Citi Trends Inc - Quarter Report: 2020 October (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

(Mark One)

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For the quarterly period ended October 31, 2020

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OR

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Commission File Number  000-51315

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CITI TRENDS, INC.

(Exact name of registrant as specified in its charter)

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Registrant’s telephone number, including area code (912) 236-1561

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Securities registered pursuant to Section 12(b) of the Act:

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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  ☒ No ☐

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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). Yes ☒ No ☐

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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.

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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.  ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

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As of November 16, 2020 the registrant had 10,138,962 outstanding shares of common stock, $0.01 par value per share.

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CITI TRENDS, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

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Item 1. Financial Statements.

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Citi Trends, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

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Citi Trends, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

October 31, 2020

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1. Significant Accounting Policies

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Basis of Presentation

Citi Trends, Inc. (collectively referred to herein with its wholly owned subsidiary as the “Company”) is a value-priced retailer of fashion apparel, accessories and home goods for the entire family. As of October 31, 2020, the Company operated 585 stores in 33 states.

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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 February 1, 2020 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended (the “2019 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 2019 Form 10-K. Operating results for the thirty-nine weeks ended October 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year as a result of the seasonality of the business and changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the novel coronavirus (“COVID-19”) pandemic.

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Fiscal Year

The following contains references to fiscal years 2020 and 2019, which represent fiscal years ending or ended on January 30, 2021 and February 1, 2020, respectively. Fiscal 2020 and 2019 both have 52-week accounting periods.

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Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduced an expected credit loss model for the impairment of financial assets measured at amortized costs. The model replaces the incurred loss model for those assets and broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost.  The Company adopted ASU No. 2016-13 on February 2, 2020. The adoption of the new standard did not have a material impact to the Company’s consolidated financial position, results of operations or cash flows.

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2. Impact of the COVID-19 Pandemic

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In December 2019, COVID-19 emerged and spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. After closely monitoring and taking into consideration the guidance from federal, state and local governments, the Company temporarily closed all of its retail store locations and distribution centers effective March 20, 2020. Beginning April 24, 2020, the Company started to reopen stores in select states in accordance with state and local government guidelines. As of July 18, 2020, the Company safely reopened all of its stores and distribution centers.

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The temporary closure of the Company’s stores has had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity. In the first quarter of 2020, the Company took several steps to increase its cash position and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic, including (i) the drawdown of $43.7 million in principal amount under the revolving credit facility on March 20, 2020 and an amendment to the revolving credit facility to extend the term to August 2021; (ii) temporary furloughs of substantially all store and distribution center personnel and a significant portion of the corporate staff, with employee benefits for eligible employees continued through the temporary furloughs; (iii) temporary tiered salary reductions for management level corporate employees and a reduction to the cash portion of non-employee director fees; (iv) extensions of payment terms with vendors and suppliers; and (v) temporarily suspending share repurchases. Other measures taken by the Company to mitigate the impact of the pandemic that began in the first quarter of 2020 and are continuing include negotiating rent concessions with landlords and executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The provisions include technical corrections to tax depreciation methods for qualified improvement property which allow for accelerated depreciation, an employee retention tax credit and the deferral of the employer portion of social security deposits. As of October 31, 2020, the Company had deferred payment of approximately $3.5 million of amounts due for the employer portion of social security tax deposits. The Company expects to defer approximately $1.2 million of additional tax deposits during the remainder of the calendar year as allowed by the CARES Act. The total amounts of deferred payroll taxes will be paid in two equal installments during the fourth calendar quarters of 2021 and 2022. In addition, in the second quarter of 2020, the Company recognized a $1.5 million benefit related to the employee retention credit created under the CARES Act based on qualified wages paid primarily to store and distribution center associates. The retention credit is included in selling, general and administrative expenses on the condensed consolidated statements of operations for the thirty-nine weeks ended October 31, 2020.

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3. Cash and Cash Equivalents/Concentration of Credit Risk

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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.

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4. Earnings per Share

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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.

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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 thirty-nine weeks ended October 31, 2020 and November 2, 2019, there were 150,000 and 139,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution. For the thirteen weeks ended October 31, 2020 and November 2, 2019, there were 134,000 and 147,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.

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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:

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5. Impairment of Assets

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If facts and circumstances indicate that a long-lived asset or operating lease right-of-use asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Non-cash impairment expenses consisted of the following (in thousands):

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6. Revolving Credit Facility

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On October 27, 2011, the Company entered into a five-year, $50 million credit facility with Bank of America. The facility was amended on August 18, 2015, extending the maturity date to August 18, 2020. The facility was amended again on May 12, 2020, extending the maturity date to August 18, 2021. The amended facility provides a $50 million credit commitment and a $25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $75 million. 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. Borrowings under the Revolving Credit Facility bear interest (a) for Eurodollar Loans, at a rate equal to LIBOR plus either 2.25% or 2.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the Federal Funds Rate plus 0.5% or (iii) LIBOR for a period of one month plus 1.0%, plus, in each case either 1.25% or 1.5%, based in any such case on the average daily availability for borrowings under the facility. On March 20, 2020, in response to the COVID-19 pandemic, the Company borrowed $43.7 million on the credit facility to enhance its liquidity position. Such borrowings accrued interest ranging from 1.625% to 3.5%. During the second quarter of 2020, the Company repaid $2.1 million of the outstanding borrowings. On September 11, 2020, the Company repaid the full amount outstanding under the credit facility.

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7. Income Taxes

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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.

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For the thirty-nine weeks ended October 31, 2020 and November 2, 2019, the Company utilized the annual effective tax rate method to calculate income taxes.

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The effective income tax rate was 23.2% for the thirty-nine weeks ended October 31, 2020, compared to 15.6% for the thirty-nine weeks ended November 2, 2019. The difference in the effective income tax rate was due to lower federal and state tax credits this year.

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8. Commitments and Contingencies

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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, 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 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.

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9. Stock Repurchase Program and Cash Dividends

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Repurchases of Common Stock

In November 2018, the Company’s board of directors approved a program that authorized the repurchase of up to $25.0 million in shares of the Company’s common stock. During the thirty-nine weeks ended November 2, 2019, the Company repurchased 82,312 shares of its common stock at an aggregate cost of $1.6 million. This repurchase program was completed in October 2019.

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In November 2019, the Company’s board of directors approved a new program that authorized the repurchase of up to $25.0 million in shares of the Company’s common stock. During the thirty-nine weeks ended October 31, 2020, the Company repurchased 260,254 shares of its common stock under this program at an aggregate cost of $6.3 million. This repurchase program was completed in February 2020.

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On March 13, 2020, the Company’s board of directors approved another new program that authorized the repurchase of up to $30.0 million in shares of the Company’s common stock. On March 23, 2020, due to the economic uncertainty stemming from the COVID-19 pandemic, the Company temporarily suspended any repurchases. On September 14, 2020, the Company announced the reinstatement of this program. During the thirteen weeks ended October 31, 2020, the Company repurchased 375,803 shares of its common stock under this program at an aggregate cost of $9.9 million.

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Dividends

On February 18, 2020, the Company’s board of directors declared a dividend of $0.08 per common share, which was paid on March 17, 2020 to stockholders of record as of March 3, 2020. On April 28, 2020, the Company announced the suspension of future cash dividends due to the current economic uncertainty stemming from the COVID-19 pandemic. Any determination to declare and pay cash dividends for future quarters will be made by the Company’s board of directors.

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10. Revenue

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Revenue Recognition

The Company’s primary source of revenue is derived from the sale of clothing and accessories 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.

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Sales Returns

The Company allows customers to return merchandise for up to thirty days after the date of sale. Expected refunds to customers are recorded based on estimated margin using historical return information.

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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.

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In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line. The percentage of net sales related to each classification of its merchandise assortment was approximately:

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