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CTRN > SEC Filings for CTRN > Form 10-Q on 10-Jun-2014All Recent SEC Filings

Show all filings for CITI TRENDS INC



Quarterly Report

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," "will likely result," or "will continue" and similar words and expressions generally identify forward-looking statements. 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.


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 505 stores in both urban and rural markets in 29 states as of May 3, 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 open 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, excluding non-cash asset impairment expense), which are considered our most important operating statistics. Although 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.

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Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the thirteen-week periods ended May 3, 2014 and May 4, 2013:

                         Thirteen Weeks Ended
                     May 3, 2014      May 4, 2013

Net income           $      9,079    $       6,164

Interest expense               48               47
Income tax expense          5,040            3,650
Depreciation                5,160            5,595

Interest income               (53 )            (68 )
EBITDA                     19,274           15,388

Asset impairment                -               27

Adjusted EBITDA      $     19,274    $      15,415

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.

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.

Thirteen Weeks Ended May 3, 2014 and May 4, 2013

Net Sales. Net sales increased $6.2 million, or 3.4%, to $188.0 million in the thirteen weeks ended May 3, 2014 from $181.8 million in the thirteen weeks ended May 4, 2013. The increase in sales was due to a 4.2% increase in comparable store sales, partially offset by the impact of closing nine stores in fiscal 2013. The increase in comparable store sales was reflected in an increase of almost 6% 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 declined by more than 2%. Comparable store sales changes by major merchandise class were as follows in the first quarter of 2014: Accessories
+22%; Home +22%; Children's +1%; Men's -2%; and Women's -7%.

The 4.2% comparable store sales increase in the 504 comparable stores totaled $7.5 million, while the 2013 store closings resulted in a decrease of $1.3 million in sales.

Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $0.3 million, or 0.2%, to $114.8 million in the first quarter of 2014 from $114.5 million in last year's first quarter due to the effect of the increase in sales discussed above, almost entirely offset by an improvement in cost of sales as a percentage of sales to 61.0% in the first quarter of 2014 from 63.0% in last year's first quarter. The decrease in cost of sales as a percentage of sales was due primarily to a 170 basis points improvement 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 quarter. A more conservative inventory position as we entered the first quarter also contributed to the reduction in merchandise markdowns.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.1 million, or 4.0%, to $54.0 million in the first quarter of 2014 from $51.9 million in last year's first quarter due to normal inflationary pressure on expenses such as rent, payroll, utilities and employee medical claims, together with some pressure on distribution center and store expense due to a significant increase in merchandise receipts during this year's first quarter. Units received during the first quarter of 2014 were 26% higher than last year's first quarter due primarily to owning less inventory at the beginning of 2014's first quarter. As a percentage of sales, selling, general and administrative expenses increased slightly to 28.7% in the first quarter of fiscal 2014 from 28.5% in the first quarter of fiscal 2013.

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Depreciation. Depreciation expense decreased $0.4 million, or 7.8%, to $5.2 million in the first quarter of 2014 from $5.6 million in the first quarter of 2013, due to the slowing of our store opening pace in relation to previous years.

Income Tax Expense. Income tax expense increased $1.3 million, or 38.1%, to $5.0 million in this year's first quarter from $3.7 million in the first quarter of 2013 due to an increase in pretax income, partially offset by a decrease in the effective income tax rate to 35.7% from 37.2%.

Net Income. Net income increased 47.3% to $9.1 million in the first quarter of 2014 from $6.2 million in the first 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 May 3, 2014, we had total cash and cash equivalents of $81.4 million compared to $58.9 million as of February 1, 2014. Additionally, we had $7.3 million and $19.1 million of short-term and long-term investment securities, respectively, as of May 3, 2014, compared with $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 37.8% of our total assets as of May 3, 2014, compared to 43.4% as of February 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 $26.0 million in the first quarter of 2014 compared to $30.2 million in the same period of 2013. Sources of cash provided during the first quarter of 2014 included net income adjusted for noncash expenses such as depreciation, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $16.1 million (compared to $13.9 million in the first quarter of 2013). Other significant sources of cash in the first quarter of 2014 were (1) a $13.8 million decrease in inventory (compared to a $33.0 million decrease in the first quarter of fiscal 2013) due to apparel retail seasonality which typically results in having more inventory at the beginning of the spring selling season than at the end, and (2) a $4.4 million change in the income tax receivable/payable (compared to a $2.2 million change in the first quarter of fiscal 2013) due to income tax expense being accrued on first quarter pretax income while no estimated tax payments were due during the quarter. The only significant use of cash from operating activities was an $8.4 million decrease in accounts payable (compared to a $22.2 million decrease in the first quarter of 2013) due to the decline in inventory discussed above.

Cash Flows From Investing Activities. Cash used in investing activities was $2.5 million in the first quarter of both 2014 and 2013. Cash used for purchases of property and equipment totaled $1.8 million and $3.0 million in the first quarter of 2014 and 2013, respectively.

Cash Flows From Financing Activities. Cash flows from financing activities were insignificant in the first thirteen weeks of both 2014 and 2013.

Cash Requirements

Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $81.4 million as of May 3, 2014); (ii) short-term and long-term investment securities (which equaled $7.3 million and $19.1 million, respectively, as of May 3, 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. 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.

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