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 November 30, 2022 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 | 11 | |
15 | ||
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)
| October 29, |
| January 29, |
|
| |||
| 2022 |
| 2022 |
|
| |||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | | $ | | ||||
Inventory |
| |
| | ||||
Prepaid and other current assets |
| |
| | ||||
Income tax receivable |
| — |
| | ||||
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 6) | ||||||||
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 | |||||||
October 29, | October 30, | ||||||
| 2022 |
| 2021 |
| |||
$ | | $ | | ||||
Cost of sales (exclusive of depreciation) | ( | ( | |||||
Selling, general and administrative expenses | ( | ( | |||||
Depreciation | ( | ( | |||||
Gain on sale-leaseback | | — | |||||
Income from operations | | | |||||
Interest income | | | |||||
Interest expense | ( | ( | |||||
Income before income taxes | | | |||||
Income tax expense | ( | ( | |||||
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)
Thirty-Nine Weeks Ended | ||||||
October 29, | October 30, | |||||
| 2022 |
| 2021 | |||
$ | | $ | | |||
Cost of sales (exclusive of depreciation) | ( | ( | ||||
Selling, general and administrative expenses | ( | ( | ||||
Depreciation | ( | ( | ||||
Gain on sale-leasebacks | | — | ||||
Income from operations | | | ||||
Interest income | | | ||||
Interest expense | ( | ( | ||||
Income before income taxes | | | ||||
Income tax expense | ( | ( | ||||
Net income | $ | | $ | | ||
Basic net income per common share | $ | | $ | | ||
Diluted net income 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)
Thirty-Nine Weeks Ended | |||||||
October 29, | October 30, | ||||||
| 2022 |
| 2021 |
| |||
Operating activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||
Depreciation | | | |||||
Non-cash operating lease costs | | | |||||
Loss on disposal of property and equipment | | | |||||
Deferred income taxes | | | |||||
Insurance proceeds related to operating activities | | | |||||
Non-cash stock-based compensation expense | | | |||||
Gain on sale-leasebacks | ( | — | |||||
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 (used in) provided by operating activities | ( | | |||||
Investing activities: | |||||||
Purchases of investment securities | — | ( | |||||
Purchases of property and equipment | ( | ( | |||||
Insurance proceeds related to investing activities | | | |||||
Proceeds from sale-leasebacks | | — | |||||
Net cash provided by (used in) investing activities | | ( | |||||
Financing activities: | |||||||
Payments of debt issuance costs | — | ( | |||||
Cash used to settle withholding taxes on the vesting of nonvested restricted stock | ( | ( | |||||
Repurchases of common stock | ( | ( | |||||
Net cash used in financing activities | ( | ( | |||||
Net increase (decrease) 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 29, 2022 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Vesting of nonvested shares | — | | — | — | — | — | | ||||||||||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Issuance of common stock under incentive plan, net of shares withheld for taxes |
| | — | — | — | — | — | — | |||||||||||
Forfeiture of nonvested shares |
| ( | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | ( | ( | — | — | — | ( | |||||||||||
Repurchase of common stock | — | — | — | — | | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — April 30, 2022 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
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 loss | — | — | — | ( | — | — | ( | ||||||||||||
Balances — July 30, 2022 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Vesting of nonvested shares | — | | — | — | — | — | | ||||||||||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Forfeiture of nonvested shares |
| ( | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares |
| ( | — | ( | — | — | — | ( | |||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — October 29, 2022 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
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 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
Vesting of nonvested restricted stock units | — | | — | — | — | — | | ||||||||||||
Issuance of nonvested shares under incentive plan |
| | — | — | — | — | — | — | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Net share settlement of nonvested shares and restricted stock units |
| ( | — | ( | — | — | — | ( | |||||||||||
Repurchase of common stock | — | — | — | — | | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balances — October 30, 2021 |
| | $ | | $ | | $ | |
| | $ | ( | $ | | |||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
6
Citi Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
October 29, 2022
1. Significant Accounting Policies
Basis of Presentation
Citi Trends, Inc. and its subsidiary (the “Company”) is a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families. As of October 29, 2022, 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 29, 2022 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the “2021 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 2021 Form 10-K. Operating results for the third quarter of 2022 are not necessarily indicative of the results that may be expected for the fiscal year as a result of the seasonality of the business, the current economic uncertainty and the extent to which future business will be impacted by the COVID-19 pandemic.
Fiscal Year
The following contains references to fiscal years 2022 and 2021, which represent fiscal years ending or ended on January 28, 2023 and January 29, 2022, respectively. Fiscal 2022 and 2021 both have
2. 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.
3. 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.
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 third quarter of 2022 and 2021, 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 | ||||
| October 29, 2022 |
| October 30, 2021 | |
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 | | | ||
7
Thirty-Nine Weeks Ended | ||||
| October 29, 2022 |
| October 30, 2021 | |
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 | | | ||
4. Revolving Credit Facility
In October 2011, the Company entered into a
As of October 29, 2022, the Company had
5. 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 thirty-nine weeks ended October 29, 2022 and October 30, 2021, the Company utilized the annual effective tax rate method to calculate income taxes. The effective income tax rate was
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 ("IRA"). The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate alternative minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. The Company is continuing to evaluate the IRA and its potential impact on future periods, and at this time the Company does not expect the IRA to have a material impact on its consolidated financial statements.
6. 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.
8
7. Stock Repurchases
Repurchases of Common Stock
The Company periodically repurchases shares of its common stock under board-authorized repurchase programs. Such repurchases may be made in the open market, through block trades or through other negotiated transactions. Share repurchases were as follows (in thousands, except per share data):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
October 29, 2022 |
| October 30, 2021 | October 29, 2022 |
| October 30, 2021 | ||||||
Total number of shares purchased | — | | | | |||||||
Average price paid per share (including commissions) | $ | — | $ | | $ | | $ | | |||
Total investment | $ | — | $ | | $ | | $ | | |||
On March 15, 2022, the Company announced that its board of directors approved an additional $
8. Revenue
Revenue Recognition
The Company’s primary source of revenue is derived from the sale of clothing, 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 from sales to customers is disaggregated by “CITI” or major merchandise category. The percentage of net sales for each CITI with the merchandise assortment was approximately:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
October 29, |
| October 30, |
| October 29, |
| October 30, | ||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Ladies | % | % | % | % | ||||||||
Kids | % | % | % | % | ||||||||
Mens | % | % | % | % | ||||||||
Accessories & Beauty | % | % | % | % | ||||||||
Home & Lifestyle | % | % | % | % | ||||||||
Footwear | % | % | % | % | ||||||||
9. Leases
The Company leases its retail store locations and certain office space and equipment. Leases for store locations are typically for a term of
9
In April 2022, the Company completed a sale-leaseback of its distribution center in Darlington, South Carolina for net proceeds of approximately $
In September 2022, the Company completed a sale-leaseback of its distribution center in Roland, Oklahoma for net proceeds of approximately $
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 | Thirty-Nine Weeks Ended | |||||||||||
October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Variable lease cost |
| |
| |
| |
| | ||||
Short term lease cost |
| |
| |
| |
| | ||||
Total lease cost | $ | | $ | | $ | | $ | | ||||
Future minimum lease payments as of October 29, 2022 are as follows (in thousands):
Fiscal Year |
| Lease Costs |
| |
Remainder of 2022 |
| $ | | |
2023 | | |||
2024 |
| | ||
2025 |
| | ||
2026 |
| | ||
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. |
Supplemental cash flows and other information related to operating leases are as follows (in thousands, except for weighted average amounts):
| Thirty-Nine Weeks Ended | |||||
October 29, 2022 | October 30, 2021 | |||||
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 | ||||||
10
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 inflation, energy and fuel costs, unemployment levels, and any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory) or other factors; changes in market interest rates and market levels of wages; natural disasters such as hurricanes; public health emergencies such as 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 re-closure of any or all of the Company’s retail stores and distribution centers; 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; consumer confidence and changes in consumer spending patterns; competition within the industry; competition in our markets; the duration and extent of any economic stimulus programs; changes in product mix; interruptions in suppliers’ businesses; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening, remodeling and operating new stores; the results of pending or threatened litigation; 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 29, 2022, 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.
Executive Overview
We are a leading specialty value retailer of apparel, accessories and home trends for way less spend 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 multicultural customers. As of October 29, 2022, we operated 615 stores in urban, suburban and rural markets in 33 states.
Uncertainties and Challenges
COVID-19
There is still uncertainty regarding the lingering effects of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows and liquidity. We cannot reasonably predict the extent to which our future business will be impacted by the COVID-19 pandemic.
11
Inflation
Our operations have been impacted by the recent surge in prices for food, fuel, housing and energy due to inflationary pressures, which may continue in the near term and are particularly impactful to the communities we serve. We are closely monitoring the impacts of inflationary pressures, higher unemployment, wage inflation and costs to source our merchandise. The future impact of inflation remains highly uncertain, and our business and results of operations could continue to be adversely impacted.
Supply Chain Disruptions
Beginning in the second half of fiscal 2021, we encountered increasing supply chain disruptions, such as production delays for our vendors and industry-wide U.S. port and ground transportation delays. In response, we have taken various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the direct shipping program from our vendors to our stores that we initiated in fiscal 2020. These supply chain disruptions have resulted in increased costs. We continue to actively monitor and manage the impact on product availability and expenses. The future impact of the supply chain disruption remain highly uncertain, and our business and results of operations could continue to be adversely impacted.
Seasonality and Weather Patterns
The nature of our 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have greatly expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.
Basis of Presentation
Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of Cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs.
The following discussion contains references to fiscal years 2022 and 2021, which represent fiscal years ending or ended on January 28, 2023 and January 29, 2022, respectively. Fiscal 2022 and fiscal 2021 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. 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 as a result of the seasonality of the business, the current economic uncertainty and the extent to which future business will be impacted by the COVID-19 pandemic.
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 2021 and fiscal 2022 are not considered comparable stores in fiscal 2022. 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. 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.
12
Thirteen Weeks Ended October 29, 2022 and October 30, 2021
Net Sales. Net sales decreased $35.7 million, or 15.6%, to $192.3 million in the third quarter of 2022 from $228.0 million in the third quarter of 2021. The decrease in sales was due to an 18.3% decrease in comparable store sales, partially offset by a $5.0 million increase from net store opening and closing activity. The decrease in comparable store sales was due to outsized sales in the third quarter of last year driven by government stimulus payments, combined with inflationary pressures in the third quarter of this year that are particularly impactful to our core customers.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) decreased $20.4 million, or 14.9%, to $115.7 million in the third quarter of 2022 from $136.1 million in the third quarter of 2021. Cost of sales as a percentage of sales increased to 60.2% from 59.7%. The change of 50 basis points was due to a decrease of 55 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to lower markdowns in the third quarter of last year during outsized stimulus-driven demand, along with an increase of 25 basis points in shrinkage, partially offset by a decrease of 30 basis points in freight costs in the current quarter.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $5.7 million, or 7.6%, to $69.1 million in the third quarter of 2022 from $74.8 million in the third quarter of 2021. The decrease was driven by: (1) a $4.7 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the third quarter of last year) as well as an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest; (2) a decrease of $1.5 million in payroll expenses related to reduced headcount; (3) the capitalization of $0.5 million of payroll related to a technology upgrade; (4) decreases in travel expenses and credit card processing fees; and (5) decreases in various other expenses related to our initiative to reduce costs. These decreases were partially offset by an increase of $1.6 million in rent expense related to the sale-leasebacks of our distribution centers. As a percentage of sales, Selling, general and administrative expenses increased to 35.9% in the third quarter of 2022 from 32.8% in the third quarter of 2021, primarily due to the deleveraging effect of lower sales.
Depreciation. Depreciation expense decreased $0.4 million, or 8.2%, to $5.1 million in the third quarter of 2022 from $5.5 million in the third quarter of 2021.
Gain on sale-leaseback. In the third quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Roland, Oklahoma that resulted in a $29.2 million gain.
Income Tax Expense. Income tax expense was $7.1 million in the third quarter of 2022 compared to $2.5 million in the third quarter of 2021 due primarily to higher pretax income in the current period, including the impact of the gain on the sale of our distribution center.
Net Income. Net income was $24.6 million in the third quarter of 2022 compared to $9.0 million in the third quarter of 2021 due to the factors discussed above.
Thirty-Nine Weeks Ended October 29, 2022 and October 30, 2021
Net Sales. Net sales decreased $165.0 million, or 22.0%, to $585.6 million in the first thirty-nine weeks of 2022 from $750.6 million in the same period of 2021. The decrease in sales was due to a 24.5% decrease in comparable store sales, partially offset by a $15.9 million increase from net store opening and closing activity. The decrease in comparable store sales was due to outsized sales in the first thirty-nine weeks of last year driven by government stimulus payments, combined with inflationary pressures in the first thirty-nine weeks of this year that are particularly impactful to our core customers.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) decreased $83.1 million, or 18.9%, to $357.3 million in the first thirty-nine weeks of 2022 from $440.4 million in the same period of 2021. Cost of sales as a percentage of sales increased to 61.0% in the first thirty-nine weeks of 2022 from 58.7% in the same period of 2021. The change of 230 basis points was due to a decrease of 180 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to lower markdowns in the first thirty-nine weeks of last year during outsized stimulus-driven demand, along with an increase of 35 basis points in shrinkage and 15 basis points in freight costs in the current period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $19.5 million, or 8.5%, to $208.6 million in the first thirty-nine weeks of 2022 from $228.1 million in the same period of 2021. The decrease was due to: (1) a $16.6 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the first thirty-nine weeks last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs related to the conversion of nonvested cash-settled units to nonvested shares; (2) $2.9 million of one-time items consisting of an insurance gain, adjustments to accrued vacation expense and the capitalization of payroll related to a
13
technology upgrade; (3) a decrease of $1.6 million in payroll expenses related to reduced headcount; and (4) decreases in credit card processing fees and professional fees. These decreases were partially offset by a $2.8 million increase in rent related to the sale-leasebacks of our distribution centers, higher utility costs and the general impact on expenses of opening and operating more stores. As a percentage of sales, Selling, general and administrative expenses increased to 35.6% in the first thirty-nine weeks of 2022 from 30.4% in the first thirty-nine weeks of 2021, primarily due to the deleveraging effect of lower sales.
Depreciation. Depreciation expense increased $0.6 million, or 3.8%, to $15.8 million in the first thirty-nine weeks of 2022 from $15.2 million in the same period last year.
Gain on sale-leaseback. In the first quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Darlington, South Carolina that resulted in a $34.9 million gain. In the third quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Roland, Oklahoma that resulted in a $29.2 million gain.
Income Tax Expense. Income tax expense was $15.6 million in the first thirty-nine weeks of 2022 compared to $14.4 million in the first thirty-nine weeks of 2021 due to higher pretax income this year, combined with a slightly higher rate because the prior year had a favorable tax impact of restricted stock vestings.
Net Income. Net income was $52.3 million in the first thirty-nine weeks of 2022 compared to $52.4 million in the same period of 2021 due to the factors discussed above.
Liquidity and Capital Resources
Capital Allocation
Our capital allocation strategy is to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs. Our quarter-end cash and cash equivalents balance was $77.8 million compared to cash and cash equivalents and short-term investments of $47.5 million at the end of the third quarter last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.
Our principal sources of liquidity consist of: (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75.0 million credit commitment.
In addition, in April 2022, we completed a sale-leaseback transaction of our distribution center in Darlington, South Carolina, for pretax proceeds of $45.5 million. In September 2022, we completed a sale-leaseback transaction of our distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.
Inventory
Our quarter-end inventory balance was $128.5 million, compared with $126.9 million at the end of the third quarter last year. The increase was primarily due to reduced inventory levels at the end of the third quarter last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021 and during the first quarter of this year.
Capital Expenditures
Capital expenditures in the first thirty-nine weeks of 2022 were $19.2 million, a decrease of $1.6 million over the first thirty-nine weeks of 2021 as we invested in our strategic initiatives, including opening 12 new stores, remodeling 35 stores and continuing our investments in system upgrades and distribution center enhancements. We anticipate capital expenditures in fiscal 2022 of approximately $22 million.
Share Repurchases
During the first thirty-nine weeks of 2022 and 2021, we returned $10.0 million and $107.2 million, respectively, to shareholders through share repurchases. See Part II of this Report and Note 7 to the Financial Statements for more information.
Revolving Credit Facility
We have a revolving credit facility that matures in April 2026 and provides a $75.0 million credit commitment and a $25.0 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of the third quarter of 2022, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.
14
Cash Flows
Cash Flows From Operating Activities. Net cash used in operating activities was $23.1 million in the first thirty-nine weeks of 2022 compared to cash provided of $54.9 million in the same period of 2021. Sources of cash this year included net income adjusted for insurance proceeds, non-cash expenses and gain on sale-leasebacks totaling $48.5 million (compared to $110.8 million in the first thirty-nine weeks of 2021) and an increase of $6.9 million in income tax payable.
Significant uses of cash from operating activities in the first thirty-nine weeks of 2022 included (1) a $44.8 million decrease in accrued expenses and other long-term liabilities (compared to a $36.3 million decrease in the first thirty-nine weeks of 2021) due primarily to payments of operating lease liabilities; (2) a $15.6 million decrease in accounts payable (compared to a $15.9 million increase last year) due to significantly fewer inventory purchases in the last two months of the current quarter; (3) a $15.2 million decrease in accrued compensation (compared to a $6.5 million decrease in the same period last year) due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year; and (4) a $5.9 million increase in inventory (compared to a $23.4 million increase in the same period last year).
Cash Flows From Investing Activities. Cash provided by investing activities was $63.3 million in the first thirty-nine weeks of 2022 compared to cash used of $56.1 million in the same period last year. Cash provided in the first thirty-nine weeks of 2022 consisted of $81.1 million net proceeds from the sale of buildings in the sale-leaseback transactions, partially offset by $19.2 million for purchases of property and equipment. Cash used for investing activities in the first thirty-nine weeks of 2021 consisted of $35.5 million purchases of investment securities and $20.8 million purchases of property and equipment.
Cash Flows From Financing Activities. Cash used in financing activities was $12.2 million in the first thirty-nine weeks of 2022 compared to $109.9 million in the same period last year. Cash used in the first thirty-nine weeks of 2022 consisted of $10.0 million for repurchases of our common stock and $2.2 million paid to settle withholding taxes on restricted stock that vested. Cash used in the first thirty-nine weeks of 2021 consisted primarily of repurchases of our common stock.
Cash Requirements and Commitments
Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We may also use cash to fund any share repurchases, make any required debt payments and satisfy other contractual obligations. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of October 29, 2022, our contractual commitments for operating leases totaled $270.7 million (with $48.3 million due within 12 months). See Note 9 to the Financial Statements for more information regarding lease commitments.
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 fiscal year ended January 29, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the thirty-nine weeks ended October 29, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
15
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 October 29, 2022 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 October 29, 2022 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 our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Information on Share Repurchases
The Company did not repurchase any shares in the third quarter of 2022. At October 29, 2022, $50.0 million remained available under the Company’s stock repurchase authorization.
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 | ||
3.2 | ||
3.3 | ||
10.1 | Lease Agreement, dated September 6, 2022, between Citi Trends, Inc. and CTROOK2 LLC.+ | |
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.
* indicates management contract for compensatory plan or arrangement.
† 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: December 8, 2022 | ||
By: | /s/ Heather L. Plutino | |
Name: | Heather L. Plutino | |
Title: | Chief Financial Officer | |
19