Cost of sales as a percentage of sales decreased to 58.2% in the first half of 2021 from 63.7% in the same period of 2020 due to an improvement of 580 basis points in the core merchandise margin (initial mark-up, net of markdowns) driven by lower markdowns, along with an improvement of 90 basis points in shrinkage, partially offset by an increase of 120 basis points in freight costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $41.6 million, or 37.2%, to $153.3 million in the first half of 2021 from $111.7 million in the first half of 2020. The increase was due primarily to significant favorable one-time expense reductions in the first half of last year related to COVID-19, including furloughs, store closures and reduced operating hours, abated rents and other COVID-19 cost credits. Also contributing to the increase was a $13.0 million increase in incentive compensation resulting from favorable operating results in relation to budget, as well as the general impact on expenses of opening 16 new stores since the second quarter of last year. As a percentage of sales, selling, general and administrative expenses decreased to 29.3% in the first half of 2021 from 33.6% in the first half of 2020.
Depreciation. Depreciation expense decreased $0.2 million, or 1.9%, to $9.7 million in the first half of 2021 from $9.9 million in the first half of 2020.
Asset Impairment. There were no asset impairment charges in the first half of 2021. In the first half of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.
Income Tax Expense/Benefit. Income tax expense was $11.9 million in the first half of 2021 compared to an income tax benefit of $0.4 million in the first half of 2020 due primarily to pretax income this year compared to a pretax loss in the first half of last year.
Net Income/Loss. Net income was $43.4 million in the first half of 2021 compared to a loss of $1.0 million in the first half of 2020 due to the factors discussed above.
14
Liquidity and Capital Resources
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $76.8 million as of July 31, 2021); (ii) short-term investment securities (which equaled $24.6 million as of July 31, 2021); (iii) short-term trade credit; (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) a revolving credit facility with a $75 million credit commitment (with no borrowings as of July 31, 2021). Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors.
Cash Flows From Operating Activities. Net cash provided by operating activities was $56.8 million in the first half of 2021 compared to $55.4 million in the first half of 2020. Sources of cash in the first half of 2021 included net income adjusted for insurance proceeds and non-cash expenses such as depreciation, non-cash operating lease costs, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $82.2 million (compared to $33.4 million in the first half of 2020). Other significant sources of cash in the first half of 2021 included a $14.3 million increase in accounts payable (compared to a $2.2 million decrease in the first half of 2020) due to a high volume of merchandise receipts during the final two months of the second quarter of 2021, with nearly all of such purchases still in accounts payable at the end of the quarter.
Significant uses of cash from operating activities in the first half of 2021 were (1) a $22.6 million decrease in accrued expenses and other long-term liabilities (compared to a $13.2 million decrease in the first half of 2020) due primarily to payments of operating lease liabilities; (2) a $9.7 million increase in inventory (compared to a $43.7 million decrease in the first half of 2020) due to replenishing our merchandise in 2021 following robust sales in the fourth quarter of last year; and (3) a $4.8 million decrease in accrued compensation (compared to a $0.1 million increase in the first half of 2020) due to payment in the first quarter of 2021 of incentive compensation accrued in the second half of last year.
Cash Flows From Investing Activities. Cash used in investing activities was $36.4 million in the first half of 2021 compared to cash provided of $37.4 million in the first half of 2020. Cash used in the first half of 2021 consisted of $24.6 million for purchases of short-term investment securities and $12.0 million for purchases of property and equipment. Cash provided in the first half of 2020 was primarily from the sales of investment securities due to the pandemic, partially offset by $5.8 million used for purchases of property and equipment.
Cash Flows From Financing Activities. Cash used in financing activities was $66.8 million in the first half of 2021 compared to cash provided of $34.0 million in the first half of 2020. Cash used in the first half of 2021 consisted primarily of $64.4 million for repurchases of our common stock. Cash provided in the first half of 2020 was the result of a net drawdown of $41.6 million on our credit facility due to the pandemic, partially offset by $7.1 million used for repurchases of our common stock and dividend payments.
Cash Requirements
Our cash requirements are primarily for working capital and capital expenditures for stores, distribution infrastructure and information systems. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. We have also used cash to repurchase shares of our common stock. In the first half of 2021, pursuant to our stock repurchase program, we repurchased 502,257 shares of our common stock at an aggregate cost of $42.5 million. In addition, we repurchased in a block trade 250,000 shares of our common stock at an aggregate cost of $21.9 million.
We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months as well as the foreseeable future. However, any significant reduction in customer willingness to visit shopping centers or levels of customer spending at our stores, or any future temporary closures of our stores or distribution centers, or any disruptions in the supply chains related to our merchandise could require us to take actions that could include material changes in our operations and seeking additional debt or equity capital. We will continue to monitor the situation and take action as necessary to reduce our expenses and preserve our financial flexibility.
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.
15
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, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the twenty-six weeks ended July 31, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021.
Item 4. Controls and Procedures.
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 July 31, 2021 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 July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
16
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time involved in various legal proceedings incidental to the conduct of our business, including claims by customers, landlords, employees or former employees. Once it becomes probable that we will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, we establish appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, we are not aware of any legal proceedings pending or threatened against us that we expect to have a material adverse effect on our financial condition, results of operations or liquidity.
Item 1A. Risk Factors.
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, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Information on Share Repurchases
The number of shares of common stock repurchased by the Company during the second quarter of 2021 and the average price paid per share are as follows:
|
|
|
| Maximum number (or |
| ||||||
Total number of shares | approximate dollar value) |
| |||||||||
purchased as part of | of shares that may yet be |
| |||||||||
Total number of | Average price paid | publicly announced | purchased under the plans |
| |||||||
Period | shares purchased | per share (1) | plans or programs (2) | or programs (2) |
| ||||||
May (5/2/21 - 5/29/21) |
| 85,083 | $ | 95.41 |
| 85,083 | $ | 1,687,300 | |||
June (5/30/21 - 7/3/21) |
| 68,864 | $ | 83.62 |
| 68,864 | $ | 25,930,297 | |||
July (7/4/21 - 7/31/21) |
| 60,814 | $ | 82.73 |
| 60,814 | $ | 20,900,331 | |||
Total |
| 214,761 |
| 214,761 | |||||||
(1) | Includes commissions for the shares repurchased under the stock repurchase program. |
(2) | On March 13, 2020, the Company announced that its board of directors approved a $30 million stock repurchase program. On December 22, 2020, the Company announced that its board of directors approved an additional $30 million stock repurchase program. On June 2, 2021, the Company announced that its board of directors authorized another $30 million for stock repurchases. The programs do not have expiration dates. |
On August 24, 2021, the Company announced that its board of directors approved another stock repurchase program that authorized the repurchase of up to $30 million in shares of the Company’s common stock.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
17
Item 6. Exhibits.
3.1 | ||
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
101 | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.* | |
104 | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.* |
* Included herewith.
† Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934 and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and the undersigned also has signed this report in her capacity as the Registrant’s Chief Financial Officer (Principal Financial Officer).
CITI TRENDS, INC. | ||
Date: September 8, 2021 | ||
By: | /s/ Pamela J. Edwards | |
Name: | Pamela J. Edwards | |
Title: | Chief Financial Officer | |
19