Citi Trends Inc - Quarter Report: 2014 November (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51315
CITI TRENDS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE |
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52-2150697 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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104 Coleman Boulevard |
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Savannah, Georgia |
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31408 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code (912) 236-1561
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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o |
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Accelerated Filer x |
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Non-Accelerated Filer o (Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding as of November 24, 2014 |
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Common Stock, $.01 par value |
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15,578,367 shares |
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CITI TRENDS, INC.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Citi Trends, Inc.
Condensed Consolidated Balance Sheets
November 1, 2014 and February 1, 2014
(Unaudited)
(in thousands, except share data)
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November 1, |
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February 1, |
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|
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2014 |
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2014 |
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Assets |
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Current assets: |
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|
|
|
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Cash and cash equivalents |
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$ |
65,991 |
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$ |
58,928 |
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Short-term investment securities |
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13,988 |
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6,004 |
| ||
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Inventory |
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128,516 |
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126,501 |
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Prepaid and other current assets |
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13,038 |
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11,221 |
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Income tax receivable |
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755 |
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394 |
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Deferred tax asset |
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4,865 |
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4,711 |
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Total current assets |
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227,153 |
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207,759 |
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Property and equipment, net of accumulated depreciation of $176,883 and $161,868 as of November 1, 2014 and February 1, 2014, respectively |
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49,756 |
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56,154 |
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Long-term investment securities |
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24,038 |
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19,777 |
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Deferred tax asset |
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6,354 |
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6,932 |
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Other assets |
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651 |
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686 |
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Total assets |
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$ |
307,952 |
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$ |
291,308 |
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Liabilities and Stockholders’ Equity |
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|
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Current liabilities: |
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|
|
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Accounts payable |
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$ |
63,478 |
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$ |
60,037 |
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Accrued expenses |
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17,366 |
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14,651 |
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Accrued compensation |
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13,481 |
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9,548 |
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Layaway deposits |
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2,359 |
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515 |
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Total current liabilities |
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96,684 |
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84,751 |
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Other long-term liabilities |
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6,247 |
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7,686 |
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Total liabilities |
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102,931 |
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92,437 |
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Stockholders’ equity: |
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Common stock, $0.01 par value. Authorized 32,000,000 shares; 15,752,907 shares issued as of November 1, 2014 and 15,604,805 shares issued as of February 1, 2014; 15,587,157 shares outstanding as of November 1, 2014 and 15,439,055 outstanding as of February 1, 2014 |
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151 |
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150 |
| ||
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Paid-in-capital |
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84,671 |
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82,815 |
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Retained earnings |
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120,364 |
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116,071 |
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Treasury stock, at cost; 165,750 shares as of November 1, 2014 and February 1, 2014 |
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(165 |
) |
(165 |
) | ||
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Total stockholders’ equity |
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205,021 |
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198,871 |
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Commitments and contingencies (note 10) |
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Total liabilities and stockholders’ equity |
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$ |
307,952 |
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$ |
291,308 |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
Thirty-Nine Weeks Ended November 1, 2014 and November 2, 2013
(Unaudited)
(in thousands, except per share data)
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Thirty-Nine Weeks Ended |
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November 1, |
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November 2, |
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2014 |
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2013 |
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Net sales |
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$ |
489,697 |
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$ |
465,011 |
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|
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Cost of sales (exclusive of depreciation shown separately below) |
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(304,849 |
) |
(294,878 |
) | ||
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Selling, general and administrative expenses |
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(163,526 |
) |
(155,976 |
) | ||
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Depreciation |
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(15,306 |
) |
(16,716 |
) | ||
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Asset impairment |
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(83 |
) |
(1,237 |
) | ||
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Gain on sale of former distribution center |
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— |
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1,526 |
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Income (loss) from operations |
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5,933 |
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(2,270 |
) | ||
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Interest income |
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135 |
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213 |
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Interest expense |
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(152 |
) |
(145 |
) | ||
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Income (loss) before income tax (expense) benefit |
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5,916 |
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(2,202 |
) | ||
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Income tax (expense) benefit |
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(1,623 |
) |
1,201 |
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Net income (loss) |
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$ |
4,293 |
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$ |
(1,001 |
) |
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Basic net income (loss) per common share |
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$ |
0.29 |
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$ |
(0.07 |
) |
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Diluted net income (loss) per common share |
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$ |
0.29 |
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$ |
(0.07 |
) |
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Weighted average number of shares outstanding |
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Basic |
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14,952 |
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14,789 |
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Diluted |
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14,985 |
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14,789 |
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Citi Trends, Inc.
Condensed Consolidated Statements of Operations
Thirteen Weeks Ended November 1, 2014 and November 2, 2013
(Unaudited)
(in thousands, except per share data)
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Thirteen Weeks Ended |
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November 1, |
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November 2, |
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2014 |
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2013 |
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Net sales |
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$ |
156,694 |
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$ |
145,362 |
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|
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Cost of sales (exclusive of depreciation shown separately below) |
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(98,542 |
) |
(92,074 |
) | ||
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Selling, general and administrative expenses |
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(56,354 |
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(52,148 |
) | ||
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Depreciation |
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(5,038 |
) |
(5,454 |
) | ||
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Asset impairment |
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— |
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(556 |
) | ||
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Gain on sale of former distribution center |
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— |
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1,526 |
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Loss from operations |
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(3,240 |
) |
(3,344 |
) | ||
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Interest income |
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43 |
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78 |
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Interest expense |
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(48 |
) |
(49 |
) | ||
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Loss before income tax benefit |
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(3,245 |
) |
(3,315 |
) | ||
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Income tax benefit |
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1,038 |
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1,643 |
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Net loss |
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$ |
(2,207 |
) |
$ |
(1,672 |
) |
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Basic net loss per common share |
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$ |
(0.15 |
) |
$ |
(0.11 |
) |
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Diluted net loss per common share |
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$ |
(0.15 |
) |
$ |
(0.11 |
) |
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|
|
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|
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Weighted average number of shares outstanding |
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|
|
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Basic |
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14,982 |
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14,815 |
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Diluted |
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14,982 |
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14,815 |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Condensed Consolidated Statements of Cash Flows
Thirty-Nine Weeks Ended November 1, 2014 and November 2, 2013
(Unaudited)
(in thousands)
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Thirty-Nine Weeks Ended |
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November 1, |
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November 2, |
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2014 |
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2013 |
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Operating activities: |
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Net income (loss) |
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$ |
4,293 |
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$ |
(1,001 |
) |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation |
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15,306 |
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16,716 |
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Asset impairment |
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83 |
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1,237 |
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Gain on sale of former distribution center |
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— |
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(1,526 |
) | ||
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Loss on disposal of property and equipment |
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20 |
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1 |
| ||
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Deferred income taxes |
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424 |
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(1,002 |
) | ||
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Noncash stock-based compensation expense |
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3,043 |
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2,572 |
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Excess tax benefits from stock-based payment arrangements |
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(317 |
) |
294 |
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Changes in assets and liabilities: |
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|
|
|
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Inventory |
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(2,015 |
) |
18,270 |
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Prepaid and other current assets |
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(1,817 |
) |
(2,089 |
) | ||
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Other assets |
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35 |
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41 |
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Accounts payable |
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3,441 |
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(3,761 |
) | ||
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Accrued expenses and other long-term liabilities |
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1,354 |
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1,020 |
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Accrued compensation |
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3,933 |
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3,951 |
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Income tax receivable/payable |
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(44 |
) |
(602 |
) | ||
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Layaway deposits |
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1,844 |
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1,737 |
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Net cash provided by operating activities |
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29,583 |
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35,858 |
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Investing activities: |
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|
|
|
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Sales/redemptions of investment securities |
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7,340 |
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3,736 |
| ||
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Purchases of investment securities |
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(19,585 |
) |
(23,481 |
) | ||
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Proceeds from sale of former distribution center |
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— |
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2,941 |
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Purchases of property and equipment |
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(9,089 |
) |
(7,829 |
) | ||
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Net cash used in investing activities |
|
(21,334 |
) |
(24,633 |
) | ||
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Financing activities: |
|
|
|
|
| ||
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Excess tax benefits from stock-based payment arrangements |
|
317 |
|
(294 |
) | ||
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Proceeds from the exercise of stock options |
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— |
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44 |
| ||
|
Cash used to settle withholding taxes on the vesting of nonvested restricted stock |
|
(1,503 |
) |
(653 |
) | ||
|
Net cash used in financing activities |
|
(1,186 |
) |
(903 |
) | ||
|
Net increase in cash and cash equivalents |
|
7,063 |
|
10,322 |
| ||
|
Cash and cash equivalents: |
|
|
|
|
| ||
|
Beginning of period |
|
58,928 |
|
37,263 |
| ||
|
End of period |
|
$ |
65,991 |
|
$ |
47,585 |
|
|
|
|
|
|
|
| ||
|
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
|
Cash paid for interest |
|
$ |
102 |
|
$ |
95 |
|
|
Cash payments of income taxes |
|
$ |
1,243 |
|
$ |
404 |
|
|
Supplemental disclosures of noncash investing activities: |
|
|
|
|
| ||
|
(Decrease) increase in accrual for purchases of property and equipment |
|
$ |
(78 |
) |
$ |
109 |
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
November 1, 2014
1. Basis of Presentation
Citi Trends, Inc. and its subsidiary (the “Company”) operate as a value-priced retailer of urban fashion apparel and accessories for the entire family. As of November 1, 2014, the Company operated 512 stores in 29 states.
The condensed consolidated balance sheet as of November 1, 2014, the condensed consolidated statements of operations for the thirty-nine and thirteen week periods ended November 1, 2014 and November 2, 2013, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 1, 2014 and November 2, 2013 have been prepared by the Company without audit. The condensed consolidated balance sheet as of February 1, 2014 has been derived from the audited financial statements as of that date, but does not include all required year-end disclosures. In the opinion of management, such statements include all adjustments considered necessary to present fairly the Company’s financial position as of November 1, 2014 and February 1, 2014, and its results of operations and cash flows for all periods presented. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended February 1, 2014.
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the interim periods ended November 1, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015.
The following contains references to years 2014 and 2013, which represent fiscal years ending or ended on January 31, 2015 and February 1, 2014, respectively. Fiscal 2014 and fiscal 2013 both have 52-week accounting periods.
2. Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and 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.
The most significant estimates made by management include those used in the valuation of inventory, property and equipment, self-insurance liabilities, leases and income taxes. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
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 and stock options. 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. This method assumes that the proceeds the Company receives from the exercise of stock options are used to repurchase common shares in the market. The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of outstanding options and vesting of nonvested restricted stock. For the thirty-nine weeks ended November 1, 2014 and November 2, 2013, there were 29,000 and 43,000 stock options, respectively, and 572,000 and 619,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution. For the thirteen weeks ended November 1, 2014 and November 2, 2013, there were 27,000 and 36,000 stock options, respectively, and 600,000 and 639,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.
The following table provides a reconciliation of the 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 for the thirty-nine and thirteen week periods ended November 1, 2014 and November 2, 2013:
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|
|
Thirty-Nine Weeks Ended |
| ||
|
|
|
November 1, 2014 |
|
November 2, 2013 |
|
|
Average number of common shares outstanding |
|
14,951,546 |
|
14,789,320 |
|
|
Incremental shares from assumed exercises of stock options |
|
1,172 |
|
— |
|
|
Incremental shares from assumed vesting of nonvested restricted stock |
|
31,864 |
|
— |
|
|
Average number of common shares and common stock equivalents outstanding |
|
14,984,582 |
|
14,789,320 |
|
|
|
|
Thirteen Weeks Ended |
| ||
|
|
|
November 1, 2014 |
|
November 2, 2013 |
|
|
Average number of common shares outstanding |
|
14,981,559 |
|
14,815,107 |
|
|
Incremental shares from assumed exercises of stock options |
|
— |
|
— |
|
|
Incremental shares from assumed vesting of nonvested restricted stock |
|
— |
|
— |
|
|
Average number of common shares and common stock equivalents outstanding |
|
14,981,559 |
|
14,815,107 |
|
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 November 1, 2014, 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):
|
|
|
Amortized Cost |
|
Gross |
|
Gross |
|
Fair Market |
| ||||
|
Short-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of states and municipalities (Level 2) |
|
$ |
4,089 |
|
$ |
1 |
|
$ |
— |
|
$ |
4,090 |
|
|
Obligations of the U. S. Treasury (Level 1) |
|
7,525 |
|
9 |
|
— |
|
7,534 |
| ||||
|
Bank certificates of deposit (Level 2) |
|
2,374 |
|
— |
|
— |
|
2,374 |
| ||||
|
|
|
$ |
13,988 |
|
$ |
10 |
|
$ |
— |
|
$ |
13,998 |
|
|
Long-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of the U. S. Treasury (Level 1) |
|
$ |
8,826 |
|
$ |
21 |
|
$ |
1 |
|
$ |
8,846 |
|
|
Bank certificates of deposit (Level 2) |
|
15,212 |
|
1 |
|
— |
|
15,213 |
| ||||
|
|
|
$ |
24,038 |
|
$ |
22 |
|
$ |
1 |
|
$ |
24,059 |
|
The amortized cost and fair market value of investment securities as of November 1, 2014 by contractual maturity are as follows (in thousands):
|
|
|
Amortized |
|
Fair Market |
| ||
|
Mature in one year or less |
|
$ |
13,988 |
|
$ |
13,998 |
|
|
Mature after one year through five years |
|
24,038 |
|
24,059 |
| ||
|
|
|
$ |
38,026 |
|
$ |
38,057 |
|
As of February 1, 2014, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
|
Short-term: |
|
|
|
|
|
|
|
|
| ||||
|
Bank certificates of deposit (Level 2) |
|
$ |
6,004 |
|
$ |
— |
|
$ |
— |
|
$ |
6,004 |
|
|
Long-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of the U. S. Treasury (Level 1) |
|
$ |
15,152 |
|
$ |
19 |
|
$ |
— |
|
$ |
15,171 |
|
|
Bank certificates of deposit (Level 2) |
|
4,625 |
|
— |
|
— |
|
4,625 |
| ||||
|
|
|
$ |
19,777 |
|
$ |
19 |
|
$ |
— |
|
$ |
19,796 |
|
The amortized cost and fair market value of investment securities as of February 1, 2014 by contractual maturity were as follows (in thousands):
|
|
|
Amortized |
|
Fair |
| ||
|
Mature in one year or less |
|
$ |
6,004 |
|
$ |
6,004 |
|
|
Mature after one year through five years |
|
19,777 |
|
19,796 |
| ||
|
|
|
$ |
25,781 |
|
$ |
25,800 |
|
There were no changes among the levels in the thirty-nine weeks ended November 1, 2014.
Fair market values of Level 2 investments are determined by management with the assistance of a third party pricing service. Because quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.
6. Impairment of Long-Lived Assets
If facts and circumstances indicate that a long-lived 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. Non-cash impairment expense related to leasehold improvements and fixtures and equipment at underperforming stores totaled $0.1 million and $0.0 million, respectively, in the thirty-nine and thirteen week periods ended November 1, 2014. Impairment expense was $1.2 million and $0.6 million, respectively, in the thirty-nine and thirteen week periods ended November 2, 2013.
7. Revolving Line of Credit
On October 27, 2011, the Company entered into a five-year, $50 million credit facility with Bank of America to replace its prior $20 million credit facility. The facility includes a $25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $75 million. Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus 0.5%, (ii) the Federal Funds Rate plus 1.0%, or (iii) LIBOR plus 1.5%. The facility is secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings under either the existing or prior facility.
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.
ASC 740 requires companies to calculate income taxes by applying their estimated full-year tax rate in each interim period unless the estimated full-year tax rate is not reliably predictable. For the thirty-nine weeks ended November 1, 2014, the Company utilized this annual effective tax rate method to calculate income taxes; however, for the thirty-nine weeks ended November 2, 2013, the Company used the discrete effective tax rate method, as allowed by ASC 740-270, “Income Taxes - Interim Reporting”. Under the discrete method, the Company determines its tax expense based upon actual results as if the interim period were an annual period. The Company concluded that the use of the discrete method for the thirty-nine weeks ended November 2, 2013 was more appropriate than the annual effective tax rate method, because the annual rate method would not be reliable due to its sensitivity to minimal changes in forecasted annual pre-tax earnings.
Comparisons of the effective tax rates for the thirty-nine week periods ended November 1, 2014 and November 2, 2013 are affected by Work Opportunity Tax Credits (WOTC) being available to the Company in 2013, but not 2014. Federal income tax regulations providing for WOTC expired on December 31, 2013 and have not been renewed. The effective income tax expense rate was 27.4% in the thirty-nine weeks ended November 1, 2014, while the effective income tax benefit rate was 54.5% in the thirty-nine weeks ended November 2, 2013, with last year’s rate reflecting the benefit of WOTC.
Similarly, the comparison of the effective tax rates for the thirteen week periods ended November 1, 2014 and November 2, 2013 are affected by WOTC availability. Since both quarters had pretax losses and income tax benefits, the effective benefit rate for the third quarter of 2014 (32.0%) was lower than the third quarter of 2013 (49.6%) due to not having WOTC this year.
9. Other Long-Term Liabilities
The components of other long-term liabilities as of November 1, 2014 and February 1, 2014 are as follows (in thousands):
|
|
|
November 1, |
|
February 1, |
| ||
|
Deferred rent |
|
$ |
1,429 |
|
$ |
2,051 |
|
|
Tenant improvement allowances |
|
2,973 |
|
3,823 |
| ||
|
Other |
|
1,845 |
|
1,812 |
| ||
|
|
|
$ |
6,247 |
|
$ |
7,686 |
|
10. Commitments and Contingencies
On August 12, 2011, the Company received a letter of determination from the U.S. Equal Employment Opportunity Commission (the “EEOC”) commencing a conciliation process regarding alleged discrimination against males by the Company in its hiring and promotion practices during the years 2004 through 2006. In its letter of determination, the EEOC sought recovery in the amount of $0.2 million on behalf of a former male employee and in the additional amount of $3.8 million in a settlement fund for a class of unidentified males who sought or considered seeking manager or assistant manager positions in the Company’s stores. The EEOC also seeks certain undertakings by the Company with regard to its employment policies and procedures and a reporting obligation to the EEOC with respect to the Company’s compliance with these undertakings.
The Company has not received full documentation or information from the EEOC in support of its letter of determination, but has undertaken its own internal analysis of the EEOC’s claims and defenses to such claims and has had discussions with the EEOC in that regard. Following discussions with the EEOC regarding possible settlement, the EEOC proposed a settlement amount to be paid by the Company of $2.5 million, with any unclaimed funds following efforts to identify and compensate claimants to be directed to one or more charities. In the interest of reaching a satisfactory conciliation agreement with the EEOC, the Company proposed a total economic settlement offer of $1.0 million to cover all claims and the expenses of administering and complying with the settlement (excluding professional fees), with no reversion of unclaimed funds back to the Company. The Company continues to await the EEOC’s response to the Company’s most recent proposal regarding settlement. The Company is also evaluating other aspects of the conciliation process established by the EEOC.
On February 24, 2012, a suit was filed in the United States District Court for the Northern District of Alabama, Middle Division, by certain individuals as a purported collective action on behalf of current and former employees of the Company holding store managerial positions. The plaintiffs alleged that store managers have been improperly classified as exempt from the obligation to pay overtime in violation of the Fair Labor Standards Act (FLSA). Although the Company continues to believe that its store managers are and have been properly classified as exempt employees under FLSA, the parties agreed to settle this case. The court approved the settlement in October 2014 with no finding of wrongdoing by the Company. Selling, general and administrative expenses include a charge totaling $1.7 million in the thirteen weeks ended November 1, 2014 for the amount of the settlement and related costs which are expected to be paid in the fourth quarter of 2014.
The Company from time to time is also involved in various other legal proceedings incidental to the conduct of its business, including claims by customers, 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, it 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 other 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.
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, 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 words. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.
The factors that may result in actual results differing from such forward-looking information include, but are not limited to: transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; changes in consumer spending on apparel; changes in product mix; interruptions in suppliers’ businesses; a deterioration in general economic conditions caused by acts of war or terrorism or other factors; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening and operating new stores; delays associated with building, opening or expanding new or existing distribution centers; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K.
Overview
We are a value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. We operated 512 stores in both urban and rural markets in 29 states as of November 1, 2014.
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 2013 and fiscal 2014 are not considered comparable stores in fiscal 2014. Relocated and expanded stores are included in the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.
In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts. All of the statistics discussed above are critical components of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, as adjusted for non-cash asset impairment expense and infrequent significant items, such as the gain on sale of our former distribution center in fiscal 2013), which are considered our most important operating statistics. Although non-GAAP measures such as EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense. Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under U.S. GAAP and should not be used as a singular measure of operating performance or as a substitute for U.S. GAAP results.
Provided below is a reconciliation of net income (loss) to EBITDA and to Adjusted EBITDA for the thirty-nine and thirteen week periods ended November 1, 2014 and November 2, 2013:
|
|
|
Thirty-Nine Weeks Ended |
|
Thirteen Weeks Ended |
| ||||||||
|
|
|
November 1, 2014 |
|
November 2, 2013 |
|
November 1, 2014 |
|
November 2, 2013 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net income (loss) |
|
$ |
4,293 |
|
$ |
(1,001 |
) |
$ |
(2,207 |
) |
$ |
(1,672 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Plus: |
|
|
|
|
|
|
|
|
| ||||
|
Interest expense |
|
152 |
|
145 |
|
48 |
|
49 |
| ||||
|
Income tax expense |
|
1,623 |
|
— |
|
— |
|
— |
| ||||
|
Depreciation |
|
15,306 |
|
16,716 |
|
5,038 |
|
5,454 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Less: |
|
|
|
|
|
|
|
|
| ||||
|
Interest income |
|
(135 |
) |
(213 |
) |
(43 |
) |
(78 |
) | ||||
|
Income tax benefit |
|
— |
|
(1,201 |
) |
(1,038 |
) |
(1,643 |
) | ||||
|
EBITDA |
|
21,239 |
|
14,446 |
|
1,798 |
|
2,110 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Asset impairment |
|
83 |
|
1,237 |
|
— |
|
556 |
| ||||
|
Gain on sale of former distribution center |
|
— |
|
(1,526 |
) |
— |
|
(1,526 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Adjusted EBITDA |
|
$ |
21,322 |
|
$ |
14,157 |
|
$ |
1,798 |
|
$ |
1,140 |
|
Accounting Periods
The following discussion contains references to fiscal years 2014 and 2013, which represent fiscal years ending or ended on January 31, 2015 and February 1, 2014, respectively. Fiscal 2014 and fiscal 2013 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto that are contained herein.
Results of Operations
The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. The nature of the Company’s business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of the Company’s business may affect comparisons between periods.
Thirty-Nine Weeks Ended November 1, 2014 and November 2, 2013
Net Sales. Net sales increased $24.7 million, or 5.3%, to $489.7 million in the thirty-nine weeks ended November 1, 2014 from $465.0 million in the thirty-nine weeks ended November 2, 2013, consisting of a 5.3% increase in comparable store sales and the opening of eight new stores since last year’s third quarter, partially offset by the closing of nine stores in 2013 and one store in 2014. The increase in comparable store sales was reflected in an increase in the number of customer transactions by more than 7% and a 1% increase in the average number of items per transaction, partially offset by a 3% decrease in the average unit sale. Comparable store sales changes by major merchandise class were as follows in the first thirty-nine weeks of 2014: Accessories +21%; Home +20%; Men’s 0%; Children’s 0%; and Ladies’ -3%.
The 5.3% comparable store sales increase in the 503 comparable stores totaled $24.4 million, while store closing and opening activity resulted in a net increase of $0.3 million in sales.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $9.9 million, or 3.4%, to $304.8 million in the thirty-nine weeks ended November 1, 2014 from $294.9 million in the thirty-nine weeks ended November 2, 2013 due to the effect of the increase in sales discussed above, partially offset by an improvement in cost of sales as a percentage of sales to 62.3% in the thirty-nine weeks ended November 1, 2014 from 63.4% in the thirty-nine weeks ended November 2, 2013. The decrease in cost of sales as a percentage of sales was due to an increase in the core merchandise margin (initial mark-up, net of markdowns) as the result of improved sales and the resulting need for fewer merchandise markdowns in this year’s first thirty-nine weeks. A more conservative inventory position as we entered 2014 also contributed to the reduction in merchandise markdowns.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $7.5 million, or 4.8%, to $163.5 million in the first thirty-nine weeks of 2014 from $156.0 million in the first thirty-nine weeks of 2013 due primarily to (1) normal inflationary pressure
on expenses such as rent, payroll, utilities and employee medical claims, (2) higher costs to handle the increasing sales, (3) a $1.8 million increase in incentive compensation expense resulting from the improvement in operating results, and (4) a $1.7 million charge related to a legal settlement. As a percentage of sales, selling, general and administrative expenses decreased to 33.4% in the first thirty-nine weeks of fiscal 2014 from 33.5% in the first thirty-nine weeks of fiscal 2013, due primarily to the leveraging effect associated with the 5.3% increase in comparable store sales discussed above.
Depreciation. Depreciation expense decreased $1.4 million, or 8.4%, to $15.3 million in the thirty-nine weeks ended November 1, 2014 from $16.7 million in the thirty-nine weeks ended November 2, 2013 due to the slowing of our store opening pace in relation to previous years.
Asset Impairment. Impairment charges for property and equipment at certain underperforming stores decreased $1.1 million to $0.1 million in the first thirty-nine weeks of 2014 from $1.2 million in the first thirty-nine weeks of 2013 due to the improvement in the Company’s operating results.
Gain on Sale of Former Distribution Center. During last year’s third quarter, we sold a previously closed distribution center in Savannah, Georgia for $2.9 million, which resulted in a gain of $1.5 million.
Income Tax (Expense) Benefit. Income tax expense increased $2.8 million to $1.6 million in this year’s first thirty-nine weeks from an income tax benefit of $1.2 million in the first thirty-nine weeks of 2013 due to the improvement from a pretax loss last year to pretax income this year, partially offset by a decrease in the effective income tax rate to 27.4% from 54.5%. The comparison of the effective tax rate between the two years is affected by Work Opportunity Tax Credits (WOTC) being available in 2013, but not 2014. Federal income tax regulations providing for WOTC expired on December 31, 2013 and have not been renewed. As a result, the higher effective tax rate in the thirty-nine weeks ended November 2, 2013 included such tax credits as part of that period’s income tax benefit.
Net Income. Net income increased to $4.3 million in the first thirty-nine weeks of 2014 from a net loss of $1.0 million in the first thirty-nine weeks of 2013 due to the factors discussed above.
Thirteen Weeks Ended November 1, 2014 and November 2, 2013
Net Sales. Net sales increased $11.3 million, or 7.8%, to $156.7 million in the third quarter of 2014 from $145.4 million in the third quarter of 2013, consisting of a 6.7% increase in comparable store sales and the opening of eight new stores since last year’s third quarter, partially offset by the closing of two stores during or after the third quarter of 2013. The increase in comparable store sales was reflected in an increase of more than 9% in the number of customer transactions and a 1% increase in the average number of items per transaction, partially offset by an average unit sale that was almost 4% lower. Comparable store sales changes by major merchandise class were as follows in the third quarter of 2014: Accessories +18%; Home +11%; Ladies’ +4%; Men’s +2%; and Children’s 0%.
The 6.7% comparable store sales increase in the 503 comparable stores totaled $9.7 million, while store closing and opening activity resulted in a net increase of $1.6 million in sales.
Cost of sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $6.4 million, or 7.0%, to $98.5 million in the third quarter of 2014 from $92.1 million in last year’s third quarter due to the effect of the increase in sales discussed above, partially offset by an improvement in cost of sales as a percentage of sales to 62.9% in the third quarter of 2014 from 63.3% in the third quarter of 2013. The decrease in cost of sales as a percentage of sales was due to an improvement of 80 basis points in the core merchandise margin (initial mark-up, net of markdowns) as the result of improved sales and the resulting need for fewer merchandise markdowns in this year’s third quarter. A 40 basis points increase in freight expense partially offset the improvement in the core merchandise margin.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $4.3 million, or 8.1%, to $56.4 million in the third quarter of 2014 from $52.1 million in last year’s third quarter due primarily to (1) a $1.7 million charge related to a legal settlement, (2) normal inflationary pressure on expenses such as rent, payroll, utilities and employee medical claims, (3) higher costs to handle the increasing sales, and (4) a $0.8 million increase in incentive compensation expense resulting from the improvement in operating results. In looking forward to the fourth quarter, while incentive compensation expense is not expected to be significantly different than it was in the earlier quarters of 2014, it could be approximately $2.5 million higher than in last year’s fourth quarter because of (1) the improvement in 2014 operating results and (2) because such expense was negative in last year’s fourth quarter when we had an unexpected sales decline and had to reverse a portion of the expense accrued earlier in 2013. Ultimately, we expect that selling, general and administrative expenses in this year’s fourth quarter will fall in a range of approximately $55.0 million to $56.0 million, up from $50.2 million in last year’s fourth quarter. In addition to the expected increase in incentive compensation expense, other factors likely to contribute to the overall expense increase include normal inflation, an increase in store count and the incremental impact on expenses from an expected fourth quarter comparable store sales increase this year, against a decrease in the same quarter last year. As a percentage of sales, selling, general and administrative expenses increased to 36.0% in the third quarter of 2014 from 35.9% in the third quarter of 2013 due primarily to the effect of the legal settlement, mostly offset by the leveraging effect associated with the 6.7% increase in comparable store sales.
Depreciation. Depreciation expense decreased $0.5 million, or 7.6%, to $5.0 million in the third quarter of 2014 from $5.5 million in the third quarter of 2013, due to the slowing of our store opening pace in relation to previous years.
Asset Impairment. Impairment charges for property and equipment at certain underperforming stores decreased $0.6 million to $0.0 million in the third quarter of 2014 from $0.6 million in the third quarter of 2013 due to the improvement in the Company’s operating results.
Gain on Sale of Former Distribution Center. During last year’s third quarter, we sold a previously closed distribution center in Savannah, Georgia for $2.9 million, which resulted in a gain of $1.5 million.
Income Tax Benefit. Income tax benefit decreased $0.6 million, or 36.8%, to $1.0 million in this year’s third quarter from $1.6 million in the third quarter of 2013 due primarily to a decrease in the effective income tax rate to 32.0% from 49.6%. The income tax benefit rate for the third quarter of 2014 was lower than the rate for last year’s third quarter due to the availability of WOTC in 2013, but not 2014. Federal income tax regulations providing for WOTC expired on December 31, 2013 and have not been renewed.
Net Loss. Net loss increased to $2.2 million in the third quarter of 2014 from $1.7 million in the third quarter of 2013 due to the factors discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, opening of new stores, remodeling of our existing stores and the improvement of our information systems. In recent years, we have met these cash requirements using cash flow from operations and short-term trade credit. We expect to be able to meet future cash requirements with cash flow from operations, short-term trade credit, existing balances of cash and investment securities and, if necessary, borrowings under our revolving credit facility.
Current Financial Condition. As of November 1, 2014, we had total cash and cash equivalents of $66.0 million compared to $58.9 million as of February 1, 2014. Additionally, we had $14.0 million and $24.0 million of short-term and long-term investment securities, respectively, as of November 1, 2014, compared to $6.0 million and $19.8 million, respectively, as of February 1, 2014. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 41.7% of our total assets as of November 1, 2014. Management’s ability to manage our inventory can have a significant impact on our cash flows from operations during a given interim period or fiscal year. In addition, inventory purchases can be seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise.
Cash Flows From Operating Activities. Net cash provided by operating activities was $29.6 million in the thirty-nine weeks ended November 1, 2014 compared to $35.9 million in the same period of 2013. Sources of cash provided during the first thirty-nine weeks of 2014 included net income adjusted for noncash expenses such as depreciation, asset impairment, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $23.2 million (compared to $17.0 million in the thirty-nine weeks ended November 2, 2013). Other significant sources of cash in the thirty-nine weeks ended November 1, 2014 included (1) a $3.9 million increase in accrued compensation (compared to a $4.0 million increase in the thirty-nine weeks ended November 2, 2013) due to (a) our balance sheet as of the end of the third quarter of 2014 including accrued payroll for two weeks, while our 2013 year-end balance sheet included accrued payroll for only one week due to the timing of our bi-weekly payroll, and (b) accrued incentive compensation increasing due to improved operating results in 2014; and (2) a $3.4 million increase in accounts payable (compared to a $3.8 million decrease in the thirty-nine weeks ended November 2, 2013) due to the increase in inventory and an improvement in inventory turnover associated with the increase in comparable store sales.
Significant uses of cash during the thirty-nine weeks ended November 1, 2014 consisted of a $2.0 million increase in inventory (compared to an $18.3 million decrease in the thirty-nine weeks ended November 2, 2013) due to having seven more stores at the end of this year’s third quarter in relation to the end of 2013 and in order to support the increase in sales.
Cash Flows From Investing Activities. Cash used in investing activities was $21.3 million in the thirty-nine weeks ended November 1, 2014 compared to $24.6 million in the thirty-nine weeks ended November 2, 2013. Cash used for purchases of property and equipment totaled $9.1 million and $7.8 million in the first thirty-nine weeks of 2014 and 2013, respectively. Purchases of investment securities, net of sales/redemptions, used cash of $12.2 million and $19.7 million in the first thirty-nine weeks of 2014 and 2013, respectively, while proceeds from the sale of our former distribution center provided cash of $2.9 million in the thirty-nine weeks ended November 2, 2013.
Cash Flows From Financing Activities. Cash flows from financing activities were $1.2 million and $0.9 million in the first thirty-nine weeks of 2014 and 2013, respectively.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $66.0 million as of November 1, 2014); (ii) short-term and long-term investment securities (which equaled $14.0 million and $24.0 million, respectively, as of November 1, 2014); (iii) short-term trade credit; (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) a $50 million revolving credit facility (under which the Company has no borrowings outstanding). Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors. Historically, our principal liquidity requirements have been for working capital and capital expenditure needs.
We believe that our existing sources of liquidity will be sufficient to fund our operations and anticipated capital expenditures for at least the next 12 months.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.
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 November 1, 2014 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 1, 2014.
Item 4. Controls and Procedures.
We have carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 1, 2014 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended November 1, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On August 12, 2011, we received a letter of determination from the U.S. Equal Employment Opportunity Commission (the “EEOC”) commencing a conciliation process regarding alleged discrimination against males by us in our hiring and promotion practices during the years 2004 through 2006. In its letter of determination, the EEOC sought recovery in the amount of $0.2 million on behalf of a former male employee and in the additional amount of $3.8 million in a settlement fund for a class of unidentified males who sought or considered seeking manager or assistant manager positions in our stores. The EEOC also seeks certain undertakings by us with regard to our employment policies and procedures and a reporting obligation to the EEOC with respect to our compliance with these undertakings.
We have not received full documentation or information from the EEOC in support of its letter of determination, but have undertaken our own internal analysis of the EEOC’s claims and defenses to such claims and have had discussions with the EEOC in that regard. Following discussions with the EEOC regarding possible settlement, the EEOC proposed a settlement amount to be paid by us of $2.5 million, with any unclaimed funds following efforts to identify and compensate claimants to be directed to one or more charities. In the interest of reaching a satisfactory conciliation agreement with the EEOC, we proposed a total economic settlement offer of $1.0 million to cover all claims and the expenses of administering and complying with the settlement (excluding professional fees), with no reversion of unclaimed funds back to us. We continue to await the EEOC’s response to our most recent proposal regarding settlement. We are also evaluating other aspects of the conciliation process established by the EEOC.
On February 24, 2012, a suit was filed in the United States District Court for the Northern District of Alabama, Middle Division, by certain individuals as a purported collective action on behalf of current and former employees of the Company holding store managerial positions. The plaintiffs alleged that store managers have been improperly classified as exempt from the obligation to pay overtime in violation of the Fair Labor Standards Act (FLSA). Although we continue to believe that our store managers are and have been properly classified as exempt employees under FLSA, the parties agreed to settle this case. The court approved the settlement in October 2014 with no finding of wrongdoing by the Company. Selling, general and administrative expenses include a charge totaling $1.7 million in the thirteen weeks ended November 1, 2014 for the amount of the settlement and related costs which are expected to be paid in the fourth quarter of 2014.
We are from time to time also involved in various other legal proceedings incidental to the conduct of our business, including claims by customers, 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 other 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.
There are no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
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31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* † |
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101 |
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The following financial information from Citi Trends, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 1, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets as of November 1, 2014 and February 1, 2014, (ii) the Condensed Consolidated Statements of Operations for the thirty-nine and thirteen-week periods ended November 1, 2014 and November 2, 2013, (iii) the Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended November 1, 2014 and November 2, 2013, and (iv) Notes to the Condensed Consolidated Financial Statements.* |
* 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.
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 his capacity as the Registrant’s Chief Financial Officer (Principal Financial Officer).
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CITI TRENDS, INC. | |
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Date: December 8, 2014 |
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By: |
/s/ Bruce D. Smith |
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Name: |
Bruce D. Smith |
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Title: |
Executive Vice President, Chief Financial Officer and Secretary |