Citi Trends Inc - Quarter Report: 2022 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2022



☐	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)



Delaware		52-2150697
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

104 Coleman Boulevard
Savannah, Georgia		31408
(Address of principal executive offices)		(Zip Code)

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

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


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	CTRN	NASDAQ Stock Market

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 ☐

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 ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ☐ Accelerated Filer ☒	Non-Accelerated Filer ☐

Smaller Reporting Company ☐	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 15, 2022 the registrant had 8,379,412 outstanding shares of common stock, $0.01 par value per share.

Table of Contents

CITI TRENDS, INC.

FORM 10-Q

TABLE OF CONTENTS


		PAGE
		NUMBER
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Cash Flows	5

	Condensed Consolidated Statements of Stockholders’ Equity	6

	Notes to the Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4	Controls and Procedures	16

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	17

Item 1A	Risk Factors	17

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3	Defaults Upon Senior Securities	17

Item 4	Mine Safety Disclosures	17

Item 5	Other Information	17

Item 6	Exhibits	18

	SIGNATURES	19

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Citi Trends, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)


	July 30,		January 29,
	2022		2022
Assets
Current assets:
Cash and cash equivalents	$	27,914	$	49,788
Inventory		142,101		123,835
Prepaid and other current assets		17,102		14,997
Income tax receivable		626		3,987
Total current assets		187,743		192,607
Property and equipment, net of accumulated depreciation of $273,941 and $283,445 as of July 30, 2022 and January 29, 2022, respectively		72,450		75,282
Operating lease right of use assets		237,556		201,827
Deferred income taxes		2,538		2,992
Other assets		1,252		1,317
Total assets	$	501,539	$	474,025

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	82,956	$	98,879
Operating lease liabilities		47,547		47,803
Accrued expenses		20,792		14,532
Accrued compensation		13,005		25,896
Layaway deposits		1,205		364
Total current liabilities		165,505		187,474
Noncurrent operating lease liabilities		200,220		168,304
Other long-term liabilities		2,204		2,104
Total liabilities		367,929		357,882

Stockholders’ equity:
Common stock, $0.01 par value. Authorized 32,000,000 shares; 16,183,425 shares issued as of July 30, 2022 and 16,090,365 shares issued as of January 29, 2022; 8,379,412 shares outstanding as of July 30, 2022 and 8,617,210 shares outstanding as of January 29, 2022		159		159
Paid in capital		100,837		101,037
Retained earnings		299,825		272,158
Treasury stock, at cost; 7,804,013 shares held as of July 30, 2022 and 7,473,155 shares held as of January 29, 2022		(267,211)		(257,211)
Total stockholders’ equity		133,610		116,143

Commitments and contingencies (Note 7)
Total liabilities and stockholders’ equity	$	501,539	$	474,025

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)


	Thirteen Weeks Ended
	July 30,		July 31,
	2022		2021
Net sales	$	185,012	$	237,281

Cost of sales (exclusive of depreciation)		(114,589)		(140,542)
Selling, general and administrative expenses		(68,481)		(75,383)
Depreciation		(5,272)		(4,994)
(Loss) income from operations		(3,330)		16,362
Interest income		2		2
Interest expense		(78)		(77)
(Loss) income before income taxes		(3,406)		16,287
Income tax benefit (provision)		870		(3,797)
Net (loss) income	$	(2,536)	$	12,490

Basic net (loss) income per common share	$	(0.31)	$	1.37
Diluted net (loss) income per common share	$	(0.31)	$	1.36

Weighted average number of shares outstanding
Basic		8,165		9,088
Diluted		8,165		9,178

Citi Trends, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)


	Twenty-Six Weeks Ended
	July 30,		July 31,
	2022		2021
Net sales	$	393,227	$	522,662

Cost of sales (exclusive of depreciation)		(241,600)		(304,333)
Selling, general and administrative expenses		(139,507)		(153,275)
Depreciation		(10,717)		(9,691)
Gain on sale-leaseback		34,920		—
Income from operations		36,323		55,363
Interest income		2		6
Interest expense		(154)		(124)
Income before income taxes		36,171		55,245
Income tax provision		(8,504)		(11,858)
Net income	$	27,667	$	43,387

Basic net income per common share	$	3.34	$	4.68
Diluted net income per common share	$	3.34	$	4.63

Weighted average number of shares outstanding
Basic		8,284		9,269
Diluted		8,284		9,374

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)


	Twenty-Six Weeks Ended
	July 30,		July 31,
	2022		2021
Operating activities:
Net income	$	27,667	$	43,387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		10,717		9,691
Non-cash operating lease costs		25,302		24,582
Loss on disposal of property and equipment		10		76
Deferred income taxes		454		2,109
Insurance proceeds related to operating activities		1,575		454
Non-cash stock-based compensation expense		1,939		1,901
Gain on sale-leaseback		(34,920)		—
Changes in assets and liabilities:
Inventory		(19,480)		(9,733)
Prepaid and other current assets		(2,466)		(1,786)
Other assets		65		(375)
Accounts payable		(16,268)		14,260
Accrued expenses and other long-term liabilities		(24,086)		(22,578)
Accrued compensation		(12,891)		(4,834)
Income tax receivable/payable		3,361		(981)
Layaway deposits		841		633
Net cash (used in) provided by operating activities		(38,180)		56,806
Investing activities:
Purchases of investment securities		—		(24,603)
Purchases of property and equipment		(18,438)		(12,003)
Insurance proceeds related to investing activities		1,370		192
Proceeds from sale-leaseback		45,513		—
Net cash provided by (used in) investing activities		28,445		(36,414)
Financing activities:
Payments of debt issuance costs		—		(270)
Cash used to settle withholding taxes on the vesting of nonvested restricted stock		(2,139)		(2,171)
Repurchases of common stock		(10,000)		(64,377)
Net cash used in financing activities		(12,139)		(66,818)
Net decrease in cash and cash equivalents		(21,874)		(46,426)
Cash and cash equivalents:
Beginning of period		49,788		123,177
End of period	$	27,914	$	76,751

Supplemental disclosures of cash flow information:
Cash paid for interest	$	79	$	70
Cash payments of income taxes	$	4,689	$	10,730
Supplemental disclosures of non-cash investing activities:
Accrual for purchases of property and equipment	$	1,419	$	966

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)


	Common Stock			Paid in		Retained		Treasury Stock
	Shares	Amount		Capital		Earnings		Shares	Amount		Total
Balances — January 29, 2022	16,090,365	$	159	$	101,037	$	272,158	7,473,155	$	(257,211)	$	116,143
Vesting of nonvested shares	—		1		—		—	—		—		1
Issuance of nonvested shares	109,157		—		—		—	—		—		—
Issuance of common stock under incentive plan, net of shares withheld for taxes	15,977		—		—		—	—		—		—
Forfeiture of nonvested shares	(15,761)		—		—		—	—		—		—
Stock-based compensation expense	—		—		2,277		—	—		—		2,277
Net share settlement of nonvested shares	(40,345)		(1)		(2,127)		—	—		—		(2,128)
Repurchase of common stock	—		—		—		—	170,436		(5,317)		(5,317)
Net income	—		—		—		30,203	—		—		30,203
Balances — April 30, 2022	16,159,393	$	159	$	101,187	$	302,361	7,643,591	$	(262,528)	$	141,179
Issuance of nonvested shares under incentive plan	29,938		—		—		—	—		—		—
Forfeiture of nonvested shares	(5,379)		—		—		—	—		—		—
Stock-based compensation expense	—		—		(338)		—	—		—		(338)
Net share settlement of nonvested shares	(527)		—		(12)		—	—		—		(12)
Repurchase of common stock	—		—		—		—	160,422		(4,683)		(4,683)
Net loss	—		—		—		(2,536)	—		—		(2,536)
Balances — July 30, 2022	16,183,425	$	159	$	100,837	$	299,825	7,804,013	$	(267,211)	$	133,610


	Common Stock			Paid in		Retained		Treasury Stock
	Shares	Amount		Capital		Earnings		Shares	Amount		Total
Balances — January 30, 2021	15,981,394	$	158	$	95,484	$	209,918	6,104,493	$	(141,926)	$	163,634
Issuance of nonvested shares under incentive plan	17,278		—		—		—	—		—		—
Forfeiture of nonvested shares	(3,005)		—		—		—	—		—		—
Stock-based compensation expense	—		—		1,087		—	—		—		1,087
Net share settlement of nonvested shares	(22,666)		—		(2,155)		—	—		—		(2,155)
Repurchase of common stock	—		—		—		—	537,496		(45,470)		(45,470)
Net income	—		—		—		30,897	—		—		30,897
Balances — May 1, 2021	15,973,001	$	158	$	94,416	$	240,815	6,641,989	$	(187,396)	$	147,993
Issuance of nonvested shares under incentive plan	4,680		—		—		—	—		—		—
Forfeiture of nonvested shares	(6,161)		—		—			—		—		—
Stock-based compensation expense	—		—		814		—	—		—		814
Net share settlement of nonvested shares	(171)		—		(16)		—	—		—		(16)
Repurchase of common stock	—		—		—		—	214,761		(18,907)		(18,907)
Net income	—		—		—		12,490	—		—		12,490
Balances — July 31, 2021	15,971,349	$	158	$	95,214	$	253,305	6,856,750	$	(206,303)	$	142,374

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)

July 30, 2022

1. Significant Accounting Policies

Basis of Presentation

Citi Trends, Inc. and its subsidiary (the “Company”) is a growing specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families. As of July 30, 2022, the Company operated 617 stores in urban, suburban and rural markets in 33 states.

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The condensed consolidated balance sheet as of January 29, 2022 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the “2021 Form 10-K”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2021 Form 10-K. Operating results for the second quarter of 2022 are not necessarily indicative of the results that may be expected for the fiscal year as a result of the seasonality of the business, the current economic uncertainty and the extent to which future business will be impacted by the COVID-19 pandemic.

Fiscal Year

The following contains references to fiscal years 2022 and 2021, which represent fiscal years ending or ended on January 28, 2023 and January 29, 2022, respectively. Fiscal 2022 and 2021 both have 52-week accounting periods.

2. COVID-19 Pandemic

The COVID-19 pandemic continues to evolve and has caused significant volatility and disruptions in our business, particularly during fiscal 2021 and 2020. Despite the recent improvement in trends, we cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

3. Cash and Cash Equivalents/Concentration of Credit Risk

For purposes of the condensed consolidated balance sheets and condensed consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds. The Company maintains cash accounts that exceed federally insured limits.

4. Earnings per Share

Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock. During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding because the inclusion of common stock equivalents would be antidilutive.

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 second quarter of 2022 and 2021, there were 236,000 and 39,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution. For the twenty-six weeks ended July 30, 2022 and July 31, 2021, there were 229,000 and 38,000 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:


	Thirteen Weeks Ended
	July 30, 2022	July 31, 2021
Weighted average number of common shares outstanding	8,164,765	9,087,709
Incremental shares from assumed vesting of nonvested restricted stock	—	90,263
Weighted average number of common shares and common stock equivalents outstanding	8,164,765	9,177,972


	Twenty-Six Weeks Ended
	July 30, 2022	July 31, 2021
Weighted average number of common shares outstanding	8,283,522	9,268,751
Incremental shares from assumed vesting of nonvested restricted stock	—	105,653
Weighted average number of common shares and common stock equivalents outstanding	8,283,522	9,374,404

5. Revolving Credit Facility

In October 2011, the Company entered into a five-year, $50 million credit facility with Bank of America. The facility was amended in August 2015 and May 2020 to extend the maturity dates. The facility was further amended on April 15, 2021 to modify terms and extend the maturity date to April 15, 2026. The amended facility provides a $75 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 $100 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 0.20% and permits the payment of cash dividends subject to certain limitations. Borrowings under the credit facility bear interest (a) for Eurodollar Loans, at a rate equal to the Eurodollar Rate plus either 1.25%, 1.50% or 1.75%, 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) the Eurodollar Rate plus 1.0%, plus, in each case either 0.25%, 0.50% or 0.75%, based in any such case on the average daily availability for borrowings under the facility.

As of July 30, 2022, the Company had no borrowings under the credit facility and $0.6 million of letters of credit outstanding.

6. Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. If there is a change in tax rates, the Company would recognize the impact of such change in income in the period that includes the enactment date.

For the twenty-six weeks ended July 30, 2022 and July 31, 2021, the Company utilized the annual effective tax rate method to calculate income taxes. The effective income tax rate was 23.5% for the first half of 2022, compared to 21.5% for the first half of 2021. The difference in the tax rate was due to a favorable tax impact of restricted stock vestings in the prior year.

7. Commitments and Contingencies

The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, landlords, employees or former employees. Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, the Company establishes appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.

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8. Stock Repurchases

Repurchases of Common Stock

The Company periodically repurchases shares of its common stock under board-authorized repurchase programs. Such repurchases may be made in the open market, through block trades or through other negotiated transactions. Share repurchases were as follows (in thousands, except per share data):


	Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 30, 2022		July 31, 2021		July 30, 2022		July 31, 2021
Total number of shares purchased		160		215		331		752
Average price paid per share (including commissions)	$	29.17	$	88.04	$	30.22	$	85.58
Total investment	$	4,683	$	18,907	$	10,000	$	64,377

On March 15, 2022, the Company announced that its board of directors approved an additional $30 million stock repurchase program. At July 30, 2022, $50.0 million remained available under the Company’s stock repurchase authorization.

9. Revenue

Revenue Recognition

The Company’s primary source of revenue is derived from the sale of clothing, accessories and home trends to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise. Sales taxes collected by the Company from customers are excluded from revenue. Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation. The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise.

Sales Returns

The Company allows customers to return merchandise for up to 30 days after the date of sale. Expected refunds to customers are recorded based on estimated margin using historical return information.

Disaggregation of Revenue

The Company’s retail operations represent a single operating segment based on the way the Company manages its business. Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s retail stores sell similar products, use similar processes to sell those products and sell their products to similar classes of customers.

In the following table, the Company’s revenue from sales to customers is disaggregated by “CITI” or major merchandise category. The percentage of net sales for each CITI with the merchandise assortment was approximately:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 30,		July 31,		July 30,		July 31,
	2022		2021		2022		2021
Ladies	27	%	28	%	28	%	29	%
Kids	21	%	20	%	21	%	20	%
Accessories & Beauty	18	%	18	%	18	%	17	%
Mens	18	%	18	%	17	%	18	%
Home & Lifestyle	8	%	8	%	8	%	8	%
Footwear	8	%	8	%	8	%	8	%

10. Leases

The Company leases its retail store locations and certain office space and equipment. Leases for store locations are typically for a term of five years with options to extend for one or more five-year periods. The Company analyzes all leases at inception to determine if a right-of-use asset and lease liability should be recognized. Leases with an initial term of 12 months or less and leases with mutual termination clauses are not included on the condensed consolidated balance sheets. The lease liability is measured at the present value of future lease payments as of the lease commencement date.

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In April 2022, the Company completed a sale-leaseback of its distribution center in Darlington, South Carolina for net proceeds of approximately $45.5 million. The total annual rent for this property starts at approximately $3.2 million with increases of 2% annually over the 20-year lease term. The net proceeds included $5.6 million of advance funding for a capital improvement project that will be amortized over the 20-year lease term. The lease contains the option to extend for six additional periods of five years each. The transaction met the requirements for sale-leaseback accounting, resulting in a gain of approximately $34.9 million on the condensed consolidated statements of operations. The related land and property were removed from property and equipment, and an operating lease right-of-use asset and lease liability of $42.6 million and $37.0 million, respectively, were recorded in the condensed consolidated balance sheets.

Total lease cost is comprised of operating lease costs, short-term lease costs and variable lease costs, which include rent paid as a percentage of sales, common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Lease costs consisted of the following (in thousands):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 30, 2022		July 31, 2021		July 30, 2022		July 31, 2021
Operating lease cost	$	15,022	$	13,111	$	28,883	$	26,065
Variable lease cost		2,580		2,598		4,913		5,579
Short term lease cost		373		246		719		561
Total lease cost	$	17,975	$	15,955	$	34,515	$	32,205

Future minimum lease payments as of July 30, 2022 are as follows (in thousands):


Fiscal Year	Lease Costs
Remainder of 2022	$	26,414
2023		58,567
2024		50,362
2025		39,771
2026		29,369
Thereafter		103,480
Total future minimum lease payments		307,963
Less: imputed interest		(60,196)	(1)
Total present value of lease liabilities	$	247,767	(2)

(1)

Calculated using the discount rate for each lease.

(2)

Includes short-term and long-term portions of operating lease liabilities.

Supplemental cash flows and other information related to operating leases are as follows (in thousands, except for weighted average amounts):


	Twenty-Six Weeks Ended
	July 30, 2022		July 31, 2021
Cash paid for operating leases	$	29,012	$	27,618
Right of use assets obtained in exchange for new operating lease liabilities	$	58,745	$	36,247

Weighted average remaining lease term (years) - operating leases		7.26		5.18
Weighted average discount rate - operating leases		3.84%		2.99%

11. Subsequent Events

As previously announced, the Company elected to sell its distribution center in Roland, Oklahoma. On September 6, 2022, the Company completed the sale-leaseback of this property for pretax proceeds of $35.6 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, capital allocation expectations or statements regarding the outcome or impact of pending or threatened litigation. These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.

The factors that may result in actual results differing from such forward-looking information include, but are not limited to: uncertainties relating to general economic conditions, including inflation, energy and fuel costs, unemployment levels, and any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory) or other factors; changes in market interest rates and market levels of wages; natural disasters such as hurricanes; public health emergencies such as the ongoing COVID-19 pandemic and associated containment and remediation efforts; the potential negative impacts of COVID-19 on the global economy and foreign sourcing; the impacts of COVID-19 on the Company’s financial condition, business operation and liquidity, including the re-closure of any or all of the Company’s retail stores and distribution centers; transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to attract and retain workers; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; consumer confidence and changes in consumer spending patterns; competition within the industry; competition in our markets; the duration and extent of any economic stimulus programs; changes in product mix; interruptions in suppliers’ businesses; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening, remodeling and operating new stores; the results of pending or threatened litigation; delays associated with building, opening or expanding new or existing distribution centers; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K.

Executive Overview

We are a growing specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious multicultural customers. As of July 30, 2022, we operated 617 stores in urban, suburban and rural markets in 33 states.

Uncertainties and Challenges

COVID-19

There is still significant uncertainty regarding the lingering effects of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows and liquidity. We cannot reasonably predict the extent to which our future business will be impacted by the COVID-19 pandemic.

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Inflation

Our operations have been impacted by the recent surge in prices for food, fuel, housing and energy due to inflationary pressures, which are particularly impactful to the communities we serve. We expect inflationary pressures will persist in the near term. In addition, we are closely monitoring the impacts of higher unemployment, wage inflation and costs to source our merchandise.

Supply Chain Disruptions

We have encountered increasing supply chain disruptions that began in the second half of fiscal 2021 and have continued through the date of this Report. In particular, our vendors have faced production delays, and we have been impacted by industry-wide U.S. port and ground transportation delays. In response, we have taken various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the direct shipping program from our vendors to our stores that we initiated in fiscal 2020. These supply chain disruptions have resulted in increased costs, and we expect supply chain pressures will persist in the near term.

Seasonality and Weather Patterns

The nature of our business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have greatly expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.

Basis of Presentation

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of Cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs.

The following discussion contains references to fiscal years 2022 and 2021, which represent fiscal years ending or ended on January 28, 2023 and January 29, 2022, respectively. Fiscal 2022 and fiscal 2021 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part 1, Item 1 of this Report.

Results of Operations

The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year as a result of the seasonality of the business, the current economic uncertainty and the extent to which future business will be impacted by the COVID-19 pandemic.

Key Operating Statistics

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been opened for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13th month of operation at the earliest or until its 24th month at the latest. As an example, stores opened in fiscal 2021 and fiscal 2022 are not considered comparable stores in fiscal 2022. Relocated and expanded stores are included in the comparable store sales results. Stores that are closed permanently or for an extended period are excluded from the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability. In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts.

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Thirteen Weeks Ended July 30, 2022 and July 31, 2021

Net Sales. Net sales decreased $52.3 million, or 22.0%, to $185.0 million in the second quarter of 2022 from $237.3 million in the second quarter of 2021. The decrease in sales was due to a 24.9% decrease in comparable store sales, partially offset by a $6.5 million increase from net store opening and closing activity. The decrease in comparable store sales was due to outsized sales in the first quarter of last year driven by government stimulus payments, combined with inflationary pressures in the first quarter of this year that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) decreased $25.9 million, or 18.5%, to $114.6 million in the second quarter of 2022 from $140.5 million in the second quarter of 2021. Cost of sales as a percentage of sales increased to 61.9% from 59.2%. The change of 270 basis points was due to a decrease of 190 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to unusually low markdowns in the second quarter of last year during outsized stimulus-driven demand, along with an increase of 60 basis points in shrinkage and 20 basis points in freight costs in the current quarter.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $6.9 million, or 9.2%, to $68.5 million in the second quarter of 2022 from $75.4 million in the second quarter of 2021. The decrease was driven by a $5.4 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the second quarter of last year) as well as an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest. Also contributing to the lower expense were other one-time items totaling $2.4 million consisting of an insurance gain, an adjustment to accrued vacation expense and the capitalization of payroll related to a technology upgrade, along with a decrease in credit card processing fees, a decrease in professional fees related to discontinuing a third-party warehouse provider and savings from headcount reductions. These decreases were partially offset by a $1.1 million increase in rent related to the sale-leaseback of our Darlington distribution center and the general impact on expenses of opening and operating more stores. As a percentage of sales, Selling, general and administrative expenses increased to 37.0% in the second quarter of 2022 from 31.8% in the second quarter of 2021, primarily due to the deleveraging effect of lower sales.

Depreciation. Depreciation expense increased $0.3 million, or 5.6%, to $5.3 million in the second quarter of 2022 from $5.0 million in the second quarter of 2021.

Income Tax Benefit/ Expense. Income tax benefit was $0.9 million in the second quarter of 2022 compared to expense of $3.8 million in the second quarter of 2021 due to the pretax loss in the second quarter this year versus pretax income in the second quarter of last year.

Net Loss/Income. Net loss was $2.5 million in the second quarter of 2022 compared to net income of $12.5 million in the second quarter of 2021 due to the factors discussed above.

Twenty-Six Weeks Ended July 30, 2022 and July 31, 2021

Net Sales. Net sales decreased $129.5 million, or 24.8%, to $393.2 million in the first half of 2022 from $522.7 million in the same period of 2021. The decrease in sales was due to a 27.2% decrease in comparable store sales, partially offset by a $13.4 million increase from net store opening and closing activity. The decrease in comparable store sales was due to outsized sales in the first half of last year driven by government stimulus payments, combined with inflationary pressures in the first half of this year that are particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) decreased $62.7 million, or 20.6%, to $241.6 million in the first half of 2022 from $304.3 million in the same period of 2021. Cost of sales as a percentage of sales increased to 61.4% in the first half of 2022 from 58.2% in the same period of 2021. The change of 320 basis points was due to a decrease of 235 basis points in the core merchandise margin (initial mark-up, net of markdowns) due to unusually low markdowns in the first half of last year during outsized stimulus-driven demand, along with an increase of 45 basis points in shrinkage and 40 basis points in freight costs in the current period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $13.8 million, or 9.0%, to $139.5 million in the first half of 2022 from $153.3 million in the same period of 2021. The decrease was due primarily to an $11.1 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget this year (compared to overperformance in the first half last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs related to the conversion of nonvested cash-settled units to nonvested shares. Also contributing to the lower expense were $2.4 million of one-time items in the second quarter of 2022 as discussed above, along with a decrease in credit card processing fees and a decrease in payroll expense related to headcount reductions. These decreases were partially offset by a $1.1 million increase in rent related to the sale-

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leaseback of our Darlington distribution center and the general impact on expenses of opening and operating more stores. As a percentage of sales, Selling, general and administrative expenses increased to 35.5% in the first half of 2022 from 29.3% in the first half of 2021, primarily due to the deleveraging effect of lower sales.

Depreciation. Depreciation expense increased $1.0 million, or 10.6%, to $10.7 million in the first half of 2022 from $9.7 million in the same period last year.

Gain on sale-leaseback. In the first quarter of 2022, we completed a sale-leaseback transaction for our distribution center in Darlington, South Carolina that resulted in a $34.9 million gain.

Income Tax Expense. Income tax expense was $8.5 million in the first half of 2022 compared to $11.9 million in the first half of 2021 due primarily to lower pretax income this year.

Net Income. Net income was $27.7 million in the first half of 2022 compared to $43.4 million in the same period of 2021 due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs. Our quarter-end cash and cash equivalents balance was $27.9 million compared to $76.8 million at the end of the second quarter last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our principal sources of liquidity consist of: (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75.0 million credit commitment.

In addition, in April 2022, we completed a sale-leaseback transaction of our distribution center in Darlington, South Carolina, for pretax proceeds of $45.5 million. In September 2022, we completed a sale-leaseback transaction of our distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.

Inventory

Our quarter-end inventory balance was $142.1 million, compared with $113.2 million at the end of the second quarter last year. The increase was primarily due to reduced inventory levels at the end of the second quarter last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021 and during the first quarter of this year.

Capital Expenditures

Capital expenditures in the first half of 2022 were $18.4 million, an increase of $6.4 million over the first half of 2021 as we invested in our strategic initiatives, including opening 10 new stores, remodeling 32 stores and continuing our investments in system upgrades and distribution center enhancements. We anticipate capital expenditures in fiscal 2022 of approximately $22 million, with plans in the second half of the year to open up to five additional new stores, remodel approximately 10 more stores and continue the ongoing investments in our systems and distribution centers.

Share Repurchases

During the first half of 2022 and 2021, we returned $10.0 million and $64.4 million, respectively, to shareholders through share repurchases. See Part II of this Report and Note 8 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2026 and provides a $75.0 million credit commitment and a $25.0 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 5 to the Financial Statements. At the end of the second quarter of 2022, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

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Cash Flows

Cash Flows From Operating Activities. Net cash used in operating activities was $38.2 million in the first half of 2022 compared to cash provided of $56.8 million in the same period of 2021. Sources of cash this year included net income adjusted for insurance proceeds, non-cash expenses and gain on sale-leaseback totaling $32.7 million (compared to $82.2 million in the first half of 2021) and a decrease of $3.4 million in income tax receivable.

Significant uses of cash from operating activities in the first half of 2022 included (1) a $24.1 million decrease in accrued expenses and other long-term liabilities (compared to a $22.6 million decrease in the first half of 2021) due primarily to payments of operating lease liabilities; (2) a $19.5 million increase in inventory (compared to a $9.7 million increase in the same period last year); (3) a $16.3 million decrease in accounts payable (compared to a $14.3 million increase last year) due to significantly fewer inventory purchases in the last two months of the quarter, with substantially all of such purchases sitting in accounts payable at the end of the quarter; and (4) a $12.9 million decrease in accrued compensation (compared to a $4.8 million decrease in the same period last year) due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.

Cash Flows From Investing Activities. Cash provided by investing activities was $28.4 million in the first half of 2022 compared to cash used of $36.4 million in the same period last year. Cash provided in the first half of 2022 consisted of $45.5 million net proceeds from the sale of a building in the sale-leaseback transaction, partially offset by $18.4 million for purchases of property and equipment. Cash used for investing activities in the first half of 2021 consisted of $24.6 million purchases of investment securities and $12.0 million purchases of property and equipment.

Cash Flows From Financing Activities. Cash used in financing activities was $12.1 million in the first half of 2022 compared to $66.8 million in the same period last year. Cash used in the first half of 2022 consisted primarily of $10.0 million for repurchases of our common stock. Cash used in the first half of 2021 consisted primarily of $64.4 million for repurchases of our common stock.

Cash Requirements and Commitments

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We may also use cash to fund any share repurchases, make any required debt payments and satisfy other contractual obligations. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of July 30, 2022, our contractual commitments for operating leases totaled $247.8 million (with $47.5 million due within 12 months). See Note 10 to the Financial Statements for more information regarding lease commitments.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the twenty-six weeks ended July 30, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

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Item 4. Controls and Procedures.

We have carried out an evaluation under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 30, 2022 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.

Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended July 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time involved in various legal proceedings incidental to the conduct of our business, including claims by customers, landlords, employees or former employees. Once it becomes probable that we will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, we establish appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, we are not aware of any legal proceedings pending or threatened against us that we expect to have a material adverse effect on our financial condition, results of operations or liquidity.

Item 1A. Risk Factors.

There have been no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Information on Share Repurchases

The number of shares of common stock repurchased by the Company during the second quarter of 2022 and the average price paid per share are as follows:


					Maximum number (or
				Total number of shares	approximate dollar value)
				purchased as part of	of shares that may yet be
	Total number of	Average price paid		publicly announced	purchased under the plans
Period	shares purchased	per share (1)		plans or programs (2)	or programs (2)
May (5/1/22 - 5/28/22)	160,422	$	29.17	160,422	$	50,011,482
June (5/29/22 - 7/2/22)	—	$	—	—	$	50,011,482
July (7/3/22 - 7/30/22)	—	$	—	—	$	50,011,482
Total	160,422			160,422

(1)

Includes commissions for the shares repurchased under the stock repurchase program.

(2)

On November 30, 2021, the Company announced that its board of directors approved $30 million stock repurchase program. On March 15, 2022, the Company announced that its board of directors approved an additional $30 million stock repurchase program. The programs do not have expiration dates.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On September 6, 2022, the Company completed the previously announced sale-leaseback of its distribution center located in Roland, Oklahoma for pretax proceeds of $35.6 million. The lease for the center has a fifteen-year term. The Company will pay an initial annual base rent of approximately $2.7 million (including capital expenditures) under the lease subject to an annual 2.00% increase. See also Note 11 to the Financial Statements.

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Item 6. Exhibits.


3.1		Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 7, 2018).

10.1		Employment Non-Compete, Non-Solicit and Confidentiality Agreement, between Citi Trends, Inc. and Heather Plutino dated effective as of June 27, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2022).*

10.2		Severance Agreement, between Citi Trends, Inc. and Heather Plutino dated effective as of June 27, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2022).*

10.3		Lease Agreement, dated April 19, 2022, between Citi Trends, Inc. and CTDASC001 LLC.+

31.1		Certification of Principal 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.+

31.2		Certification of Principal 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.+

32.1		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+†

101		Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.+

104		Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.+

+ Included herewith.

* indicates management contract for compensatory plan or arrangement.

† Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934 and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and the undersigned also has signed this report in her capacity as the Registrant’s Chief Financial Officer (Principal Financial Officer).


	CITI TRENDS, INC.

Date: September 8, 2022

	By:	/s/ Heather L. Plutino
	Name:	Heather L. Plutino
	Title:	Chief Financial Officer