FINANCIAL HIGHLIGHTS
NET SALES
(in millions)
COMPARABLE
STORE SALES
$755 (1)$770
7.5%
$671
$684
$695
4.5% (2)
1.6% (3)
(0.1)%
(0.4)%
NET INCOME
(in millions)
$21.4
$15.5
$14.6
$13.3
$9.0
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
OPERATING
MARGIN
3.5%
3.3%
3.0%
2.7%
1.7%
EARNINGS
PER DILUTED SHARE
$1.64
TOTAL STORES
562
549
533
521
511
$1.03
$1.03
$0.91
$0.60
14
15
16
17
18
14
15
16
17
18
14
1%
15
2%
16
2%
17
3%
18
2%
(Dollars in thousands, except per share data)
AT YEAR END:
Total Assets
Total Stockholders’ Equity
FOR THE YEAR:
Net Sales
Income from Operations
Net Income
Net Income Per Common Share
Basic
Diluted
February 2, February 3,
2019
2018
$ 297,989
$ 187,425
$ 327,071
$ 209,468
$ 769,553
$ 25,129
$ 21,374
$ 755,241
$ 22,767
$ 14,574
$
$
1.64
1.64
$
$
1.04
1.03
(1) Fiscal 2017 included 53 weeks of operation.
(2) Compares the 53 weeks ended February 3, 2018 to the 53 weeks ended February 4, 2017.
(3) Compares the 52 weeks ended February 2, 2019 to the 52 weeks ended February 3, 2018.
STORE LOCATIONS BY STATE
2
9
Corporate Office
Distribution Center
Buying Office
2
2
6
23
20
17
28
7
13
6
17
26
31
64
1
1
7
49
35
44
52
9
2
2
4
2
5
7
21
48
Citi Trends is a value-priced retailer of urban fashion
apparel and accessories for the entire family with 562
stores in 32 states as of February 2, 2019. Citi Trends
completed its initial public offering in May 2005 and
is listed on the NASDAQ Stock Market under the
symbol CTRN. Citi Trends’ headquarters is located
in Savannah, Georgia, with distribution centers
located in Darlington, South Carolina and Roland,
Oklahoma. Citi Trends provides quality fashion items
at outstanding prices to our customers. As a team,
we are committed to delivering exceptional value to
our customers.
LETTER TO STOCKHOLDERS
During 2018, Citi Trends continued to make significant
progress in a number of areas, including increases in
comparable store sales, tight expense control and the
ongoing expansion of our store footprint. Additionally,
there was a substantial amount of work performed on a
number of initiatives that are in various stages of providing
us with opportunities to improve our merchandising
capabilities and reduce our costs. These factors combined
to produce a solid performance in 2018 and led to a
double-digit increase in earnings for the year.
For the year ended February 2, 2019, total sales increased
1.9% to $770 million from $755 million for the year ended
February 3, 2018, reflecting contributions from existing
stores as well as the 19 new stores we opened throughout
the fiscal year, net of the loss of a week of sales due to
fiscal 2017 having an extra week. Comparable store sales
rose 1.6% for the 52-weeks ended February 2, 2019, versus
the same 52-week period last year.
Our sales growth was reflected in both higher average
unit retail and the number of items per transaction, which
together more than offset a slight decrease in the number
of customer transactions. We are excited that our largest
selling category, accessories, which accounts for 32%
of our total sales, delivered a comparable store sales
increase for the tenth consecutive year.
Net income per diluted share for the full year rose 59% to
$1.64 for fiscal year 2018 from $1.03 for fiscal year 2017.
Adjusting for the impact of tax reform and proxy contest-
related expenses in 2017, earnings per share rose 30% to
$1.64 for fiscal year 2018 from $1.26 for fiscal year 2017.
With no debt, our balance sheet remained strong in 2018
to support our expansion and strategic initiatives. Cash,
together with short-term and long-term investments
totaled $77 million as of February 2, 2019. With this
strength and financial flexibility, we continued to enhance
shareholder value in concrete and tangible ways. After
completing two share repurchase programs in prior years,
our Board authorized a third share repurchase program of
$25 million in March 2018, followed by a fourth program
of $25 million in November 2018. As a result, we were
able to return an additional $45 million to shareholders
during fiscal 2018 in the form of dividends and share
repurchases. These programs demonstrate the Board’s
confidence in our business and its commitment to reward
stockholders as we grow our business. Since the initiation
of these programs in 2015, we have returned a total of
$94 million to our stockholders.
As a value-focused retailer, we strive to have the right
assortment, sizes and price points in our stores. During
2018, we made significant progress on a number of
strategic initiatives, including the roll-out of our store-level
merchandise planning system, which should help us better
plan and allocate merchandise and reduce markdowns.
With a chain of 562 stores in 32 states, we enter fiscal
2019 well positioned, with inventory per store down
2% from the prior year. We believe the continued strong
growth of accessories and the breadth of our products,
generally, make us a compelling, value-priced retailer for
customers. Additionally, by expanding our store base into
newer geographic locations, we can reach new customers
as we continue to grow our footprint.
As one of the relatively few fashion retailers focused on
the urban market, we aspire to be the leader in our space
and provide customers with a differentiated assortment
at great value prices. We will continue our efforts to
make Citi Trends the ‘go-to’ shopping destination for our
customers – a key element in our plan to deliver attractive
sales and earnings growth in the years ahead.
We enter 2019 excited about the opportunities ahead.
We are focused on several important strategic initiatives
we have set for the year, including taking full advantage
of our store-level merchandise planning capabilities,
enhancing the packing system in one of our distribution
centers, working on projects designed to reduce freight
costs and operating expenses, and implementing a
markdown optimization system later in the year. Also, we
are enthusiastic about the prospects of further expanding
our store count, especially with the upcoming opening
of our first store in a predominantly Hispanic market,
which is expected to form the basis for additional future
investments to serve this growing and vital demographic
in our communities.
Thank you for your continued interest in our company and
the confidence you express in Citi Trends through your
ongoing share ownership.
Sincerely,
Bruce D. Smith
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended February 2, 2019
Or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 000-51315
CITI TRENDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
104 Coleman Boulevard, Savannah, Georgia
(Address of principal executive offices)
52-2150697
(I.R.S. Employer Identification No.)
31408
(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
Common Stock, $.01 Par Value
Name of each exchange
on which registered
NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
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
Smaller Reporting Company
Accelerated filer
Emerging growth company
Non-accelerated filer
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 account 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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:
$345,865,178 as of August 4, 2018.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, par value $.01 per share,
12,132,535 shares outstanding as of April 2, 2019.
Part III incorporates information from the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the
close of the registrant’s fiscal year covered by this Annual Report on Form 10-K, with respect to the Annual Meeting of Stockholders to be held on June 5, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
10-K Part and Item No.
FORM 10-K REPORT INDEX
Table of Contents
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
2
3
9
17
17
18
18
19
21
22
31
31
31
31
31
32
32
32
33
33
34
37
PART I
Some statements in, or incorporated by reference into, this Annual Report on Form 10-K (this “Report”) of Citi Trends, Inc. (“we,” “us,”
or the “Company”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than historical
facts contained in this Report, including statements regarding our future financial position, business policy and plans, objectives and
expectations of management for future operations and capital allocation expectations, are forward-looking statements. The words
“believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “could,” “will likely
result,” or “will continue” and similar expressions, as they relate to us, are intended to identify forward-looking statements, although not
all forward-looking statements contain such language. We have based these forward-looking statements largely on our current
expectations and projections about future events, including, among other things: our ability to anticipate and respond to fashion trends,
competition in our markets, consumer spending patterns, general economic conditions, actions of our competitors or anchor tenants in
the strip shopping centers where our stores are located, anticipated fluctuations in our operating results and expected cash position.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A.
Risk Factors and elsewhere in this Report and the other documents we file with the Securities and Exchange Commission (“SEC”),
including our reports on Form 8-K and Form 10-Q, and any amendments thereto. Because forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements
as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur
and actual results could differ materially from those projected in the forward-looking statements. These forward-looking statements speak
only as of the date of such statements. Except as required by applicable law, including the securities laws of the United States and the
rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements contained in this Report,
whether as a result of any new information, future events or otherwise.
Information is provided herein with respect to our operations related to our fiscal years ended on February 2, 2019 (“fiscal 2018”),
February 3, 2018 (“fiscal 2017”) and January 28, 2017 (“fiscal 2016”).
ITEM 1.
BUSINESS
Overview and History
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 fashion preferences of value-conscious consumers, particularly African-Americans. We believe that we provide merchandise
at compelling values. Our goal is to provide merchandise at discounts to department and specialty stores’ regular prices of 20% to 70%.
Our stores average approximately 11,000 square feet of selling space and are typically located in neighborhood shopping centers that are
convenient to low and moderate income customers. As of February 2, 2019, we operated 562 stores in both urban and rural markets in
32 states.
Our predecessor, Allied Department Stores, was founded in 1946 and grew into a chain of family apparel stores operating in the Southeast.
In 1999, the Company, then consisting of 85 stores, was acquired by a private equity firm. Following this acquisition, management
implemented several strategies to focus on the growing urban market and improve our operating and financial performance. After the
successful implementation of these strategies and the successful growth of our chain from 85 stores to 212 stores, we completed an initial
public offering of our common stock on May 18, 2005.
We are a Delaware corporation, and our executive offices are located at 104 Coleman Boulevard, Savannah, Georgia 31408 and our
telephone number is (912) 236-1561. Our Internet address is http://www.cititrends.com. The reference to our web site address in this
Report does not constitute the incorporation by reference of the information contained at the web site into this Report. We make available,
free of charge through publication on our web site, copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we have filed such materials with, or
furnished such materials to, the SEC. In addition, you may read and print any materials we file with the SEC on the SEC’s web site at
http://www.sec.gov.
3
Company Strengths and Strategies
Our goal is to be the leading value-priced retailer of urban fashion apparel and accessories. We believe the following business strengths
differentiate us from our competitors and are important to our success:
Focus on Urban Fashion Mix. We focus our merchandise on urban fashions, which we believe appeal to our core customers. We do not
attempt to dictate trends, but rather devote considerable effort to identifying emerging trends and ensuring that our apparel assortment is
considered timely and fashionable in the urban market. Our merchandising staff tests new emerging merchandise trends before reordering
and actively manages the mix of fashion and branded products in the stores to keep our offering fresh and minimize markdowns.
Superior Value Proposition. As a value-priced retailer, we seek to offer top quality, fashionable merchandise at compelling prices in
relation to department and specialty stores. We also offer products under our proprietary brands such as “Citi Steps” and “Red Ape.”
These private brands enable us to expand our product selection, offer fashion merchandise at lower prices and enhance our product
offerings.
Merchandise Mix that Appeals to the Entire Family. We merchandise our stores to create a destination environment capable of meeting
the fashion needs of the entire value-conscious family. Each store offers a wide variety of products for men and women, as well as children.
Our stores feature sportswear, dresses, outerwear, footwear, intimate apparel, accessories, scrubs, beauty and home. We believe that the
breadth of our merchandise distinguishes our stores from many competitors that offer urban apparel primarily for women, and reduces
our exposure to fashion trends and demand cycles in any single category.
Strong and Flexible Sourcing Relationships. We maintain strong sourcing relationships with a large group of suppliers. We have purchased
merchandise from approximately 1,700 vendors in the past 12 months. Purchasing is controlled by a 50 member buying team located in
one of our three buying offices - New York, New York; Los Angeles, California; and our Savannah, Georgia headquarters. We purchase
merchandise through planned programs with vendors at reduced prices and opportunistically through close-outs, with the majority of our
merchandise purchased for the current season and a lesser quantity held for sale in future seasons. To foster vendor relationships, we pay
vendors promptly and do not ask for typical retail concessions, such as promotional and markdown allowances.
Attractive Fashion Presentation and Store Environment. We seek to provide a fashion-focused shopping environment that is similar to a
specialty apparel retailer, rather than a typical off-price store. Products are prominently displayed by style, rather than by size, on
dedicated, four-way fixtures featuring multiple sizes and styles. The remaining merchandise is arranged on hanging racks. The stores are
carpeted and well-lit, with most featuring a sound system that plays urban adult and urban contemporary music throughout the store.
Cost-Effective Store Locations. We locate stores in high traffic strip shopping centers that are convenient to low and moderate income
neighborhoods. We generally utilize previously occupied store sites which enables us to obtain attractive rents. Similarly, advertising
expenses are low as we do not rely on promotion-driven sales but rather seek to build our reputation for value through everyday low
prices. At the same time, from an investment perspective, we seek to design stores that are inviting and easy to shop, while limiting startup
and fixturing costs.
Product Merchandising and Pricing
Products. Our merchandising strategy is to offer fashionable urban apparel and accessories at attractive prices for the entire value-
conscious family. We seek to maintain a diverse assortment of first quality, in-season merchandise that appeals to the distinctive tastes
and preferences of our core customers. Approximately 20% of our net sales in fiscal 2018 were represented by nationally recognized
brands. We also offer a wide variety of products from less recognized brands and a lesser amount representing private label products
under our proprietary brands.
Our merchandise includes apparel, accessories and home. Within apparel, we offer fashion sportswear for men, women and children,
including offerings for newborns, infants, toddlers, boys and girls. Accessories include handbags, jewelry, footwear, belts, intimate
apparel, scrubs and sleepwear. Home includes functional bedroom, bathroom and kitchen products, as well as beauty and toys.
4
The following table sets forth the merchandise assortment by classification as a percentage of net sales for fiscal 2018, 2017 and 2016.
Accessories
Children’s
Ladies’
Men’s
Home
Percentage of Net Sales
2018
32 %
23 %
22 %
17 %
6 %
2017
32 %
23 %
23 %
17 %
5 %
2016
31 %
23 %
24 %
17 %
5 %
Pricing. We purchase our merchandise at attractive prices and mark prices up less than department or specialty stores. We seek to provide
nationally recognized brands at prices that are 20% to 70% below regular retail prices available in department stores and specialty stores.
Further, we consider the price-to-value relationships of our non-branded products to be exceptionally strong. Both branded and non-
branded offerings validate our value and fashion positioning to our customers. We review each department in our stores at least monthly
for possible markdowns based on sales rates and fashion seasons to promote faster turnover of inventory and to accelerate the flow of
current merchandise. In late 2019, we plan to implement a Markdown Optimization System, which is expected to improve our ability to
determine optimal price reductions and timing, minimize end-of-season inventory and provide the ability to execute markdowns at the
store level.
Sourcing and Allocation
The merchandising department oversees the sourcing, planning and allocation of merchandise to our stores, which allows us to utilize
volume purchase discounts and maintain control over our inventory. We source our merchandise from approximately 1,700 vendors,
consisting of domestic manufacturers and importers. Our merchandising department consists of a buying team of 50 merchants and a
planning and allocation team, which is comprised of over 30 associates.
The buyers on our buying team have, on average, 15 years of experience in the retail business and have developed long-standing
relationships with many of our vendors, including those controlling the distribution of branded apparel. Our buyers, who are based in New
York, Los Angeles and Savannah, travel regularly to the major United States apparel markets, visiting major manufacturers and attending
national and regional trade shows, including urban-focused trade shows.
Our buyers purchase merchandise in styles, sizes and quantities to meet inventory levels developed by the planning staff. The buying staff
utilizes several purchasing techniques that enable us to offer to customers branded and non-branded fashion merchandise at everyday low
prices. The majority of the nationally recognized branded products we sell are purchased in-season, and we generally purchase later in the
merchandising buying cycle than department and specialty stores. This allows us to take advantage of imbalances between retailers’
demands for specific merchandise and manufacturers’ supply of that merchandise. We also purchase merchandise from some vendors in
advance of the selling season at reduced prices and purchase merchandise on an opportunistic basis near the end of the selling season,
which we then store in our distribution centers for sale three to nine months later. Where possible, we seek to purchase items based on
style or color in limited quantities on a test basis with the right to reorder as needed. Finally, we purchase private brand merchandise that
we source to our specifications.
We allocate merchandise across our store base according to sales and merchandise plans that are created by our planning and allocation
teams. The merchandising staff utilizes a centralized management system to monitor merchandise purchasing, planning and allocation in
order to maximize inventory turnover, identify and respond to changing product demands and determine the timing of markdowns to our
merchandise. The recent addition of a store-level planning system assists our team in their efforts to allocate merchandise to individual
stores based on local customer preferences. The buyers also regularly review the age and condition of the merchandise and manage both
the reordering and clearance processes. In addition, the merchandising team communicates with regional, district and store managers to
ascertain regional and store-level conditions and to better ensure that our product mix meets our consumers’ demands in terms of quality,
fashion, price and overall value.
We accept payment from our customers for merchandise at time of sale. Payments are made to us by cash, check, Visa™, MasterCard™,
American Express™, or Discover™. We do not extend credit terms to our customers; however, we do offer a layaway service.
5
Seasonality
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. 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 our business may affect
comparisons between periods.
Store Operations
Store Format. The average selling space of our 562 stores is approximately 11,000 square feet, which allows us the space and flexibility
to departmentalize our stores and provide directed traffic patterns. We arrange most of our stores in a racetrack format with ladies’
sportswear in the center of each store and complementary categories adjacent to those items. Men’s and boy’s apparel and footwear are
displayed on one side of the store, while dresses, ladies’ footwear and accessories are displayed on the other side. Merchandise for infants,
toddlers, boys and girls, as well as home goods, are displayed along the back of the store. Impulse items, such as jewelry and sunglasses,
are featured near the checkout area. Products from nationally recognized brands and other current fashion styles are prominently displayed
on four-way racks at the front of each department. The remaining merchandise is displayed on hanging racks and occasionally on table
displays. Large hanging signs identify each category location. The unobstructed floor plan allows the customer to see virtually all of the
different product areas from the store entrance and provides us the flexibility to easily expand and contract departments in response to
customer demand, seasonality and merchandise availability. Virtually all of our inventory is displayed on the selling floor.
Store Management. Store operations are managed by our Senior Vice President of Store Operations, four regional vice presidents and 51
district managers, each of whom manages eight to fifteen stores. The typical store is staffed with a store manager, two or three assistant
managers and seven to eight part-time sales associates, all of whom rotate work days on a shift basis. Store managers and assistant store
managers participate in a bonus program based on achieving predetermined levels of sales and inventory shrinkage. District managers
participate in bonus programs based on achieving targeted levels of sales, profits, inventory shrinkage and payroll costs. Regional Vice
Presidents participate in a bonus program based partly on a roll-up of the district managers’ bonuses and partly on the Company’s profit
performance in relation to budget. Sales associates are compensated on an hourly basis with incentives. Moreover, we recognize individual
performance through internal promotions and provide opportunities for advancement.
We place significant emphasis on loss prevention in order to control inventory shrinkage. Initiatives include electronic tags on many of
our products, training and education of store personnel on loss prevention issues, digital video camera systems, alarm systems and motion
detectors in the stores. We also visually monitor the stores throughout the day using sophisticated camera systems, capture extensive
point-of-sale data and maintain systems that monitor returns, voids and employee sales, and produce trend and exception reports to assist
in identifying shrinkage issues. We have a centralized loss prevention team that focuses exclusively on implementation of these initiatives
and specifically on stores that have experienced above average levels of shrinkage. We also maintain an independent, third party
administered, toll-free line for reporting shrinkage concerns and any other employee concerns.
Employee Training. Our employees are critical to achieving our goals, and we strive to hire employees with high energy levels and
motivation. We have well-established store operating policies and procedures and an extensive 30-day in-store training program for new
store managers and assistant managers. Sales associates also participate in a 14-day customer service and store procedures training
program, which is designed to enable them to assist customers in a friendly, helpful manner.
Layaway Program. We offer a layaway program that allows customers to purchase merchandise by initially paying a 20% deposit and a
$2 service charge, although at various times, we have reduced the deposit requirement to 10% and waived the service charge in connection
with promotional events. The customer then makes additional payments every two weeks and has 60 days within which to complete the
purchase. If the purchase is not completed, the customer receives a Citi Trends gift card for amounts paid less a re-stocking and layaway
service fee.
Site Selection. Cost-effective store locations are an important part of our store profitability model. Accordingly, we look for second and
third use store locations that offer attractive rents, but also meet our demographic and economic criteria. We have a dedicated real estate
management team responsible for new store site selection. In selecting a location, we target both urban and rural markets. Demographic
criteria used in site selection include concentrations of our core consumers. In addition, we require convenient site accessibility, as well
as strong co-tenants, such as food stores, dollar stores and rent-to-own stores.
Shortly after we sign a new store lease and complete the necessary leasehold improvements to the building, we prepare the store over a
three to four week period by installing fixtures, signs, dressing rooms, checkout counters and cash register systems and merchandising the
initial inventory.
6
Advertising and Marketing
Our marketing goals are to build the “Citi Trends” brand, promote customers’ association of the “Citi Trends” brand with value, quality,
fashion and everyday low prices, and drive traffic into our stores. We generally focus our advertising efforts during the first quarter
(Spring/Easter), back-to-school and Christmas through the use of hip-hop radio stations, social media and influencer marketing. In
addition, we promote fashion trends and exciting deals in our window signage and through in-store announcements. In 2011, we started
a Facebook page which has grown to nearly 600,000 followers.
Distribution
All merchandise sold in our stores is shipped directly from our distribution centers in Darlington, South Carolina and Roland, Oklahoma,
utilizing various express package distributors. Our stores receive multiple shipments of merchandise from our distribution centers each
week. The Darlington distribution center has 550,000 square feet of space, while the Roland distribution center has 565,000 square feet
of space.
We have engaged a consulting firm to help us identify more efficient and less costly distribution alternatives. Likely opportunities include
implementing a transportation management system; leveraging the consultant’s relationships with transportation service providers;
expanding the number of in-bound trucking options; and evaluating the current out-bound to store model. This project has begun and is
expected to continue into 2020. Benefits from these efforts are expected to begin in the second quarter of 2019 and continue to grow
throughout the life of the project.
Information Technology and Systems
We have information systems in place to support our core business functions, using a combination of industry-standard third party products
and internally developed applications. These systems support purchase order management, price and markdown management,
merchandise planning and allocation, general ledger, accounts payable, sales audit, loss prevention and supply chain functions. We
continue to evaluate and implement new technologies to enhance the execution of our merchandising strategies, improve our operating
efficiencies and maintain financial control.
In 2018, we completed the rollout of our store-level planning system which allows for improved allocations at each level of the
merchandise hierarchy. In addition, we launched a new retail analytics solution which provides transaction based reporting to assist with
loss prevention activities.
Our 2019 projects include:
• Markdown Optimization System – expected to determine optimal price reductions and timing, minimize end-of-season inventory,
and provide the ability to execute markdowns at the store level
• Transportation Management System – expected to optimize in-bound and out-bound shipments resulting in transportation cost
savings
• Warehouse Packing System – expected to improve merchandise packing efficiency, leading to an expected reduction in payroll
costs
• Point-of-Sale System replacement – initiation of a project to replace our existing point-of-sale environment which is expected to
improve operational and transactional processes, establish an enterprise return management system to reduce return fraud, and
provide the foundation for future business initiatives.
The security of our information technology systems is critical to us. We use commercially available security systems to protect Company,
employee, customer and vendor information, and we employ a cybersecurity program to address ongoing security threats. Our program
includes, but is not limited to, routine penetration and vulnerability testing, network segmentation, strong encryption protocols, virus and
malware protection, email security scanning, simulation training, vendor assessments, and ongoing monitoring and patching activities.
Within our stores, we use external chip-accepting pin pad devices which employ point-to-point encryption technology for the protection
of our customer’s payment information. We do not retain encrypted, hashed, or tokenized payment information within our internal
systems. In addition, we are subject to the Payment Card Industry’s Data Security Standards (PCI DSS) to which we attest compliance
annually.
We believe that our information systems, with upgrades and updates over time, are adequate to support our operations for the foreseeable
future.
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Growth Strategy
Drive Comparable Store Sales Growth. We have a number of strategies in place that are focused on continuing to increase our comparable
store sales, including the following:
• Continued push toward lines of business that have proven to be consistent sales drivers over extended periods of time, including,
among other things, accessories and home merchandise,
Improvement of our fashion assortments within apparel to meet the demands of our unique customer base,
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• Recent addition of internal store planning resources and the implementation of a store-level planning system, which we expect
will improve our ability to allocate inventory at each level of the merchandise hierarchy,
• Future implementation of a markdown optimization system which is expected to improve our ability to determine the optimal
amount and timing of markdowns, as well as provide us with the ability to take markdowns at the store level,
• Continued testing and introduction of new categories of merchandise that meet the needs of our customers, and
• Continued evolution of our marketing strategies through the use of digital advertising and influencers
Increase Store Base. We believe that our store potential for the existing concept is up to 800 stores. This concept, which has historically done
well in predominantly African-American markets, has proven to be portable across much of the country. In fact, of the twenty Citi Trends
stores with the highest level of profit, sixteen are located in different cities. Also, only six of our stores are not profitable on a four-wall basis.
After opening nineteen new stores in fiscal 2018, we plan to open approximately twenty new stores in fiscal 2019, including our first test
stores in markets that are predominantly Hispanic. We already serve the Hispanic consumer in many of our stores, although not at the
same level as the African-American consumer. We currently have 36 stores with at least 40% Hispanic population within three miles.
These stores, on average, have sales that are approximately 9% higher than our average store, while attaining profit levels that are virtually
identical to the average store. As a result, we have a sampling of existing stores that we can use as guides in determining how to
appropriately merchandise stores in Hispanic markets.
Competition
The markets we serve are highly competitive. The principal methods of competition in the retail business are fashion, assortment, pricing
and presentation. We believe we have a competitive advantage in our offering of fashionable merchandise at everyday low prices. We
compete against a diverse group of retailers, including national off-price retailers, mass merchants, smaller specialty retailers and dollar
stores. The off-price retail companies with which we compete include TJX Companies, Inc. (“TJX Companies”), Ross Stores, Inc. (“Ross
Stores”), The Cato Corporation (“Cato”), and Burlington Stores, Inc. (“Burlington”). In particular, Ross Stores’ “dd’s DISCOUNTS”
stores, and Cato’s “It’s Fashion Metro” stores target lower and moderate income consumers. We believe our strategy of appealing to
African-American consumers and offering urban apparel products allows us to compete successfully with these retailers. We also believe
we offer a more inviting store format than the traditional off-price retailers, including our use of carpeted floors and more prominently
displayed brands. In addition, we compete with a group of smaller specialty retailers that sell only women’s products, such as Rainbow,
as well as value-oriented retailers, such as Forman Mills and Variety Wholesalers. Our mass merchant competitors include Wal-Mart,
Target and Kmart. These chains do not focus on fashion apparel and, within their apparel offering, lack the urban focus that we believe
differentiates our offering and appeals to our core customers. Similarly, while some of the dollar store chains offer apparel, they typically
offer a more limited selection focused on basic apparel needs. As a result, we believe there is significant demand for a value-priced retailer
that addresses the market of low and moderate income consumers generally and, particularly, African-American and other consumers who
seek value-priced, urban fashion apparel, accessories and home goods. See Item 1A. Risk Factors in this Report for additional information
regarding competition in our markets.
Intellectual Property
We regard our trademarks and service marks as having significant value and as being important to our marketing efforts. We have
registered “Citi Trends” as a trademark with the U.S. Patent and Trademark Office on the Principal Register for retail department store
services. We have also registered the following trademarks with the U.S. Patent and Trademark Office on the Principal Register for various
apparel: “Citi Steps,” “Citi Trends Fashion for Less,” “Lil Ms Hollywood,” “Red Ape,” and “Vintage Harlem.” Our policy is to pursue
registration of our marks and to oppose vigorously infringement of our marks.
Employees
As of February 2, 2019, we had approximately 2,800 full-time and approximately 2,700 part-time employees. Of these employees,
approximately 4,700 are employed in our stores and the remainder are employed in our distribution centers, buying offices and corporate
office. We are not a party to any collective bargaining agreements, and none of our employees are represented by a labor union.
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ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, together with the other information contained or incorporated by reference into
this Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we deem to be currently immaterial also may impair our business operations. The occurrence of any of the following
risks could have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to anticipate, identify and respond rapidly to changes in consumers’ fashion tastes, and our
failure to adequately evaluate fashion trends could have an adverse effect on our business, financial condition and results of
operations.
The apparel industry in general and our core customer market in particular are subject to rapidly evolving fashion trends and shifting
consumer demands. Accordingly, our success is heavily dependent on our ability to anticipate, identify and capitalize on emerging fashion
trends, including products, styles and materials that will appeal to our target consumers. A failure on our part to anticipate, identify or
react appropriately and timely to changes in styles, trends, brand preferences or desired image preferences is likely to lead to lower demand
for our merchandise, which could cause, among other things, sales declines, excess inventories and higher markdowns.
If we are unsuccessful in competing with our retail apparel competitors, our market share could decline or our growth could be
impaired and, as a result, our business, financial condition and results of operations could be negatively impacted.
The retail apparel and home fashion businesses are highly competitive with few barriers to entry. We compete against a diverse group of
retailers, including national off-price apparel chains such as TJX Companies, Ross Stores, Cato, and Burlington; mass merchants such as
Wal-Mart, Target and Kmart; smaller discount retail chains that sell only women’s products, such as Rainbow; and general merchandise
discount stores and dollar stores, which offer a variety of products, including apparel, home fashions and other merchandise we sell, for
the value-conscious consumer. We also compete against local off-price and specialty retail stores, regional retail chains, traditional
department stores, web-based retail stores and other direct retailers.
The level of competition we face from these retailers varies depending on the product segment, as many of our competitors do not offer
apparel for the entire family. Our greatest competition is generally in women’s apparel. Many of our competitors are larger than we are
and have substantially greater resources than we do and, as a result, may be able to adapt better to changing market conditions, exploit
new opportunities and exert greater pricing pressures on suppliers than we can. Many of these retailers have better name recognition
among consumers than we do and purchase significantly more merchandise from vendors. These retailers may be able to purchase
merchandise that we cannot purchase because of their name recognition and relationships with suppliers, or they may be able to purchase
merchandise with better pricing concessions than we can. Our local and regional competitors have extensive knowledge of the consumer
base and may be able to garner more loyalty from customers than we can. If the consumer base we serve is satisfied with the selection,
quality and price of our competitors’ products, consumers may decide not to shop in our stores. Additionally, if our existing competitors
or other retailers decide to focus more on our core customers, we may have greater difficulty in competing effectively. As a result of this
competition, we may experience pricing pressures, increased marketing expenditures, increased costs to open new stores, as well as loss
of market share, which could materially and adversely affect our business, financial condition and results of operations.
Our ability to attract consumers to our stores depends on the success of the strip shopping centers where our stores are located.
We locate our stores primarily in strip shopping centers where we believe our consumers and potential consumers shop. The success of
an individual store can depend on favorable placement within a given strip shopping center and from the volume of traffic generated by
the other destination retailers and the anchor stores in the strip shopping centers where our stores are located. We cannot control the
development of alternative shopping destinations near our existing stores or the availability or cost of real estate within existing or new
shopping destinations. If our store locations fail to attract sufficient consumer traffic or we are unable to locate replacement locations on
terms acceptable to us, our business could suffer. If one or more of the destination retailers or anchor stores located in the strip shopping
centers where our stores are located close or leave, or if there is significant deterioration of the surrounding areas in which our stores are
located, our business may be adversely affected.
We may not be able to sustain our growth plans or successfully implement our long-term strategic goals.
Our growth strategy includes successfully opening and operating new stores and expanding our value-priced model within our current
markets and into new geographic regions, as well as potentially branching out into some new store concepts. There are significant risks
associated with our ability to continue to expand successfully and managing the implementation of this growth effectively. If any aspect
of our expansion strategy does not achieve the success we expect, in whole or in part, we may fail to meet our financial performance
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expectations, slow our planned growth or close stores or operations. For example, we intend to open approximately 20 new stores in fiscal
2019, while refreshing, remodeling or relocating a portion of our existing store base. The success of opening new stores is dependent
upon, among other things, the current retail environment, the identification of suitable markets and the availability of real estate that meets
our criteria for traffic, square footage, co-tenancies, lease economics, demographics, and other factors, the negotiation of acceptable lease
terms, construction costs, the hiring, training and retention of competent sales personnel, and the effective management of inventory to
meet the needs of new and existing stores on a timely basis. We may not be able to execute our growth strategies successfully, on a timely
basis, or at all. If we fail to implement these strategies successfully, or if these strategies do not yield the desired outcomes, our financial
condition and results of operations would be adversely affected.
We could experience a reduction in sales if we are unable to fulfill our current and future merchandising needs.
We depend on our suppliers for the continued availability and satisfactory quality of our merchandise. Most of our suppliers could
discontinue selling to us at any time. Additionally, if the manufacturers or other owners of brands or trademarks terminate the license
agreements under which some of our suppliers sell our products, we may be unable to obtain replacement merchandise of comparable
fashion appeal or quality, in the same quantities or at the same prices. In addition, a number of our suppliers are smaller, less capitalized
companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized
companies. These smaller suppliers may not have sufficient liquidity during economic downturns to properly fund their businesses, and
their ability to supply their products to us could be negatively impacted. If we lose the services of one or more of our significant suppliers
or one or more of them fail to meet our merchandising needs, we may be unable to timely or adequately replace the merchandise we
currently source with merchandise provided elsewhere, which could negatively impact our sales and results of operations.
Failure to properly manage and allocate our inventory could have an adverse effect on our business, sales, margins, financial
condition, and results of operations.
In order to better serve our customers and maximize sales, we must properly execute our inventory management strategies by appropriately
allocating merchandise among our stores, timely and efficiently distributing inventory to such locations, maintaining an appropriate mix
and level of inventory in such locations, appropriately changing the allocation of floor space of stores among product categories to respond
to customer demand, and effectively managing pricing and markdowns, and there is no assurance we will be able to do so. In addition,
as we implement new inventory allocation initiatives, there could be disruptions in inventory flow and placement. Failure to effectively
execute our opportunistic inventory buying and inventory management strategies could adversely affect our business, financial condition
and results of operations.
If we are unable to provide frequent replenishment of fresh, quality, attractively priced merchandise in our stores, it could adversely affect
traffic to our stores as well as our sales and margins. We base our purchases of inventory, in part, on our sales forecasts. If our sales
forecasts do not match customer demand, we may experience higher inventory levels and need to markdown excess or slow-moving
inventory, leading to decreased profit margins, or we may have insufficient inventory to meet customer demand, leading to lost sales,
either of which could adversely affect our financial performance. We need to purchase inventory sufficiently below conventional retail to
maintain our pricing differential to regular department and specialty store prices, and to attract customers and sustain our margins, which
we may not achieve at various times and which could adversely affect our business, financial condition and results of operations.
Our sales could decline as a result of general economic and other factors outside of our control, such as changes in consumer
spending patterns and declines in employment levels.
Downturns, or the expectation of a downturn, in general economic conditions, including the effects of unemployment levels, salaries and
wage rates, interest rates, levels of consumer debt, inflation in food and energy prices, taxation (including delays in the distribution of tax
refunds), government stimulus, consumer confidence, and other macroeconomic factors, could adversely affect consumer spending
patterns, our sales and our results of operations. Consumer confidence may also be affected by domestic and international political unrest,
acts of war or terrorism, natural disasters or other significant events outside of our control, any of which could lead to a decrease in
spending by consumers. Because apparel generally is a discretionary purchase, declines in consumer spending patterns may have a more
negative effect on apparel retailers than some other retailers. In addition, since many of our stores are located in the southeastern United
States, our operations are more susceptible to regional factors than the operations of our more geographically diversified competitors.
Therefore, any adverse economic conditions that have a disproportionate effect on the southeastern United States could have a greater
negative effect on our sales and results of operations than on retailers with a more geographically diversified store base.
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We do not sell our products through the internet. As the retail industry experiences an increase in online sales, our sales could be
adversely affected.
The retail landscape is changing with consumers’ shopping habits shifting away from the traditional brick-and-mortar stores to online
retailers. Internet sales have been obtaining an increasing percentage of retail sales over the past few years and this trend is expected to
continue. Although we have tested the sale of products through the internet, we no longer have any items available on our company’s
website. The continued growth of online sales could have a negative impact on our sales, as our customers may decide to make purchases
through online retailers.
Adverse trade restrictions may disrupt our supply of merchandise. We also face various risks because much of our merchandise
is imported from abroad.
We do not own or operate any manufacturing or production facilities. We purchase the products we sell directly from approximately 1,700
vendors, and a substantial portion of this merchandise is manufactured outside of the United States and imported by our vendors from
countries such as China and other areas of the Far East. The countries in which our merchandise currently is manufactured or may be
manufactured in the future could become subject to new trade restrictions imposed by the United States or other foreign governments.
There is increased uncertainty with respect to trade relations between the United States and other countries, especially China. Trade
restrictions, including increased customs restrictions and tariffs or quotas against apparel or home items, as well as United States or foreign
labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply or impede the timely delivery of merchandise
available to us and have an adverse effect on our business. In addition, our merchandise supply could be impacted if our vendors’ imports
become subject to existing or future duties and quotas, or if our vendors face increased competition from other companies for production
facilities, import quota capacity and shipping capacity.
We also face a variety of other risks generally associated with relying on vendors that do business in foreign markets and import
merchandise from abroad, such as:
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political or labor instability, natural disasters, or the threat of terrorism, in particular in countries where our vendors source
merchandise;
increases in merchandise costs due to raw material price inflation or changes in purchasing power caused by fluctuations in
currency exchange rates;
enhanced security measures at United States and foreign ports, which could delay delivery of imports;
imposition of new or supplemental duties, taxes, and other charges on imports;
compliance with new or changing import/export controls;
delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with import regulations,
organized labor strikes or congestion at United States ports; and
local business practice and political issues, including issues relating to compliance with domestic or international labor and
environmental standards.
We rely on numerous third parties in the supply chain to produce and deliver the products that we sell, and our business may be
negatively impacted by their failure to comply with applicable law.
Merchandise we sell in our stores is subject to regulatory standards set by various governmental authorities with respect to quality and
safety. Regulations in this area may change from time to time. We rely on numerous third parties to supply quality merchandise that
complies with applicable product safety laws and other applicable laws, but they may not comply with their obligations to do so. Violations
of law by our importers, suppliers, manufacturers or distributors could result in delays in shipments and receipt of goods or damage our
reputation, thus causing our sales to decline. Although our arrangements with our vendors frequently provide for indemnification for
product liabilities, the vendors may fail to honor those obligations to an extent we consider sufficient or at all. Issues with the quality and
safety of merchandise we sell in our stores, regardless of our fault, or customer concerns about such issues, could result in damage to our
reputation, lost sales, uninsured product liability claims or losses, merchandise recalls, increased costs, and regulatory, civil or criminal
fines or penalties, any of which could have a material adverse effect on our financial results. Further, we are susceptible to the receipt of
counterfeit brands, infringing products or unlicensed goods. We could incur liability with manufacturers or other owners of the brands or
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trademarked products if we receive and sell counterfeit brands, infringing products or unlicensed goods, even inadvertently, and, therefore,
it is important that we establish relationships with reputable vendors to reduce the risk that we may inadvertently receive counterfeit
brands, infringing products or unlicensed goods. Although we have a quality assurance team to check merchandise in an effort to assure
that we purchase only authentic brands and licensed goods and are careful in selecting our vendors, we may receive products that we are
prohibited from selling or incur liability for selling counterfeit brands, infringing products or unlicensed goods, which could adversely
impact our results of operations.
A significant disruption to our distribution process or southeastern retail locations could have an adverse effect on our business,
financial condition and results of operations.
Our ability to distribute our merchandise to our store locations in a timely manner is essential to the efficient and profitable operation of
our business. We have distribution centers located in Darlington, South Carolina and Roland, Oklahoma. Any natural disaster or other
disruption to the operation of either of these facilities due to fire, accidents, weather conditions or any other cause could damage a
significant portion of our inventory and impair our ability to stock our stores adequately.
In addition, the southeastern United States, where the Darlington distribution center and many of our stores are located, is vulnerable to
significant damage or destruction from hurricanes and tropical storms. Although we maintain insurance on our stores and other facilities,
the economic effects of a natural disaster that affects our distribution centers and/or a significant number of our stores could have an
adverse effect on our business, financial condition and results of operations.
Additionally, any disruption to the efficient or timely transportation of merchandise to our distribution centers or stores could adversely
affect our business, financial condition and results of operations.
If we fail to protect our name and brand in the marketplace, there could be a negative effect on our business and limitations on
our ability to penetrate new markets.
We believe that our “Citi Trends” trademark is integral to our store design and our success in building consumer loyalty to our brand. We
have registered this trademark with the U.S. Patent and Trademark Office. We have also registered, or applied for registration of, additional
trademarks with the U.S. Patent and Trademark Office that we believe are important to our business. We cannot assure you that these
registrations will prevent imitation of our name, merchandising concept, store design or private label merchandise or the infringement of
our other intellectual property rights by others. Imitation of our name, concept, store design or merchandise in a manner that projects
lesser quality or carries a negative connotation of our brand image could have an adverse effect on our reputation, business, financial
condition and results of operations.
In addition, we cannot assure you that others will not try to block the manufacture or sale of our private label merchandise by claiming
that our merchandise violates their trademarks or other proprietary rights since other entities may have rights to trademarks that contain
the word “Citi” or may have rights in similar or competing marks for apparel and/or accessories. Although we cannot currently estimate
the likelihood of success of any such lawsuit or ultimate resolution of such a conflict, such a controversy could have an adverse effect on
our business, financial condition and results of operations.
If we fail to implement and maintain effective internal controls in our business, there could be an adverse effect on our business,
financial condition, results of operations and stock price.
Section 404 of the Sarbanes Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal controls over
financial reporting and an audit of such controls by our independent registered public accounting firm. If we fail to maintain the adequacy
of our internal controls, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting.
Moreover, effective internal controls, particularly those related to revenue recognition and accounting for inventory/cost of sales, are
necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. If we cannot produce
reliable financial reports or prevent fraud, our business, financial condition and results of operations could be harmed, investors could
lose confidence in our reported financial information, the market price of our stock could decline significantly and we may be unable to
obtain additional financing to operate and expand our business.
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Failure to attract, train, assimilate and retain skilled personnel could have an adverse effect on our financial condition.
Like most retailers, we experience significant employee turnover rates, particularly among store sales associates and managers. We
therefore must continually attract, hire and train new personnel to meet our staffing needs. We constantly compete for qualified personnel
with companies in our industry and in other industries. A significant increase in the turnover rate among our store sales associates and
managers would increase our recruiting and training costs and could cause us to be unable to service our customers effectively, thus
reducing our ability to operate our stores as profitably as we have in the past.
In addition, we rely heavily on the experience and expertise of our senior management team and other key management associates, and
accordingly, the loss of their services could have a material adverse effect on our business strategy and results of operations.
Our business could be negatively affected as a result of a proxy fight and the actions of activist shareholders.
If we become engaged in a proxy contest with activist shareholders in the future, our business could be adversely affected because:
• Responding to proxy contests, litigation and other actions by activist stockholders can be costly and time-consuming, disrupt
our operations and divert the attention of management and our employees.
• Perceived uncertainties as to our future direction may result in the loss of potential business opportunities and harm our
ability to attract new investors and to retain and attract experienced executives and employees.
• If individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to retain and
attract experienced directors, executives and employees, to effectively and timely implement our business strategy and create
additional value for stockholders.
• We may experience a significant increase in legal fees, administrative, advisor and associated costs incurred in connection
with responding to a proxy contest or related action. For example, we incurred $2.5 million in expenses as a result of the
proxy contest in connection with our 2017 annual meeting.
These factors could adversely impact our results of operations and could also cause our stock price to experience periods of volatility or
stagnation.
Increases in the minimum wage could have an adverse effect on our operating costs, financial condition and results of operations.
Wage rates for many of our employees are slightly above the federal minimum wage. As federal and/or state minimum wage rates increase,
we may need to increase not only our employees’ wage rates that are under the new minimum, but also the wages paid to our other hourly
employees. Any increase in the cost of our labor could have a material adverse effect on our operating costs, financial condition and results
of operations.
Failure to comply with legal requirements could have an adverse effect on our financial condition and results of operations.
Compliance risks in our business include areas such as employment law, taxation, securities laws, consumer protection laws, licensing,
customer relations and personal injury claims, among others. If we fail to comply with these laws, rules and regulations, we may be
subject to judgments, fines or other costs or penalties, which could have an adverse effect on our financial condition and results of
operations.
Changes in government regulations could have an adverse effect on our financial condition and results of operations.
Our business is subject to numerous federal, state and local laws and regulations. New legal requirements in any number of areas could
result in higher compliance costs. Changes in areas, such as workplace-regulation and other labor or employment benefits laws, supply
chain, privacy and information security, or environmental regulation may require extensive structural and organizational changes that
could be difficult to implement, disrupt our business, cause reputational harm and materially adversely affect our operations and financial
results.
Any failure of our management information systems or the inability of third parties to continue to upgrade and maintain our
systems could have an adverse effect on our business, financial condition and results of operations.
We depend on the accuracy, reliability and proper functioning of our management information systems, including the systems used to
track our sales and facilitate inventory management. We also rely on our management information systems for merchandise planning,
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replenishment and markdowns, as well as other key business functions. These functions enhance our ability to optimize sales while
limiting markdowns and reducing inventory risk through properly marking down slow-selling styles, reordering existing styles and
effectively distributing new inventory to our stores. We do not currently have redundant systems for all functions performed by our
management information systems. Any interruption in these systems could impair our ability to manage our inventory effectively, which
could have an adverse effect on our business.
We depend on third-party suppliers to maintain and periodically upgrade our management information systems. Due to ever-evolving
cybersecurity threats, we and our third-party service providers and vendors must continually evaluate and adapt our respective systems
and processes and overall security environment. If any of these suppliers is unable to continue to maintain and upgrade these software
programs and/or if we are unable to convert to alternate systems in an efficient and timely manner, it could result in an adverse effect on
our business.
Failure to maintain the security of employee, customer or vendor information could expose us to litigation, government
enforcement actions and materially impact our reputation and business operations.
Over the normal course of business operations, we obtain certain private or confidential information of our employees, customers, and
vendors. This information may be stored within our internal information technology environments or hosted by third party service
providers. We have implemented security procedures and technology that are intended to safeguard this information from cybersecurity
attacks and data breaches. These safeguards include, but are not limited to, routine penetration and vulnerability testing, network
segmentation, strong encryption protocols, virus and malware protection, email security scanning, simulation training, vendor
assessments, and on-going monitoring and patching activities. There is no guarantee that these measures will be adequate to safeguard
against all data security breaches, system compromises or misuses of data.
As we accept debit and credit card payments in our stores, we are subject to the Payment Card Industry’s Data Security Standards (“PCI
DSS”) to which we attest compliance annually. For the protection of our customer’s payment information, we utilize chip enabled pin
pads with point-to-point encryption technology. In addition, we do not retain the customer’s encrypted, hashed, or tokenized payment
information within our internal systems. However, even as we comply with PCI DSS and employ point-to-point encryption technology,
we may not be able to prevent or detect a compromise of cardholder data. In addition, as the regulatory environment related to information
security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements, compliance
with those requirements could also result in additional costs.
Cyberattacks continue to evolve and there can be no assurance that an attacker would be unable to gain access to the information we
collect. These attacks can come in many forms, including computer hacking, acts of vandalism or theft, malware, computer viruses or
other malicious codes, phishing, employee error or malfeasance, catastrophes, unforeseen events or other cyber-attacks. Additionally, a
failure of a third party service provider to monitor and secure their environment could lead to unauthorized access of our private or
confidential information. A cyberattack or a breach of our data could expose us to costly fines, private litigation and response measures,
credit card brand assessments, government enforcement actions, disruption of business operations, negative publicity and decrease our
customers’ willingness to shop in our stores which could adversely affect our business and financial conditions.
Our sales, inventory levels and earnings fluctuate on a seasonal basis, which makes our business more susceptible to adverse
events that occur during the first and fourth quarters.
Our sales and earnings are significantly higher during the first and fourth quarters each year due to the importance of the spring selling
season, which includes Easter, and the fall selling season, which includes Christmas. Factors negatively affecting us during the first and
fourth quarters, including adverse weather, unfavorable economic conditions, reduced governmental assistance, and tax refund patterns
for our customers, will have a greater adverse effect on our financial condition than if our business was less seasonal.
Seasonal fluctuations also affect our inventory levels. In order to prepare for the spring and fall selling seasons, we must order and keep
in stock significantly more merchandise than during other parts of the year. Merchandise must be ordered well in advance of the applicable
selling season and before trends are confirmed by sales. If we are not able to accurately predict customers’ preferences for our fashion
items, we may have too much inventory which may result in increased markdowns. If we are unable to accurately predict demand for our
merchandise during these periods, we could also end up with inventory shortages resulting in missed sales. In either event, our sales may
be lower and our cost of sales may be higher than historical levels, which could have a material adverse effect on our business, financial
condition and results of operations.
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If we fail to successfully implement our various marketing efforts or if our competitors are more effective with their programs
than we are, our revenue or results of operations may be adversely affected.
Customer traffic and demand for our merchandise may be influenced by our marketing efforts. Although we use marketing to drive
customer traffic through various media including radio, print, digital/social media and e-mail, some of our competitors expend more for
their marketing programs than we do, or use different approaches than we do, which may provide them with a competitive advantage.
Further, we may not effectively implement strategies with respect to rapidly evolving Internet-based and other digital or mobile
communication channels, including social media. Our programs may not be or remain effective or could require increased expenditures,
which could have a significant adverse effect on our revenue and results of operations.
We experience fluctuations and variability in our comparable store sales and quarterly results of operations and, as a result, the
market price of our common stock may fluctuate substantially.
Our comparable store sales and quarterly results have fluctuated significantly in the past based on a number of economic, seasonal and
competitive factors, and we expect them to continue to fluctuate in the future. Since the beginning of fiscal 2014, our quarter-to-quarter
comparable store sales have ranged from a decrease of 5.0% to an increase of 13.9%. This variability could cause our comparable store
sales and quarterly results to fall below the expectations of securities analysts or investors, which could result in a decline in the market
price of our common stock.
Our stock price is subject to volatility.
Our stock price has been volatile in the past and may be influenced in the future by a number of factors, including:
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actual or anticipated fluctuations in our operating results;
changes in securities analysts’ recommendations or estimates of our financial performance;
changes in market valuations or operating performance of our competitors or companies similar to ours;
announcements by us, our competitors or other retailers;
additions and departures of key personnel;
changes in accounting principles;
the passage of legislation or other developments affecting us;
the trading volume of our common stock in the public market;
changes in economic or financial market conditions;
natural disasters, terrorist acts, acts of war or periods of civil unrest; and
the realization of some or all of the risks described in this section entitled “Risk Factors.”
In addition, the stock markets have experienced significant price and trading volume fluctuations from time to time, and the market prices
of the equity securities of retailers have been extremely volatile and have recently experienced sharp price and trading volume changes.
These broad market fluctuations may adversely affect the market price of our common stock.
We cannot provide any guaranty of future cash dividend payments or that we will continue to actively repurchase our common
stock pursuant to a share repurchase program.
Any determination to declare and pay cash dividends on our common stock in the future (quarterly or otherwise) will be based, among
other things, upon our financial condition, results of operations, business and cash requirements and our board of directors’ conclusion in
each instance that the declaration and payment of a cash dividend is in the best interest of our stockholders and is in compliance with all
laws and agreements applicable to the dividend. In addition, there can be no assurance that our existing share repurchase authorization
will be completed or that our board of directors will approve another repurchase program in the future.
15
Provisions in our certificate of incorporation and by-laws and Delaware law may delay or prevent our acquisition by a third party.
Our third amended and restated certificate of incorporation and our third amended and restated by-laws contain several provisions that
may make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions
include, among other things, advance notice for raising business or making nominations at stockholder meetings and “blank check”
preferred stock. Blank check preferred stock enables our board of directors, without stockholder approval, to designate and issue additional
series of preferred stock with such dividend, liquidation, conversion, voting or other rights, including convertible securities with no
limitations on conversion, as our board of directors may determine, including rights to dividends and proceeds in a liquidation that are
senior to the common stock. Additionally, we are in the process of phasing out our classified board of directors, so only three directors
will be up for election at the next annual meeting.
We are also subject to several provisions of the Delaware General Corporation Law that could delay, prevent or deter a merger, acquisition,
tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price
for their common stock or may otherwise be in the best interests of our stockholders.
16
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Store Locations
As of February 2, 2019, we operated 562 stores located in 32 states. Our stores average approximately 11,000 square feet of selling space
and are typically located in neighborhood strip shopping centers that are convenient to low and moderate income customers.
We have no franchising relationships, and all of the stores are company operated. All existing 562 stores, totaling 7.5 million total square
feet and 6.2 million selling square feet, are leased under operating leases. The typical store lease is for five years with options to extend
the lease term for three additional five-year periods. Nearly all store leases provide us the right to cancel following an initial three-year
period in the event the store does not meet pre-determined sales levels. The table below sets forth the number of stores in each of the 32
states in which we operated as of February 2, 2019:
Alabama—31
Arkansas—13
California—9
Connecticut—4
Delaware—2
Florida—52
Georgia—64
Illinois—20
Indiana—17
Iowa—2
Kansas—1
Kentucky—6
Louisiana—35
Maryland—5
Massachusetts—2
Michigan—23
Minnesota—2
Mississippi—26
Missouri—7
Nebraska—1
Nevada—2
New York—9
North Carolina—48
Ohio—28
Oklahoma—7
Pennsylvania—7
Rhode Island—2
South Carolina—44
Tennessee—17
Texas—49
Virginia—21
Wisconsin—6
Support Center Facilities
We own a facility in Savannah, Georgia totaling approximately 70,000 square feet, which serves as our headquarters and, to a lesser
extent, as a storage facility. We also own an approximately 550,000 square-foot distribution center in Darlington, South Carolina and a
565,000 square-foot distribution center in Roland, Oklahoma. In addition, we currently lease an 11,500 square-foot office in New York
City and an 1,800 square-foot office in Los Angeles which are used for buyer operations and meetings with vendors.
17
ITEM 3.
LEGAL PROCEEDINGS
We are from time to time involved in various legal proceedings incidental to the conduct of our business, including claims by customers,
employees or former employees. Once it becomes probable that we will incur costs in connection with a legal proceeding and such costs
can be reasonably estimated, we establish appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of
any such matter is not predictable, we are not aware of any 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 4. MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Stock Market under the symbol “CTRN.” On April 2, 2019, there were 38 holders of
record and approximately 2,500 beneficial holders of our common stock.
In 2018, we paid a quarterly dividend of $0.08 per common share on March 20, 2018, June 19, 2018, September 18, 2018 and
December 26, 2018.
On February 12, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.08 per common share, which was paid on
March 19, 2019 to stockholders of record as of March 5, 2019. We currently anticipate continuing our $0.08 quarterly dividend. However,
any determination to declare and pay cash dividends on our common stock in the future (quarterly or otherwise) will be based, among
other things, upon our financial condition, results of operations, business and cash requirements and our board of directors’ conclusion in
each instance that the declaration and payment of a cash dividend is in the best interest of our stockholders and is in compliance with all
laws and agreements applicable to the dividend.
Recent Sales of Unregistered Securities.
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The number of shares of common stock that we repurchased during the fourth quarter of fiscal 2018 and the average price paid per share
are as follows:
Period
November (11/4/18 - 12/1/18)
December (12/2/18 - 1/5/19)
January (1/6/19 - 2/2/19)
Total
Total number of
shares purchased
Average price
paid per share (1)
—
19.65
20.86
— $
547,464
221,094
768,558
Total number of
shares purchased as
part of publicly
announced plans or
programs (2)
Maximum number (or
approximate dollar value)
of shares that may yet be
purchased under the plans
or programs (2)
— $
547,464
221,094
768,558
25,000,000
14,256,141
9,649,697
Includes commissions for the shares repurchased under the stock repurchase program.
(1)
(2) On November 28, 2018, the Company’s Board of Directors approved a $25.0 million stock repurchase program, under which approximately
$9.6 million of shares remained available as of February 2, 2019. Repurchases under the stock repurchase program could be made at
management’s discretion from time to time on the open market, in privately negotiated transactions or otherwise, and could be made in part
under one or more Rule 10b5-1 plans. The stock repurchase program does not have an expiration date.
Equity Compensation Plan Information.
See Item 12 of this Report.
19
Stock Performance Graph
Set forth below is a line graph comparing the last five years’ percentage change in the cumulative total stockholder return on shares of
our common stock against (i) the cumulative total return of companies listed on The NASDAQ Stock Market and (ii) the cumulative total
return of the NASDAQ Retail Trade Index. This graph assumes that $100 was invested on January 31, 2014 in our common stock and in
each of the market index and the industry index, and that all cash distributions were reinvested. Our common stock price performance
shown on the graph is not indicative of future price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Citi Trends, Inc., the NASDAQ Composite Index and the NASDAQ Retail Trade Index
*$100 invested on 1/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending on or about January 31.
Total Return Analysis
Citi Trends, Inc.
NASDAQ Composite
NASDAQ Retail Trade
1/14
1/15
1/16
1/17
1/18
1/19
100.00
100.00
100.00
143.06
114.30
112.78
129.80
115.10
142.83
102.19
141.84
174.47
152.00
189.26
261.97
134.20
187.97
289.77
20
ITEM 6.
SELECTED FINANCIAL DATA
Selected Financial and Operating Data
The following table provides selected consolidated financial and operating data for each of the fiscal years in the five-year period ended
February 2, 2019, including: (a) consolidated statement of operations data for each such period, (b) additional operating data for each such
period and (c) consolidated balance sheet data as of the end of each such period. The consolidated statement of operations data for the
fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017 and the consolidated balance sheet data as of February 2,
2019 and February 3, 2018 are derived from our audited consolidated financial statements included in Item 8 of this Report that have been
audited by KPMG LLP, an independent registered public accounting firm. The statement of operations data for the fiscal years ended
January 30, 2016 and January 31, 2015 and the balance sheet data as of January 28, 2017, January 30, 2016 and January 31, 2015 are
derived from our audited financial statements that are not included in this Report. The selected consolidated financial and operating data
set forth below should be read in conjunction with, and are qualified in their entirety by reference to, the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report and our consolidated financial
statements and related notes set forth in the financial pages of this Report. Historical results are not necessarily indicative of results to be
expected for any future period.
Statement of Operations Data:
Net sales
Cost of sales (exclusive of depreciation shown separately below)
Selling, general and administrative expenses
Depreciation
Asset impairment
Income from operations
Interest, net
Income before income taxes
Income tax expense
Net income
Net income per common share:
Basic
Diluted
Weighted average shares used to compute net income per share:
Basic
Diluted
Cash dividends per common share
Additional Operating Data:
Number of stores:
Opened during period
Closed during period
Open at end of period
Selling square footage at end of period
Comparable store sales increase (decrease) (2)
Average sales per store (4)
Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets
Total liabilities
Total stockholders’ equity
February 2,
2019
February 3,
Fiscal Year Ended (1)
January 28,
January 30, January 31,
2018
2017
2016
2015
(dollars in thousands, except per share amounts)
$
$
$
$
769,553
(476,326)
(247,938)
(18,886)
(1,274)
25,129
1,199
26,328
(4,954)
21,374
1.64
1.64
$
$
$
$
755,241
(466,022)
(247,062)
(18,883)
(507)
22,767
733
23,500
(8,926)
14,574
1.04
1.03
$
$
$
$
695,175
(428,167)
(230,666)
(17,090)
(313)
18,939
412
19,351
(6,020)
13,331
0.91
0.91
$
$
$
$
683,791
(416,779)
(224,218)
(18,577)
—
24,217
97
24,314
(8,787)
15,527
1.04
1.03
$
$
$
$
670,840
(418,416)
(221,041)
(20,177)
(83)
11,123
(13)
11,110
(2,144)
8,966
0.60
0.60
13,030,063
13,069,694
0.32
$
14,058,008
14,115,895
0.30
$
14,656,753
14,662,272
0.24
$
14,996,496
15,055,538
0.12
$
14,960,920
15,020,489
—
19
6
562
6,219,745
20
4
549
6,052,753
1.6 % (3)
4.5 % (3)
$
$
1,385
17,863
50,350
8,883
297,989
110,564
187,425
$
$
$
$
1,396
48,451
31,500
25,451
327,071
117,603
209,468
18
6
533
5,839,232
13
3
521
5,683,032
8
2
511
5,543,954
(0.4)%
$
1,319
(0.1)%
$
1,325
7.5 %
1,321
$
49,253
38,026
26,691
332,514
108,923
223,591
39,116
32,671
30,890
314,508
102,274
212,234
$
74,514
15,850
22,447
318,373
107,751
210,622
(1) Our fiscal year ends on the Saturday closest to January 31 of each year. The years ended February 2, 2019, February 3, 2018, January 28,
2017, January 30, 2016 and January 31, 2015 are referred to as fiscal 2018, 2017, 2016, 2015 and 2014, respectively. Fiscal 2017 is
comprised of 53 weeks, while fiscal years 2018, 2016, 2015 and 2014 are each comprised of 52 weeks.
(2) Stores included in the comparable store sales calculation for any period are those stores that were opened prior to the beginning of the
preceding fiscal year and were still open at the end of such period. Relocated stores and expanded stores are included in the comparable
store sales results.
(3) The Company is reporting comparable store sales on a comparable store and comparable weeks basis; for fiscal 2018, the 52 weeks ended
February 2, 2019 were compared to the 52 weeks ended February 3, 2018; for fiscal 2017, the 53 weeks ended February 3, 2018 were
compared to the 53 weeks ended February 4, 2017.
(4) Average sales per store is defined as net sales divided by the average number of stores open at the end of the prior fiscal year and stores open
at the end of the current fiscal year.
21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
section entitled “Selected Financial and Operating Data” and our audited consolidated financial statements and the respective related
notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks
and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this
Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to
appeal to the preferences of fashion conscious consumers, particularly African-Americans. As of February 2, 2019, we operated 562 stores
in both urban and rural markets in 32 states.
After opening nineteen new stores in fiscal 2018, we plan to open approximately twenty new stores in fiscal 2019.
Basis of the 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. We operate on a 52- or 53-week fiscal year, which ends on
the Saturday closest to January 31. Each of our fiscal quarters consists of four 13-week periods, with an extra week added to the fourth
quarter every five to six years. The years ended February 2, 2019, February 3, 2018 and January 28, 2017 are referred to as fiscal 2018,
2017, and 2016, respectively. Fiscal 2017 is comprised of 53 weeks, while fiscal years 2018 and 2016 are each comprised of 52 weeks.
Results of Operations
The following discussion of our financial performance is based on the consolidated financial statements set forth in the financial pages of
this Report. The nature of our business is seasonal. Historically, sales in the first and fourth quarters of the fiscal year 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 our business may affect comparisons between periods.
22
Net Sales and Additional Operating Data
The following table sets forth, for the periods indicated, selected consolidated statement of operations data expressed both in dollars and
as a percentage of net sales:
February 2,
2019
Fiscal Year Ended
February 3,
2018
(dollars in thousands)
January 28,
2017
Statement of Operations Data
Net sales
$ 769,553
100.0 % $ 755,241
100.0 % $ 695,175
100.0 %
Cost of sales (exclusive of depreciation shown separately
below)
Selling, general and administrative expenses
Depreciation
Asset impairment
(476,326)
(247,938)
(18,886)
(1,274)
(61.9)% (466,022)
(32.2)% (247,062)
(18,883)
(2.4)%
(507)
(0.2)%
(61.7)% (428,167)
(32.7)% (230,666)
(17,090)
(2.5)%
(313)
(0.1)%
(61.6)%
(33.2)%
(2.5)%
(0.0)%
Income from operations
Interest income
Interest expense
Income before income taxes
Income tax expense
25,129
1,353
(154)
26,328
(4,954)
3.3 %
0.2 %
(0.0)%
3.4 %
(0.6)%
22,767
883
(150)
23,500
(8,926)
3.0 %
0.1 %
(0.0)%
3.1 %
(1.2)%
18,939
571
(159)
19,351
(6,020)
2.7 %
0.1 %
(0.0)%
2.8 %
(0.9)%
Net income
$ 21,374
2.8 % $
14,574
1.9 % $
13,331
1.9 %
The following table provides information, for the years indicated, about the number of total stores open at the beginning of the year, stores
opened and closed during each year, total stores open at the end of each year and the change in comparable store sales for each year:
Total stores open, beginning of year
New stores
Closed stores
Total stores open, end of year
February 2,
2019
Fiscal Year Ended
February 3,
2018
January 28,
2017
549
19
(6)
562
533
20
(4)
549
521
18
(6)
533
Comparable store sales increase (decrease) (1)
1.6 % (2)
4.5 % (2)
(0.4)%
(1) Stores included in the comparable store sales calculation for any year are those stores that were opened prior to the beginning of
the preceding fiscal year and were still open at the end of such year. Relocated stores and expanded stores are included in the
comparable store sales results.
(2) The Company is reporting comparable store sales on a comparable weeks basis; for fiscal 2018, the 52 weeks ended February 2,
2019 were compared to the 52 weeks ended February 3, 2018; for fiscal 2017, the 53 weeks ended February 3, 2018 were
compared to the 53 weeks ended February 4, 2017.
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 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 2017 and
fiscal 2018 were not considered comparable stores in fiscal 2018. 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.
23
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 and expenses related to the 2017 proxy contest), which are considered our most important operating
statistics. We believe that excluding proxy contest expenses from our financial results reflects operating results that are more indicative
of our ongoing operating performance while improving comparability to other periods, and as such, provides an enhanced understanding
of our past financial performance and prospects for the future.
Although non-GAAP measures such as EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they
are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense and
should not be regarded as comparable to similarly titled measures used by other companies. Therefore, EBITDA and Adjusted EBITDA
should be used as supplements to results of operations and cash flows as reported under generally accepted accounting principles
(“GAAP”) and should not be used as the only measures of operating performance or as a substitute for GAAP results.
Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for fiscal years ended February 2, 2019,
February 3, 2018 and January 28, 2017:
Net income
Plus:
Interest expense
Income tax expense
Depreciation
Less:
Interest income
EBITDA
Plus:
Asset impairment
Proxy contest expenses
Adjusted EBITDA
Fiscal Year Ended
February 2, 2019 February 3, 2018 January 28, 2017
$
21,374 $
14,574 $
13,331
(dollars in thousands)
154
4,954
18,886
150
8,926
18,883
159
6,020
17,090
(1,353)
44,015
(883)
41,650
(571)
36,029
1,274
-
45,289 $
$
507
2,516
44,673 $
313
-
36,342
Provided below is a reconciliation of net income (the closest comparable GAAP measure) to (i) net income adjusted for proxy contest
expenses and the effect of the Tax Cuts and Jobs Act (“Adjusted net income”) and (ii) diluted Adjusted net income per share. We believe
that excluding proxy contest expenses and their related tax effects and the effect of the Tax Cuts and Jobs Act from our financial results
reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior periods,
and as such, may provide investors with an enhanced understanding of our past financial performance and prospects for the future. These
non-GAAP measures should be used as a supplement to net income and diluted net income per common share as reported under GAAP
and should not be used as the only measures of operating performance or as a substitute for GAAP results.
Net income
Proxy contest expenses and related tax effects
Tax Cuts and Jobs Act effect
Adjusted net income
Diluted Adjusted net income per share
Fiscal Year Ended
February 2, 2019 February 3, 2018 January 28, 2017
(in thousands, except per share data)
$
21,374 $
14,574 $
13,331
—
—
21,374 $
1,560
1,609
17,743 $
—
—
13,331
1.64 $
1.26 $
0.91
$
$
Diluted shares outstanding
13,070
14,116
14,662
24
Fiscal 2018 Compared to Fiscal 2017
Net Sales. Net sales increased $14.4 million, or 1.9%, to $769.6 million in the 52-week fiscal 2018 from $755.2 million in the 53-week
fiscal 2017. The increase in net sales was due primarily to nineteen new store openings in 2018 and twenty new store openings in 2017
for which there was not a full year of sales in 2017, together with a 1.6% increase in comparable store sales on a 52-week versus 52-week
basis. These sales increases were partially offset by the closing of six stores in 2018 and four stores in 2017, along with the extra week
in fiscal 2017 which contributed $10.9 million in sales. The increase in comparable store sales on a 52-week basis was reflected in a 1.6%
increase in the average unit sale, along with a 0.9% increase in the average number of items per transaction, partially offset by a 0.9%
decrease in the number of customer transactions. Comparable store sales changes on a 52-week basis, by major merchandise class, were
as follows: Home +13%; Accessories +4%; Men’s +1%; Children’s less than +1%; and Ladies’ -2%.
Store opening and closing activity resulted in a net increase of $13.8 million in sales in fiscal 2018, and the 1.6% comparable store sales
increase in the 523 comparable stores totaled $11.5 million, while the aforementioned extra week last year accounted for a decrease of
$10.9 million in sales.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $10.3 million, or 2.2%, to $476.3 million in
fiscal 2018 from $466.0 million in fiscal 2017 due to the effect of the increase in sales discussed above and an increase in cost of sales as
a percentage of sales to 61.9% in 2018 from 61.7% in 2017. The increase in cost of sales as a percentage of sales was due primarily to a
40 basis points increase in freight costs as a result of pressures in the trucking industry and higher fuel surcharges. The core merchandise
margin (initial mark-up, net of markdowns) for the year was flat with last year, while shrinkage was 20 basis points lower.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.8 million, or 0.4%, to $247.9
million in fiscal 2018 from $247.1 million in fiscal 2017 due to the opening of nineteen new stores in 2018 and twenty stores in 2017,
along with normal inflationary pressure on expenses such as payroll and rent. These factors that caused the increase in selling, general
and administrative expenses were partially offset by a $3.9 million decrease in incentive compensation expense resulting from unfavorable
operating results in relation to budget, together with $3.5 million to $4.0 million of expenses attributable to the extra week in fiscal 2017
and $2.5 million of expenses incurred in connection with a proxy contest in 2017. Selling, general and administrative expenses as a
percentage of sales decreased to 32.2% in 2018 from 32.7% in 2017 due primarily to the leveraging effect resulting from higher
comparable store sales and the 2017 proxy contest.
Depreciation. Depreciation expense of $18.9 million in fiscal 2018 was unchanged from fiscal 2017, attributable to the acceleration of
our store opening pace in relation to previous years being entirely offset by distribution center additions and expansions in prior years
becoming fully depreciated during 2018.
Asset Impairment. Impairment charges related to property and equipment at underperforming stores totaled $1.3 million and $0.5 million
in fiscal 2018 and 2017, respectively.
Income Tax Expense. Income tax expense decreased $3.9 million to $5.0 million in fiscal 2018 from $8.9 million in fiscal 2017 as the
impact of a $2.8 million increase in pretax income was more than offset by a decrease in the effective income tax rate to 18.8% from
38.0%. The decrease in the effective tax rate was due primarily to the full-year impact of the reduction in the federal income tax rate from
35% to 21% in the Tax Cuts and Jobs Act tax reform legislation (“TCJA”) which was enacted in December 2017, as well as last year’s
$1.9 million write-down of net deferred tax assets resulting from the revaluation of deferred tax assets and liabilities to reflect the TCJA’s
reduced federal income tax rate.
Net Income. Net income increased $6.8 million to $21.4 million in fiscal 2018 compared to $14.6 million in fiscal 2017, due to the factors
discussed above.
Fiscal 2017 Compared to Fiscal 2016
Net Sales. Net sales increased $60.0 million, or 8.6%, to $755.2 million in the 53-week fiscal 2017 from $695.2 million in the 52-week
fiscal 2016. The increase in net sales was due primarily to a 4.5% increase in comparable store sales on a 53-week versus 53-week basis,
together with twenty new store openings in 2017 and eighteen new store openings in 2016 for which there was not a full year of sales in
2016, and an extra week in fiscal 2017 which contributed $11.8 million in sales. These sales increases were partially offset by the closing
of four stores in 2017 and six stores in 2016. The increase in comparable store sales on a 53-week basis was reflected in a 2.6% increase
in the number of customer transactions, along with a 1.8% increase in the average number of items per transaction and a 0.1% increase in
the average unit sale. Comparable store sales changes on a 53-week basis, by major merchandise class, were as follows: Home +21%;
Men’s +5%; Accessories +5%; Ladies’ +4%; and Children’s +2%.
25
The 4.5% comparable store sales increase in the 511 comparable stores totaled $30.8 million in fiscal 2017 and store opening and closing
activity resulted in a net increase of $17.4 million in sales, while the aforementioned extra week in fiscal 2017 added $11.8 million in
sales.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $37.8 million, or 8.8%, to $466.0 million in
fiscal 2017 from $428.2 million in 2016 due to the effect of the increase in sales discussed above and an increase in cost of sales as a
percentage of sales to 61.7% in 2017 from 61.6% in 2016. The increase in cost of sales as a percentage of sales was due primarily to an
increase in freight costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $16.4 million, or 7.1%, to
$247.1 million in fiscal 2017 from $230.7 million in fiscal 2016 due to a $4.8 million increase in incentive compensation expense resulting
from the improved operating results in relation to budget, together with $3.5 million to $4.0 million of expenses attributable to the extra
week in fiscal 2017, $2.5 million in expenses incurred in connection with a proxy contest, the opening of twenty new stores in 2017 and
eighteen stores in 2016, and normal inflationary pressure on expenses such as payroll and rent. These factors that caused the increase in
selling, general and administrative expenses were partially offset by a $1.0 million gain on insurance claims. Selling, general and
administrative expenses as a percentage of sales decreased to 32.7% in 2017 from 33.2% in 2016 due primarily to the leveraging effect
resulting from higher comparable store sales.
Depreciation. Depreciation expense increased $1.8 million, or 10.5%, to $18.9 million in fiscal 2017 from $17.1 million in fiscal 2016,
due to the acceleration of our store opening pace in relation to previous years, along with the completion of an expansion of our Roland,
Oklahoma distribution center.
Asset Impairment. Impairment charges related to property and equipment at underperforming stores totaled $0.5 million and $0.3 million
in fiscal 2017 and 2016, respectively.
Income Tax Expense. Income tax expense increased $2.9 million to $8.9 million in fiscal 2017 from $6.0 million in fiscal 2016 due to
pretax income increasing $4.1 million, accompanied by an increase in the effective income tax rate to 38.0% from 31.1%. The increase
in the effective tax rate from 2016 was due primarily to a $1.9 million write-down of net deferred tax assets resulting from the reduction
in the federal income tax rate from 35% to 21% in the TCJA. The Company was required to revalue its deferred tax assets and liabilities
to reflect the reduced federal income tax rate expected to be in effect at the time of future reversals.
Net Income. Net income increased $1.3 million to $14.6 million in fiscal 2017 compared to $13.3 million in fiscal 2016, due to the factors
discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital and for capital expenditures for our stores, distribution infrastructure and
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 and existing balances
of cash and investment securities and, if necessary, borrowings under our revolving credit facility (described below). In fiscal 2018, there
were no borrowings under the credit facility. Due to our strong cash and cash equivalents position as of February 2, 2019 ($17.9 million),
we believe that we will likely not have to borrow under the credit facility during fiscal 2019.
Cash Flows
Fiscal 2018 Compared to Fiscal 2017
As of February 2, 2019, we had total cash and cash equivalents of $17.9 million, compared with $48.5 million as of February 3, 2018.
Additionally, we had $50.3 million and $8.9 million of short-term and long-term investment securities, respectively, as of February 2,
2019, compared with $31.5 million and $25.5 million, respectively, as of February 3, 2018. These securities are comprised of bank
certificates of deposit and obligations of the U.S. Treasury, states and municipalities.
Inventory represented 46.9% of our total assets as of February 2, 2019, compared with 42.1% as of February 3, 2018. 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.
26
Cash Flows Provided by Operating Activities. Net cash provided by operating activities was $30.4 million in fiscal 2018 compared with
$42.3 million in fiscal 2017. Net income, adjusted for noncash expenses such as depreciation, asset impairment, loss on disposal of
property and equipment, insurance proceeds from operating activities, deferred income taxes and stock-based compensation expense,
provided cash of $44.0 million in fiscal 2018 (compared with $39.8 million in fiscal 2017). Significant uses of cash included (1) a $4.3
million decrease in accrued compensation (compared with an $8.1 million increase in fiscal 2017) primarily as a result of lower incentive
compensation accruals due to unfavorable financial performance relative to budget in fiscal 2018; (2) a $2.8 million decrease in accounts
payable (compared with a $0.2 million increase in fiscal 2017) due to significant sales increases in the fourth quarter of 2017 which
required an increase in merchandise purchases in January 2018; since this higher level of purchases occurred in the last month of the fiscal
year, all such purchases were still in accounts payable as of February 3, 2018; (3) a $2.3 million increase in inventory (compared with a
$3.9 million increase in fiscal 2017) due primarily to having thirteen more stores than at the previous year end; (4) a $2.1 million increase
in prepaid and other current assets (compared with a $2.4 million increase in fiscal 2017) due primarily to increases in tenant improvement
allowances for new and expanded stores that opened in the fourth quarter of fiscal 2018 and prepaid insurance as the renewal of the
Company's insurance policies on December 1, 2018 included higher property insurance premiums; and (5) a $1.5 million decrease in
income tax payable (compared with a $3.6 million increase in fiscal 2017) due to higher prepayments of estimated taxes during 2018.
Cash Flows Used in Investing Activities. Cash used in investing activities was $15.3 million in fiscal 2018 compared with $12.8 million
in fiscal 2017. Cash used for the purchase of property and equipment was $13.3 million in fiscal 2018 and $21.0 million in fiscal 2017,
with the decrease resulting primarily from capital expenditures made in fiscal 2017 for store fixtures needed to facilitate a shift towards
more home merchandise, together with the completion of the Roland distribution center expansion in fiscal 2017 and opening one fewer
store and relocating two fewer stores in fiscal 2018. Sales/redemptions of investment securities, net of purchases, used cash of $2.3
million in fiscal 2018 and provided cash of $7.8 million in fiscal 2017.
Cash Flows Used in Financing Activities. Cash used in financing activities was $45.7 million in fiscal 2018 compared with $30.3 million
in fiscal 2017. Cash used for the repurchase of common stock totaled $40.4 million in fiscal 2018 and $25.0 million in fiscal 2017.
Dividends paid to stockholders used cash of $4.2 million in fiscal 2018 and fiscal 2017.
Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.
Fiscal 2017 Compared to Fiscal 2016
As of February 3, 2018, we had total cash and cash equivalents of $48.5 million, compared with $49.3 million as of January 28, 2017.
Additionally, we had $31.5 million and $25.5 million of short-term and long-term investment securities, respectively, as of February 3,
2018, compared with $38.0 million and $26.7 million, respectively, as of January 28, 2017. These securities are comprised of bank
certificates of deposit and obligations of the U.S. Treasury, states and municipalities.
Inventory represented 42.1% of our total assets as of February 3, 2018, compared with 40.5% as of January 28, 2017. 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 Provided by Operating Activities. Net cash provided by operating activities was $42.3 million in fiscal 2017 compared with
$39.7 million in fiscal 2016. Net income, adjusted for noncash expenses such as depreciation, asset impairment, loss on disposal of
property and equipment, insurance proceeds from operating activities, deferred income taxes and stock-based compensation expense,
provided cash of $39.8 million in fiscal 2017 (compared with $36.3 million in fiscal 2016). Other significant sources of cash provided by
operating activities in fiscal 2017 included (1) an $8.1 million increase in accrued compensation (compared with a $4.2 million decrease
in fiscal 2016) primarily as a result of higher incentive compensation accruals in fiscal 2017 due to improved financial performance
relative to budget in 2017, and our balance sheet as of the end of fiscal 2017 included accrued payroll for two weeks, while our 2016 year-
end balance sheet included accrued payroll for one week, due to the timing of our bi-weekly payroll; and (2) a shift from an income tax
receivable to an income tax payable totaling $3.6 million (compared with an increase in the income tax receivable last year of $0.2 million)
due to an increase in federal and state income taxes arising from higher pre-tax income in fiscal 2017 and lower prepayments of estimated
tax during the year. Significant uses of cash included (1) a $3.9 million increase in inventory (compared with a $1.7 million decrease in
fiscal 2016) due primarily to having sixteen more stores than at the previous year end; (2) a $3.1 million decrease in accrued expenses
and other long-term liabilities (compared with a $0.1 million increase in fiscal 2016) due primarily to a $1.6 million decrease in the fixed
asset accrual as a result of completion of the aforementioned Roland distribution center expansion; along with a $1.1 million decrease in
a legal settlement accrual as a result of a final settlement payment; and (3) a $2.4 million increase in prepaid and other current assets
(compared with a $1.7 million increase in fiscal 2016) due to a $1.3 million increase in self-insurance collateral for payment of workers
compensation claims, along with a $1.2 million increase in charge card receivables, as the last three days of fiscal 2017 had $4.0 million
more in sales than the last three days of fiscal 2016 as a result of fiscal 2017 ending one week later, thereby including first-of-the-month
27
sales. Since charge card receivables are comprised of charge card sales for the last three days of the month, the receivable was higher in
fiscal 2017.
Cash Flows Used in Investing Activities. Cash used in investing activities was $12.8 million in fiscal 2017 compared with $24.7 million
in fiscal 2016. Cash used for the purchase of property and equipment was $21.0 million in fiscal 2017 and $23.9 million in fiscal 2016,
with the decrease resulting primarily from capital expenditures made in 2016 to expand the Roland distribution center
and enhance markdown equipment in all stores. Sales/redemptions of investment securities, net of purchases, provided cash of $7.8
million in fiscal 2017 and used cash of $1.2 million in fiscal 2016.
Cash Flows Used in Financing Activities. Cash used in financing activities was $30.3 million in fiscal 2017 compared with $4.9 million
in fiscal 2016. Cash used for the repurchase of common stock totaled $25.0 million in fiscal 2017 and there were no repurchases in fiscal
2016. Dividends paid to stockholders used cash of $4.2 million in fiscal 2017 and $3.5 million in fiscal 2016.
Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.
Liquidity Sources and Requirements and Contractual Cash Requirements and Commitments
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $17.9 million as of February 2, 2019); (ii) short-
term and long-term investment securities (which equaled $50.3 million and $8.9 million, respectively, as of February 2, 2019); (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.
We anticipate that capital expenditures will be approximately $22 million to $25 million in fiscal 2019, including amounts related to
approximately twenty new stores that we plan to open in fiscal 2019. We plan to finance these capital expenditures with cash flow from
operations and existing cash balances.
The following table discloses aggregate information about our contractual obligations as of February 2, 2019 and the periods in which
payments are due:
Contractual obligations:
Operating leases (1)
Purchase obligations
Total contractual cash obligations
Payments Due by Period
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
(in thousands)
$ 148,967 $
134,004
47,289 $ 67,522 $ 26,320 $
—
134,004
—
$ 282,971 $ 181,293 $ 67,522 $ 26,320 $
7,836
—
7,836
(1) Represents fixed minimum rents in stores and does not include incremental rents which are computed as a percentage of net
sales. For example, in fiscal 2018 incremental percentage rent was approximately $0.5 million, which represented 0.9% of total
rent expense.
Indebtedness. On October 27, 2011, we 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 amended facility provides a $50 million credit
commitment and a $25 million uncommitted “accordion” feature that under certain circumstances could allow us to increase the size of
the facility to $75 million. Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus either 1.25%
or 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus either 0.25% or 0.5%, (ii) the Federal Funds
Rate plus either 0.75% or 1.0%, or (iii) LIBOR plus either 1.25% or 1.5%, based in any such case on the average daily availability for
borrowings under the facility. The facility continues to be secured by our inventory, accounts receivable and related assets, but not our
real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested
only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to
certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and
no borrowings are expected in the 30 days subsequent to the payment. We have had no borrowings under the credit facility.
28
Operating Leases. We lease our stores under operating leases, which generally have an initial term of five years with renewal options.
The typical store lease requires a combination of both fixed monthly rents and contingent rents computed as a percentage of net sales after
a certain sales threshold has been met. For fiscal 2018, rent expense was $55.3 million compared with $53.0 million in fiscal 2017
(including $0.5 million of contingent rent in both fiscal 2018 and 2017).
Purchase Obligations. As of February 2, 2019, we had purchase obligations of $134.0 million, all of which were for less than one year.
These purchase obligations consist of outstanding merchandise orders.
Off-Balance Sheet Arrangements
Other than the store operating leases described above, we do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. We believe the following critical accounting policies
describe the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for
store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is
determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. Inherent in the retail inventory calculation
are certain management judgments and estimates, including, among others, merchandise markups, markdowns and shrinkage, which
impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory
valuation when the price of an item is lowered in the stores. As a result, we believe the retail inventory method results in a more
conservative inventory valuation than other accounting methods. We estimate and record an allowance for shrinkage for the period
between the last physical count and the balance sheet date. The estimate of shrinkage can be affected by changes in actual shrinkage
trends. Inventory shrinkage as a percentage of sales was 1.3% in fiscal 2018, compared to 1.5% in fiscal 2017 and 1.3% in fiscal 2016.
The allowance for estimated inventory shrinkage was $3.1 million as of February 2, 2019 and $3.5 million as of February 3, 2018. Many
retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the
value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates
or assumptions related to the valuation of inventory during fiscal 2018.
Property and Equipment, net
We have a significant investment in property and equipment stated at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over the lesser of the estimated useful lives (primarily three to five years for computer equipment and furniture,
fixtures and equipment, five years for leasehold improvements, seven years for major purchased software systems, and fifteen to twenty
years for buildings and building improvements) of the related assets or the relevant lease term. Any reduction in these estimated useful
lives would result in a higher annual depreciation expense for the related assets. There were no material changes in the estimates or
assumptions related to the valuation and classification of property and equipment during fiscal 2018.
Impairment of Long-Lived Assets
We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives or recognition of an
impairment loss for long-lived assets. If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is
reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted
cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Non-cash
impairment losses related to leasehold improvements and fixtures and equipment at underperforming stores totaled $1.3 million, $0.5
million and $0.3 million in fiscal 2018, 2017 and 2016, respectively. Impairment losses in the future are dependent on a number of factors
such as site selection and general economic trends on a localized, regional, or national basis, and thus could be significantly different from
historical results. To the extent our estimates for net sales, cost of sales and store expenses are not realized, future assessments of
recoverability could result in impairment charges. There were no changes in our impairment loss methodology during fiscal 2018.
29
Insurance Liabilities
We are largely self-insured for workers’ compensation costs and employee medical claims. Our self-insurance liabilities are based on the
total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims. We use
current and historical claims data, together with information from actuarial studies, in developing our estimates. The insurance liabilities
we record are primarily influenced by the frequency and severity of claims and the Company’s growth. If the underlying facts and
circumstances related to the claims change, then we may be required to record more or less expense which could be material in relation
to our results of operations. Our self-insurance liabilities totaled $2.4 million ($1.4 million current and $1.0 million noncurrent) as of
February 2, 2019 and $2.8 million ($1.6 million current and $1.2 million noncurrent) as of February 3, 2018. There were no material
changes in the estimates or assumptions related to insurance liabilities during fiscal 2018.
Operating Leases
We lease all of our store properties and account for the leases as operating leases. Many lease agreements contain tenant improvement
allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and minimum
rent expense on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is
generally when we enter the space and begin to make improvements in preparation of intended use.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing “rent holidays” at a date other than the
date of initial occupancy, we record minimum rent expense on a straight-line basis over the terms of the leases. Tenant improvement
allowances are included in accrued expenses (current portion) and other long-term liabilities (noncurrent portion) and are amortized over
the lease term. Changes in the balances of tenant improvement allowances are included as a component of operating activities in the
consolidated statements of cash flows.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage
of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the
determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable. There
were no material changes in the estimates or assumptions related to operating leases during fiscal 2018.
Accounting for Income Taxes
We account for income taxes under the asset and liability method. The computation of income taxes is subject to estimation due to the
judgment required and the uncertainty related to the recoverability of deferred tax assets or the outcome of tax audits. We adjust our
income tax provision in the period it is determined that actual results will differ from our estimates. Tax law and rate changes are reflected
in the income tax provision in the year in which such changes are enacted. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making
an assessment as to the realization of these assets. Based upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible and income tax credits and net operating losses may be utilized,
management may determine that some or all of the Company’s deferred tax assets may not ultimately be deductible and income tax credits
and net operating losses may expire unused. Should such an assessment be made, a valuation allowance against some or all of the
Company’s $6.5 million in deferred tax assets would have to be recorded with a resulting charge to income tax expense. During the fourth
quarter of fiscal 2017, the Company revalued its deferred tax assets and liabilities to reflect the reduced federal income tax rate expected
to be in effect at the time of future reversals. Such reduction was the result of the Tax Cuts and Jobs Act tax reform legislation enacted
in December 2017 which reduced the federal statutory rate from 35% to 21%. Such revaluation resulted in the reduction of net deferred
tax assets and a charge to income tax expense of $1.9 million. There were no material changes in the estimates or assumptions related to
income taxes during fiscal 2018.
The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases the accounting treatment of a
particular transaction is specifically dictated by U.S. GAAP, with no need for management’s judgment in their application. There are also
areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in this Report for recently issued accounting standards, including the expected
dates of adoption and estimated effects on our consolidated financial statements.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to financial market risks related to changes in interest rates earned on our investments. We cannot predict market
fluctuations in interest rates. As a result, future results may differ materially from estimated results due to changes in interest rates. A
hypothetical 100 basis point change in prevailing market interest rates would not have materially impacted our financial position, results
of operations or cash flows for fiscal 2018. We do not engage in financial transactions for trading or speculative purposes and have not
entered into any interest rate hedging contracts. Interest rates on our credit facility did not impact us in fiscal 2018 because we did not
borrow during the year.
We source all of our products from markets in the United States in U.S. Dollars and, therefore, are not directly subject to fluctuations in
foreign currency exchange rates. However, fluctuations in currency exchange rates could affect our purchasing power with vendors that
import merchandise to sell to us. We have not entered into forward contracts to hedge against fluctuations in foreign currency prices.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item and the report of the independent accountant thereon required by Item 14(a)(2) appear
beginning on page F-2 of this Report. See accompanying Index to the consolidated financial statements on page F-1. The supplementary
financial data required by Item 302 of Regulation S-K appears in note 11 to the consolidated financial statements.
ITEM 9.
DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the
period covered by this Report pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer each concluded that our disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated
and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions
regarding the required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their
objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended February 2, 2019 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
For the Report of Management on Internal Control over Financial Reporting and the report of our independent registered public accounting
firm on Internal Control over Financial Reporting, see “Management’s Annual Report on Internal Control Over Financial Reporting” on
page F-2 of this Report and “Report of Independent Registered Public Accounting Firm” on page F-4 of this Report.
ITEM 9B. OTHER INFORMATION
None.
31
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to our executive officers and directors, compliance by our directors, executive officers
and certain beneficial owners of our common stock with Section 16(a) of the Exchange Act, the committees of our Board of Directors,
our Audit Committee Financial Expert and our Code of Ethics is incorporated herein by reference to information under the captions
entitled “Board of Directors and Committees of the Board of Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in our definitive proxy statement (to be filed hereafter) in connection with our 2019 Annual Meeting of
Stockholders and possibly elsewhere in the proxy statement (or will be filed by amendment to this Report).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to information under the captions entitled “Executive
Compensation,” “Board of Directors and Committees of the Board of Directors” and “Compensation Committee Report” in our definitive
proxy statement (to be filed hereafter) in connection with our 2019 Annual Meeting of Stockholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this Report).
ITEM 12.
STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
The information required by this Item with respect to ownership of our common stock is incorporated herein by reference to the
information under the caption entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy
statement (to be filed hereafter) in connection with our 2019 Annual Meeting of Stockholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this Report).
Equity Compensation Plan Information. The following table represents those securities authorized for issuance as of February 2, 2019
under our existing equity compensation plans.
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
(a)
Weighted average
exercise price of
outstanding options,
warrants and rights (2)
(b)
— $
—
— $
—
—
—
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (3) (c)
874,755
—
874,755
(1) The Citi Trends, Inc. 2012 Incentive Plan (the “2012 Plan”) became effective in May 2012 as a successor to the 2005 Plan.
The 2012 Plan provides for the issuance of up to 1,600,000 shares of common stock, plus a number of additional shares (not to
exceed 300,000) underlying awards outstanding under prior plans that later terminate or expire unexercised. Such shares will
be issued upon the exercise of stock options or as awards of nonvested restricted stock and other performance awards vest.
Does not include nonvested restricted stock grants issued under the 2012 Plan totaling 163,220 shares. No options were
outstanding as of February 2, 2019.
(2) The weighted average exercise price is for options only and does not include nonvested restricted stock.
(3) Consists of shares available for awards of options, restricted stock and other performance awards under the 2012 Plan.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the information under the captions entitled “Certain
Relationships and Related Party Transactions” and “Board of Directors and Committees of the Board of Directors” in our definitive proxy
statement (to be filed hereafter) in connection with our 2019 Annual Meeting of Stockholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this Report).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information under the caption entitled “Ratification of
Independent Registered Public Accounting Firm” in our definitive proxy statement (to be filed hereafter) in connection with our 2019
Annual Meeting of Stockholders and possibly elsewhere in the proxy statement (or will be filed by amendment to this Report).
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements
See accompanying Financial Statements beginning on page F-1.
(a)(2)
Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related
instructions, are inapplicable or the information is included in the Financial Statements, and therefore, have been omitted.
(a)(3)
Exhibits
Exhibit Index
Exhibit No.
3.1
Description
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)
3.2
4.1
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
Third Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on
Form 8-K filed with the SEC on June 7, 2018)
Specimen certificate for shares of common stock, $.01 par value (incorporated by reference to Exhibit 4.1 to Amendment
No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-123028) filed with the SEC on April 29, 2005)
Citi Trends, Inc. Amended and Restated 2005 Long-Term Incentive Plan (the “2005 Plan”) (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2008)
Form of Restricted Stock Award Agreement for Employees under the 2005 Plan (incorporated by reference to Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2008)
Form of Restricted Stock Award Agreement for Directors under the 2005 Plan (incorporated by reference to Exhibit 10.19
to the Company’s Annual Report on Form 10-K for the year ended February 3, 2007)
Form of Stock Option Agreement for Employees under the 2005 Plan (incorporated by reference to Exhibit 10.20 to the
Company’s Annual Report on Form 10-K for the year ended February 3, 2007)
Form of Stock Option Agreement for Directors under the 2005 Plan (incorporated by reference to Exhibit 10.21 to the
Company’s Annual Report on Form 10-K for the year ended February 3, 2007)
Offer Letter to Ivy Council dated December 6, 2006 (incorporated by reference to Exhibit 10.24 to the Company’s Annual
Report on Form 10-K for the year ended February 2, 2008)
Offer Letter to Bruce D. Smith dated March 5, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 5, 2007)
Citi Trends, Inc. Annual Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended August 1, 2009)
Form of Restricted Stock Award Agreement for Employees under the 2005 Plan (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2009)
*10.10
Form of Restricted Stock Award Agreement for Directors under the 2005 Plan (incorporated by reference to Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2009)
34
Exhibit No.
*10.11
10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
*10.21
*10.22
*10.23
*10.24
10.25
Description
Offer Letter to Charles D. Crowell dated February 3, 2011 (incorporated by reference to Exhibit 10.29 to the Company’s
Annual Report on Form 10-K for the year ended January 28, 2012)
Credit Agreement, dated October 27, 2011 among Citi Trends, Inc., as Borrower, its wholly owned subsidiary, as
Guarantor, and Bank of America, N.A., as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended October 29, 2011)
Citi Trends, Inc. 2012 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended July 28, 2012)
Form of Restricted Stock Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 29, 2017)
Form of Restricted Stock Award Agreement for Directors under the Citi Trends, Inc. 2012 Incentive Plan (incorporated
by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2012)
Form of Restricted Stock Unit Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
April 29, 2017)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Bruce D. Smith dated
May 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended August 3, 2013)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Ivy D. Council dated
May 1, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended August 3, 2013)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and James A. Dunn dated
May 1, 2013 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended August 3, 2013)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Charles D. Crowell
dated May 1, 2013 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended August 3, 2013)
Severance Agreement between the Company and Bruce D. Smith dated May 1, 2013 (incorporated by reference to
Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2013)
Severance Agreement between the Company and Ivy D. Council dated May 1, 2013 (incorporated by reference to
Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2013)
Severance Agreement between the Company and James A. Dunn dated May 1, 2013 (incorporated by reference to
Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2013)
Severance Agreement between the Company and Charles D. Crowell dated May 1, 2013 (incorporated by reference to
Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2013)
First Amendment to Credit Agreement, dated as of August 18, 2015, by and among Citi Trends, Inc., as Borrower, Citi
Trends Marketing Solutions, Inc., as Guarantor, and Bank of America, N.A., as Lender (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 19, 2015)
*10.26
Amendment to the Citi Trends, Inc. 2012 Incentive Plan, effective as of February 7, 2017 (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 29, 2017)
35
Exhibit No.
*10.27
Description
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Bruce D. Smith dated
March 15, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on form 8-K filed with the
SEC on March 16, 2018)
*10.28
*10.29
*10.30
*10.31
*10.32
*10.33
*10.34
*10.35
*10.36
*10.37
*10.38
*10.39
*10.40
*10.41
Severance Agreement between the Company and Bruce D. Smith dated March 15, 2018 (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2018)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Stuart C. Clifford
dated March 15, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
with the SEC on March 16, 2018)
Severance Agreement between the Company and Stuart C. Clifford dated March 15, 2018 (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2018)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Ivy D. Council dated
March 26, 2018 (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company’s Quarterly Report on
Form 10-Q/A filed with the SEC on March 15, 2019)
Severance Agreement between the Company and Ivy D. Council dated March 26, 2018 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on March 15,
2019)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and James A. Dunn dated
March 27, 2018 (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Company’s Quarterly Report on
Form 10-Q/A filed with the SEC on March 15, 2019)
Severance Agreement between the Company and James A. Dunn dated March 27, 2018 (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on March 15,
2019)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Charles D. Crowell
dated March 30, 2018 (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Company’s Quarterly Report
on Form 10-Q/A filed with the SEC on March 15, 2019)
Severance Agreement between the Company and Charles D. Crowell dated March 30, 2018 (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on March 15,
2019)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Brian Lattman dated
March 30, 2018 (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Company’s Quarterly Report on
Form 10-Q/A filed with the SEC on March 15, 2019)
Severance Agreement between the Company and Brian Lattman dated March 30, 2018 (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on March 15,
2019)
Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Christina Short dated
April 6, 2018 (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Company’s Quarterly Report on
Form 10-Q/A filed with the SEC on March 15, 2019)
Severance Agreement between the Company and Christina Short dated April 6, 2018 (incorporated by reference to Exhibit
10.14 to Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on March 15, 2019)
Form of Restricted Stock Unit Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan
(Performance Based Vesting - Average Stock Price)
36
Exhibit No.
*10.42
Description
Form of Restricted Stock Unit Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan
(Performance Based Vesting - EBITDA Target)
21.1
Subsidiary of the Registrant
23.1
Consent of KPMG LLP
31.1
31.2
32.1
32.2
Certification of Bruce D. Smith, President and Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Stuart C. Clifford, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification of Bruce D. Smith, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Stuart C. Clifford, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
*
Indicates management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
37
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date April 17, 2019
CITI TRENDS, INC.
(Registrant)
By /s/ Bruce D. Smith
Bruce D. Smith
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Bruce D. Smith
Bruce D. Smith
President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Stuart C. Clifford
Stuart C. Clifford
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
April 17, 2019
April 17, 2019
/s/ John S. Lupo
John S. Lupo
/s/ Brian P. Carney
Brian P. Carney
/s/ Jonathan Duskin
Jonathan Duskin
/s/ Laurens M. Goff
Laurens M. Goff
/s/ Margaret L. Jenkins
Margaret L. Jenkins
/s/ Barbara Levy
Barbara Levy
Chairman of the Board of Directors
April 17, 2019
April 17, 2019
April 17, 2019
April 17, 2019
April 17, 2019
April 17, 2019
Director
Director
Director
Director
Director
38
Citi Trends, Inc.
Index to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED FEBRUARY 2, 2019, FEBRUARY 3,
2018 AND JANUARY 28, 2017
Management’s Annual Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of February 2, 2019 and February 3, 2018
Consolidated Statements of Operations for the Years Ended February 2, 2019, February 3, 2018 and January 28, 2017
Consolidated Statements of Cash Flows for the Years Ended February 2, 2019, February 3, 2018 and January 28, 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended February 2, 2019, February 3, 2018 and
January 28, 2017
Notes to Consolidated Financial Statements for the Years Ended February 2, 2019, February 3, 2018 and January 28, 2017
F-2
F-3
F-5
F-6
F-7
F-8
F-9
F-1
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and
procedures that:
•
•
•
pertain to maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are made
only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we
assessed the effectiveness of our internal control over financial reporting as of February 2, 2019, based on the criteria described in
Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this assessment, our management concluded that our internal control over financial reporting was effective based
on those criteria as of February 2, 2019.
Our independent registered public accounting firm, KPMG LLP, audited the effectiveness of our internal control over financial reporting
as of February 2, 2019, as stated in their report which is included herein.
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Citi Trends, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Citi Trends, Inc. and subsidiary (the Company) as of February 2,
2019 and February 3, 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years
ended February 2, 2019, February 3, 2018, and January 28, 2017, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of February 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the years ended
February 2, 2019, February 3, 2018, and January 28, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
April 17, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Jacksonville, Florida
April 17, 2019
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Citi Trends, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Citi Trends, Inc. and subsidiary’s (the Company) internal control over financial reporting as of February 2, 2019, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of February 2, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of February 2, 2019 and February 3, 2018, the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the years ended February 2, 2019, February 3, 2018, and January 28, 2017,
and the related notes (collectively, the consolidated financial statements), and our report dated April 17, 2019 expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Jacksonville, Florida
April 17, 2019
F-4
Citi Trends, Inc.
Consolidated Balance Sheets
February 2, 2019 and February 3, 2018
(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investment securities
Inventory
Prepaid and other current assets
Total current assets
Property and equipment, net
Long-term investment securities
Deferred tax asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation
Income tax payable
Layaway deposits
Total current liabilities
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 32,000,000 shares; 15,827,713 shares issued as of
February 2, 2019 and 15,777,946 shares issued as of February 3, 2018; 12,158,237 shares
outstanding as of February 2, 2019 and 13,743,776 shares outstanding as of February 3, 2018
Paid in capital
Retained earnings
Treasury stock, at cost; 3,669,476 shares held as of February 2, 2019 and 2,034,170 shares held as
of February 3, 2018
Total stockholders’ equity
Commitments and contingencies (note 9)
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
February 2, February 3,
2019
2018
$
17,863
50,350
139,841
17,544
225,598
56,224
8,883
6,539
745
$ 297,989
$
48,451
31,500
137,701
15,694
233,346
61,777
25,451
5,777
720
$ 327,071
$
73,391
15,311
12,746
395
526
102,369
8,195
110,564
$
75,947
13,762
17,013
1,916
532
109,170
8,433
117,603
157
91,794
176,094
156
90,605
158,927
(80,620)
187,425
(40,220)
209,468
$ 297,989
$ 327,071
F-5
Citi Trends, Inc.
Consolidated Statements of Operations
Years Ended February 2, 2019, February 3, 2018, and January 28, 2017
(in thousands, except per share data)
Fiscal 2018 Fiscal 2017 Fiscal 2016
$ 769,553 $ 755,241 $ 695,175
(476,326)
(247,938)
(18,886)
(1,274)
25,129
1,353
(154)
26,328
(4,954)
21,374 $ 14,574 $
(466,022)
(247,062)
(18,883)
(507)
22,767
883
(150)
23,500
(8,926)
(428,167)
(230,666)
(17,090)
(313)
18,939
571
(159)
19,351
(6,020)
13,331
$
$
$
1.64 $
1.64 $
1.04 $
1.03 $
0.91
0.91
13,030
13,070
14,058
14,116
14,657
14,662
Net sales
Cost of sales (exclusive of depreciation shown separately below)
Selling, general and administrative expenses
Depreciation
Asset impairment
Income from operations
Interest income
Interest expense
Income before income taxes
Income tax expense
Net income
Basic net income per common share
Diluted net income per common share
Weighted average number of shares outstanding
Basic
Diluted
See accompanying notes to consolidated financial statements
F-6
Citi Trends, Inc.
Consolidated Statements of Cash Flows
Years Ended February 2, 2019, February 3, 2018, and January 28, 2017
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Asset impairment
Deferred income taxes
Loss on disposal of property and equipment
Insurance proceeds related to operating activities
Noncash stock-based compensation expense
Excess tax benefits from stock-based payment arrangements
Changes in assets and liabilities:
Inventory
Prepaid and other current assets
Other assets
Accounts payable
Accrued expenses and other long-term liabilities
Accrued compensation
Income tax payable/receivable
Layaway deposits
Net cash provided by operating activities
Investing activities:
Purchases of investment securities
Sales/redemptions of investment securities
Purchases of property and equipment
Insurance proceeds related to investing activities
Net cash used in investing activities
Financing activities:
Fiscal 2018 Fiscal 2017 Fiscal 2016
$ 21,374 $ 14,574 $ 13,331
18,886
1,274
(762)
471
475
2,238
—
(2,330)
(2,135)
(25)
(2,844)
(418)
(4,267)
(1,521)
(6)
30,410
18,883
507
2,729
130
1,349
1,632
—
(3,948)
(2,398)
5
230
(3,093)
8,092
3,551
61
42,304
17,090
313
1,482
290
847
2,923
(168)
1,665
(1,689)
(20)
8,009
54
(4,176)
(182)
(26)
39,743
(43,882)
41,600
(13,256)
195
(15,343)
(37,654)
45,420
(20,986)
443
(12,777)
(44,882)
43,726
(23,932)
421
(24,667)
Excess tax benefits from stock-based payment arrangements
Cash used to settle withholding taxes on stock option exercises and the vesting of
nonvested restricted stock
Dividends paid to stockholders
Repurchase of common stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
—
—
168
(1,048)
(4,207)
(40,400)
(45,655)
(30,588)
(1,062)
(4,232)
(25,035)
(30,329)
(802)
(1,594)
(3,513)
—
(4,939)
10,137
Cash and cash equivalents:
Beginning of year
End of year
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash payments of income taxes
Supplemental disclosures of noncash investing activities:
Accrual for purchases of property and equipment
See accompanying notes to consolidated financial statements
F-7
48,451
39,116
$ 17,863 $ 48,451 $ 49,253
49,253
$
$
127 $
7,237 $
127 $
2,646 $
127
4,720
$
2,017 $
1,474 $
2,830
Citi Trends, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended February 2, 2019, February 3, 2018, and January 28, 2017
(in thousands, except share amounts)
Common Stock
Paid in Retained Treasury Stock
Shares
Amount Capital Earnings Shares Amount
Total
—
168
—
—
2,923
(1,595)
—
—
—
90,036
—
—
—
1,632
(1,063)
—
—
—
90,605
—
—
2,238
(1,049)
—
—
—
88,540 $ 138,725
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,471)
—
13,331
833,188
148,585
—
—
—
—
—
—
—
—
—
—
— 1,200,982
—
—
158,927 2,034,170
—
—
—
—
—
—
—
—
— 1,635,306
—
—
833,188 $ (15,185) $ 212,234
2
168
—
—
2,923
(1,596)
—
(3,471)
13,331
223,591
2
—
—
1,632
(1,064)
(25,035)
(4,232)
14,574
209,468
1
—
2,238
(1,049)
(40,400)
(4,207)
21,374
91,794 $ 176,094 3,669,476 $ (80,620) $ 187,425
—
—
—
—
—
—
—
—
—
(15,185)
—
—
—
—
—
(25,035)
—
—
(40,220)
—
—
—
—
(40,400)
—
—
(4,207)
21,374
(4,232)
14,574
Balances —January 30, 2016
Vesting of nonvested shares and restricted stock units
Excess tax benefits from stock based payment arrangements
Issuance of nonvested shares to employees and directors under incentive plan
Forfeiture of nonvested shares by employees and directors
Stock-based compensation expense
Net share settlement of nonvested shares
Repurchase of common stock
Dividends paid to stockholders
Net income
Balances —January 28, 2017
Vesting of nonvested shares
Issuance of nonvested shares to employees and directors under incentive plan
Forfeiture of nonvested shares by employees and directors
Stock-based compensation expense
Net share settlement of nonvested shares and restricted stock units
Repurchase of common stock
Dividends paid to stockholders
Net income
Balances —February 3, 2018
Vesting of nonvested restricted stock units
Issuance of nonvested shares to employees and directors under incentive plan
Stock-based compensation expense
Net share settlement of nonvested shares and restricted stock units
Repurchase of common stock
Dividends paid to stockholders
Net income
Balances—February 2, 2019
15,707,859 $
—
—
134,710
(25,018)
—
(85,212)
—
—
—
15,732,339
12,982
118,676
(31,303)
—
(54,748)
—
—
—
15,777,946
10,663
80,045
—
(40,941)
—
—
—
15,827,713 $
154 $
2
—
—
—
—
(1)
—
—
—
155
2
—
—
—
(1)
—
—
—
156
1
—
—
—
—
—
—
157 $
See accompanying notes to consolidated financial statements
F-8
Citi Trends, Inc.
Notes to Consolidated Financial Statements
February 2, 2019, February 3, 2018 and January 28, 2017
(1) Organization and Business
Citi Trends, Inc. and its subsidiary (the “Company”) operate as a value-priced retailer of urban fashion apparel and accessories for the
entire family. As of February 2, 2019, the Company operated 562 stores in 32 states.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany
transactions and balances have been eliminated in consolidation.
(b) Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31 of each year. The years ended February 2, 2019, February 3, 2018
and January 28, 2017 are referred to as fiscal 2018, fiscal 2017 and fiscal 2016, respectively, in the accompanying consolidated financial
statements. Fiscal year 2017 is comprised of 53 weeks, while fiscal years 2018 and 2016 are each comprised of 52 weeks.
(c) Cash and Cash Equivalents/Concentration of Credit Risk
For purposes of the consolidated balance sheets and 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.
(d) Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for
store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory
is determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. Merchandise markdowns are reflected
in the inventory valuation when the retail price of an item is lowered in the stores. Inventory is recorded net of an allowance for shrinkage
based on the most recent physical inventory counts.
(e) Property and Equipment, net
Property and equipment, net are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method
over the lesser of the estimated useful lives (primarily three to five years for computer equipment and furniture, fixtures and equipment,
five years for leasehold improvements, seven years for major purchased software systems, and fifteen to twenty years for buildings and
building improvements) of the related assets or the relevant lease term.
(f) Impairment of Long-Lived Assets
If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that
the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over
its remaining life, the carrying value of the asset is reduced to its estimated fair value. Non-cash impairment expense related primarily
to leasehold improvements and fixtures and equipment at underperforming stores totaled $1.3 million, $0.5 million and $0.3 million in
fiscal 2018, 2017 and 2016, respectively.
F-9
(g) Insurance Liabilities
The Company is largely self-insured for workers’ compensation costs and employee medical claims. The Company’s self-insured
retention or deductible, as applicable, for each claim involving workers’ compensation and employee medical is limited to $250,000
and $100,000, respectively. Self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims
incurred but not reported, less amounts paid against such claims. Current and historical claims data, together with information from
actuarial studies, are used in developing the estimates. The insurance liabilities that are recorded are primarily influenced by the
frequency and severity of claims and the Company’s growth. If the underlying facts and circumstances related to the claims change,
then the Company may be required to record more or less expense which could be material in relation to results of operations.
(h) Stock-Based Compensation
The Company recognizes compensation expense associated with all nonvested restricted stock and restricted stock units based on an
estimate of the grant-date fair value of each equity award. Grants of time-based nonvested restricted stock are valued based on the
closing stock price on the grant date, while grants of performance-based restricted stock units are valued at an estimate of fair market
value using a lattice model. See Note 8 for additional information on the Company’s stock-based compensation plans.
(i) 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 at the point of sale 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. Non-refundable layaway service fees are recognized in revenue when collected by the Company from
customers. 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. Breakage on gift cards is minimal as the cards are generally subject to escheat regulations
of the state in which the gift card subsidiary is located.
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. Under Accounting Standard Update (“ASU”) 2014-09, the
Company recorded an estimated refund liability of $0.3 million, included in the line item “Accrued expenses,” and the carrying value
of a return asset of $0.2 million, presented separately from inventory, included in the line item “Prepaid and other current assets” on the
consolidated balance sheets. The cumulative effect of the changes made to the February 2, 2019 consolidated balance sheet from the
modified retrospective adoption of ASU 2014-09 on retained earnings was immaterial.
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 is disaggregated by major product line. The percentage of net sales related to each
classification of its merchandise assortment for fiscal 2018, 2017 and 2016 was as follows:
Accessories
Children’s
Ladies’
Men’s
Home
Percentage of Net Sales
2018 2017 2016
32 % 32 % 31 %
23 % 23 % 23 %
22 % 23 % 24 %
17 % 17 % 17 %
5 %
5 %
6 %
F-10
(j) Cost of Sales
Cost of sales includes the cost of inventory sold during the period and transportation costs, including inbound freight related to inventory
sold and freight from the distribution centers to the stores, net of discounts and allowances. Distribution center costs, store occupancy
expenses and advertising expenses are not considered components of cost of sales and are included as part of selling, general and
administrative expenses. Depreciation is also not considered a component of cost of sales and is included as a separate line item in the
consolidated statements of operations. Distribution center costs (exclusive of depreciation) for fiscal 2018, 2017 and 2016 were $17.6
million, $17.4 million and $17.2 million, respectively.
(k) Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the
period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding
plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock and stock options. During loss
periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding because the inclusion
of common stock equivalents would be antidilutive.
The following table provides a reconciliation of the number of average common shares outstanding used to calculate basic earnings per
share to the number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share for
fiscal 2018, 2017 and 2016:
Weighted average number of common shares outstanding
Incremental shares from assumed vesting of nonvested restricted stock
Average number of common shares and common stock equivalents outstanding
2018
13,030,063
39,631
13,069,694
2017
14,058,008
57,887
14,115,895
2016
14,656,753
5,519
14,662,272
The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. This method assumes
that the proceeds the Company receives from the exercise of stock options are used to repurchase common shares in the market. Prior
to the adoption of ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment
Accounting, in the first quarter of fiscal 2017, the Company included as assumed proceeds the amount of compensation costs attributed
to future services and not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital
assuming exercise of outstanding options and vesting of nonvested restricted stock. Following the adoption of ASU No. 2016-09, the
assumed proceeds include only the amount of compensation costs attributed to future services and not yet recognized but does not
include any tax benefits arising from the assumed exercise of outstanding options and the vesting of nonvested restricted stock. For
fiscal 2018, 2017 and 2016, respectively, there were 0, 0 and 4,000 options outstanding to purchase shares of common stock excluded
from the calculation of diluted earnings per share because of antidilution. For fiscal 2018, 2017 and 2016, respectively, there were
124,000, 125,000 and 237,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per
share because of antidilution.
(l) Advertising
The Company expenses advertising as incurred. Advertising expense for fiscal 2018, 2017 and 2016 was $1.7 million, $2.0 million and
$2.5 million, respectively.
(m) Operating Leases
The Company leases all of its store properties and accounts for the leases as operating leases. Many lease agreements contain tenant
improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives
and minimum rent expense on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin
amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing “rent holidays” at a date other than the
date of initial occupancy, the Company records minimum rent expense on a straight-line basis over the terms of the leases. Tenant
improvement allowances are included in accrued expenses (current portion) and other long-term liabilities (noncurrent portion) and are
amortized over the lease term. Changes in the balances of tenant improvement allowances are included as a component of operating
activities in the consolidated statements of cash flows.
F-11
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a
percentage of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in
the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
The Company is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the
liability’s fair value can be reasonably estimated. The Company included a liability of $0.8 million as of both February 2, 2019 and
February 3, 2018 in other long-term liabilities, representing estimated expenses that would be incurred upon the termination of the
Company’s operating leases.
(n) Store Opening and Closing Costs
New and relocated store opening period costs are charged directly to expense when incurred. When the Company decides to close or
relocate a store, the Company records an expense for the present value of expected future rent payments, net of sublease income, if any,
in the period that a store closes or relocates. All store opening and closing costs are included in selling, general and administrative
expenses.
(o) 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.
(p) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include those used in the valuation of inventory, property and equipment, self-
insurance liabilities, leases and income taxes. Management periodically evaluates estimates used in the preparation of the consolidated
financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based
on such periodic evaluations.
(q) Business Reporting Segments
The Company is a value-priced retailer of urban fashion apparel and accessories for the entire family. The 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. All sales and assets are
located within the United States.
(r) Recent Accounting Pronouncements
Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606). The guidance requires an entity to recognize revenue on contracts with customers relating to the transfer of promised goods
or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve this, an entity is required to identify the contract with a customer; identify the separate performance obligations in the
contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and
recognize revenue when (or as) the entity satisfies each performance obligation. In August of 2015, the FASB issued ASU 2015-14
which defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods in
the year of adoption. The Company adopted ASU 2014-09 in fiscal 2018 beginning February 4, 2018 using the modified retrospective
approach. The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the
F-12
Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise. As
such, adoption of the new standard did not have a material impact on the Company’s consolidated balance sheet, results of operations
or cash flows. Additionally, the adoption of the ASU did not result in significant changes to the Company’s business processes, controls,
systems.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which amends the existing guidance in ASC Topic 840,
Leases. Additional amendments to the standard were issued subsequent to the initial release. The new standard requires lessees to
recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for leases with such obligations representing the
discounted value of future lease payments. The Company will adopt the requirements of the new lease standard effective February 3,
2019, the first day of fiscal 2019. As part of the implementation process, the Company has assessed its lease arrangements and evaluated
practical expedient and accounting policy elections. The Company is finalizing its evaluation of processes and controls, and has
implemented necessary modifications to its existing lease system. In adopting the new lease standard, the Company will elect the
optional transition method which will apply the standard as of the effective date, but will not apply the standard to the comparative
periods previously presented in its consolidated financial statements. At the adoption date, the Company expects to recognize a
cumulative effect adjustment to retained earnings as a result of the impairment of certain ROU assets. The new standard provides
optional practical expedients in transition. The Company is electing the transition package of practical expedients allowed by the
standard which permits it to not reassess prior conclusions regarding lease classification, identification and initial direct costs. Further,
the Company is electing a short-term lease exception policy which permits it to not apply the recognition requirements of this standard
to short-term leases (leases with terms of 12 months or less), as well as an accounting policy to account for lease and non-lease
components as a single component for certain classes of assets. The Company is not electing the hindsight practical expedient.
The adoption of ASU 2016-02 will have a material impact on the Company's consolidated balance sheet due to the recognition of ROU
assets and lease liabilities related to operating leases. The Company expects to record operating lease liabilities totaling approximately
$130 million to $150 million based on the present value of the remaining minimum rental payments using a discount rate as of the date
of adoption. The Company also expects to record corresponding ROU assets based on the operating lease liabilities as adjusted for
prepaid and deferred rent, unamortized lease incentives and other transition adjustments. These estimates may differ from the actual
amounts recorded upon adoption in fiscal 2019 as they are based on transition procedures completed to date. The Company does not
expect a material impact to its consolidated statement of operations or consolidated statement of cash flows.
(3) Property and Equipment, net
The components of property and equipment as of February 2, 2019 and February 3, 2018 are as follows (in thousands):
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Computer equipment
Construction in progress
Accumulated depreciation
February 2, February 3,
2019
2018
$
479 $
30,779
97,825
132,067
38,039
2,993
302,182
(245,958)
$
56,224 $
479
30,540
93,653
127,816
37,115
1,873
291,476
(229,699)
61,777
F-13
(4) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the principal or most advantageous market at the measurement date. Fair value is established according to a
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for assets or liabilities. The
fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. Level 3 inputs are given the lowest priority
in the fair value hierarchy.
As of February 2, 2019, the Company’s investment securities are classified as held-to-maturity since the Company has the intent and
ability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of the following
(in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Market
Value
Short-term:
Obligations of the U.S. Treasury and U.S. government agencies (Level 1) $
Obligations of states and municipalities (Level 2)
Bank certificates of deposit (Level 2)
Long-term:
Obligations of the U.S. Treasury (Level 1)
Bank certificates of deposit (Level 2)
$
$
$
38,706 $
95
11,549
50,350 $
4,956 $
3,927
8,883 $
4 $
—
—
4 $
— $
—
— $
(37) $
—
—
(37) $
38,673
95
11,549
50,317
(16) $
—
(16) $
4,940
3,927
8,867
The amortized cost and fair market value of investment securities as of February 2, 2019 by contractual maturity are as follows (in
thousands):
Fair
Mature in one year or less
Mature after one year through five years
$
$
Amortized Market
Value
Cost
50,350 $
8,883
59,233 $
50,317
8,867
59,184
As of February 3, 2018, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in
thousands):
Short-term:
Obligations of the U.S. Treasury and U.S. government agencies (Level 1)
Obligations of states and municipalities (Level 2)
Bank certificates of deposit (Level 2)
Long-term:
Obligations of the U.S. Treasury (Level 1)
Bank certificates of deposit (Level 2)
Gross
Gross
Amortized Unrealized Unrealized Fair Market
Cost
Gains
Losses
Value
$
$
$
$
10,162 $
8,111
13,227
31,500 $
9,967 $
15,484
25,451 $
— $
1
—
1 $
— $
—
— $
(25) $
(2)
-
(27) $
10,137
8,110
13,227
31,474
(116) $
-
(116) $
9,851
15,484
25,335
F-14
The amortized cost and fair market value of investment securities as of February 3, 2018 by contractual maturity were as follows (in
thousands):
Mature in one year or less
Mature after one year through five years
$
$
There were no changes among the levels in the three fiscal years ended February 2, 2019.
Amortized
Fair
Market
Value
Cost
31,500 $
25,451
56,951 $
31,474
25,335
56,809
Fair market values of Level 2 investments are determined by management with the assistance of a third party pricing service. Since
quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using
observable market information such as quotes from less active markets and quoted prices of similar securities.
(5) Revolving Line of Credit
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 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. Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus either
1.25% or 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus either 0.25% or 0.5%, (ii) the Federal
Funds Rate plus either 0.75% or 1.0%, or (iii) LIBOR plus either 1.25% or 1.5%, based in any such case on the average daily availability
for borrowings under the facility. The facility continues to be secured by the Company’s inventory, accounts receivable and related
assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is
applicable and tested only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of
cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to
the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings
under the credit facility.
(6) Income Taxes
Income tax expense for fiscal 2018, 2017 and 2016 consists of the following (in thousands):
2018
2017
2016
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
$ (4,326) $ (5,249) $ (3,759)
(779)
(4,538)
(948)
(6,197)
(1,390)
(5,716)
619
143
762
(1,541)
(3,078)
59
349
(1,482)
(2,729)
$ (4,954) $ (8,926) $ (6,020)
F-15
Income tax expense computed using the federal statutory rate is reconciled to the reported income tax expense as follows for fiscal 2018,
2017 and 2016 (in thousands):
Statutory rate applied to income before income taxes
Revaluation of net deferred tax assets due to the Tax Cuts and Jobs Act
State income taxes, net of federal benefit
State tax credits
State tax credits - valuation allowance (net of federal benefit)
Tax exempt interest
General business credits
Excess tax benefits from stock based compensation
Other
Income tax expense
2018
2016
2017
$ (5,529) $ (7,924) $ (6,773)
—
(1,925)
(903)
(549)
226
252
—
(79)
20
24
1,605
1,273
—
70
(195)
(68)
$ (4,954) $ (8,926) $ (6,020)
—
(1,250)
276
10
16
1,409
140
(26)
The components of deferred tax assets and deferred tax liabilities as of February 2, 2019 and February 3, 2018 are as follows (in
thousands):
February 2, February 3,
2019
2018
Deferred tax assets:
Deferred rent amortization
Inventory capitalization
Book and tax depreciation differences
Vacation liability
State tax credits
Stock compensation
Legal expense reserve
Insurance liabilities
Other
Subtotal deferred tax assets
Less: State tax credits valuation allowance - net
Total deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Total deferred tax liabilities
Net deferred tax asset
$
652 $
1,953
853
653
2,863
843
178
319
412
8,726
(1,615)
7,111
558
1,863
312
585
2,676
834
73
537
342
7,780
(1,624)
6,156
(572)
(572)
(379)
(379)
$ 6,539 $ 5,777
The Company files income tax returns in U.S. federal and state jurisdictions where it does business and is subject to examinations by
the Internal Revenue Service (“IRS”) and other taxing authorities. With a few exceptions, the Company is no longer subject to U.S.
federal and state income tax examinations by tax authorities for years prior to fiscal 2013. The Company reviews and assesses uncertain
tax positions, if any, with recognition and measurement of tax benefit based on a “more-likely-than-not” standard with respect to the
ultimate outcome, regardless of whether this assessment is favorable or unfavorable. As of February 2, 2019, there were no benefits
taken on the Company’s income tax returns that do not qualify for financial statement recognition. If a tax position does not meet the
minimum statutory threshold to avoid payment of penalties and interest, a company is required to recognize an expense for the amount
of the interest and penalty in the period in which the company claims or expects to claim the position on its tax return. For financial
statement purposes, companies are allowed to elect whether to classify such charges as either income tax expense or another expense
classification. Should such expense be incurred in the future, the Company will classify such interest as a component of interest expense
and penalties as a component of income tax expense.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are
F-16
deductible and income tax credits may be utilized, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences with the exception of certain tax credits available in one state. Beginning in 2011, the Company
concluded that its ability to utilize a portion of such state’s tax credits was no longer more likely than not. Such recognition resulted in
the establishment of a valuation allowance which necessitated a charge to income tax expense and a reduction in deferred tax assets.
Subsequent to 2011, the Company has continued to earn such state credits and has further adjusted the related valuation allowance. At
February 2, 2019, the valuation allowance, net of federal tax benefit, totaled $1.6 million.
The effective income tax rate for fiscal 2018, 2017 and 2016 included the recognition of benefits arising from various federal and state
tax credits. Under current IRS and state income tax regulations, these credits may be carried back for one year or carried forward for
periods up to 20 years. The income tax benefit included $1.7 million related to such credits in fiscal 2018, $1.3 million related to such
credits in fiscal 2017 and $1.8 million related to such credits in fiscal 2016.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. The
legislation was effective January 1, 2018 and made significant changes to U.S. tax law including a reduction in the corporate income
tax rate, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The
legislation reduced the federal statutory tax rate from 35% to 21% and required corporations with fiscal years spanning periods before
and after the effective date to use a blended federal tax rate for fiscal years which include January 1, 2018. As a result of the provision
requiring a blended rate, the Company’s federal statutory rate was reduced from 35% to 33.7% with a commensurate reduction in income
tax expense of $0.3 million for fiscal 2017. In addition, the Company was required to revalue its deferred tax assets and liabilities to
reflect the reduced federal income tax rate expected to be in effect at the time of future reversals. Such revaluation resulted in the
reduction of net deferred tax assets and a charge to income tax expense in the fourth quarter of 2017 of $1.9 million. The other provisions
of the Tax Cuts and Jobs Act did not have a material impact on the fiscal 2017 consolidated financial statements. In 2018, the Company’s
effective income tax rate was significantly lower than previous years due to the reduction in the federal statutory tax rate.
(7) Other Long-Term Liabilities
The components of other long-term liabilities as of February 2, 2019 and February 3, 2018 are as follows (in thousands):
Deferred rent
Tenant improvement allowances
Other
(8) Stockholders’ Equity
February 2, February 3,
2019
2,344 $
4,037
1,814
8,195 $
2018
2,148
4,325
1,960
8,433
$
$
Repurchases of common stock
In March 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 first three quarters of fiscal 2018, the Company repurchased 866,748 shares of its common
stock in the open market at an aggregate cost of $25.0 million.
In November 2018, the Company’s Board of Directors approved a new program that authorized the purchase of up to $25.0 million in
shares of the Company’s common stock. During the thirteen weeks ended February 2, 2019, the Company repurchased 768,558 shares
of its common stock in the open market at an aggregate cost of $15.4 million. At February 2, 2019, $9.6 million of shares remained
available for purchase under this program.
Dividends
In fiscal 2018, the Company paid four quarterly dividends of $0.08 per common share on March 20, 2018, June 19, 2018, September
18, 2018 and December 26, 2018. On February 12, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common
share, which was paid on March 19, 2019 to stockholders of record as of March 5, 2019. Any determination to declare and pay cash
dividends for future quarters will be made by the Board of Directors.
Stock-Based Compensation
On April 6, 2012, the Company adopted the Citi Trends, Inc. 2012 Incentive Plan (the “2012 Plan”), which became effective upon
approval by the Company’s stockholders on May 23, 2012. The 2012 Plan is a successor plan to the 2005 Citi Trends, Inc. Long-Term
F-17
Incentive Plan (the “2005 Plan”), which became effective upon the consummation of the Company’s initial public offering in
May 2005.
The 2005 Plan provided for the grant of incentive and nonqualified options, nonvested restricted stock and other forms of stock-based
compensation to key employees and directors. The 2012 Plan provides for the grant of incentive and nonqualified options, nonvested
restricted stock and other forms of stock-based and cash-based compensation to key employees and directors.
Shares of time-based nonvested restricted stock granted to employees vest in equal installments over three years from the date of grant.
Shares issued to directors vest one year from the date of grant. The Company records compensation expense for grants of time-based
nonvested restricted stock on a straight line basis over the requisite service period of the stock recipients which is equal to the vesting
period of the stock. Total compensation cost for such stock is calculated based on the closing market price on the date of grant multiplied
by the number of shares granted. The Company expects to recognize $2.2 million in future compensation expense from the grants of
time-based restricted stock over the requisite service period of up to three years. Compensation costs for grants of performance-based
restricted stock units (“RSUs”) are recorded in full on the date of grant using a lattice model to estimate fair market value. During fiscal
2018, 2017 and 2016, compensation expense arising from time-based nonvested restricted stock grants and performance-based RSUs
totaled $2.2 million, $1.6 million and $2.9 million, respectively.
A summary of activity related to time-based nonvested restricted stock grants during fiscal 2018 is as follows:
Outstanding as of February 3, 2018
Granted
Vested
Forfeited
Outstanding as of February 2, 2019
Nonvested Weighted Average
Restricted
Shares
173,208 $
80,045
(90,033)
—
163,220 $
Grant Date
Fair Value
19.02
30.03
19.55
—
24.09
In March 2018, the Company granted 8,400 RSUs to one employee. The RSUs had performance vesting criteria which were based upon
the closing price of the Company’s stock achieving certain thresholds. The shares vest one-third upon achieving an average closing
stock price for a 20 consecutive day period of $30.44; $35.01; and $40.26, respectively. The awards expire three years from the date of
grant. On the date of grant, the Company expensed $137,000 which was the estimated fair market value. One of these thresholds was
achieved in 2018.
In March 2018, the Company granted 8,401 RSUs to one employee. The RSUs had performance vesting criteria which were based upon
the Company achieving certain thresholds of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). The
shares vest one-third upon achieving trailing 12-month adjusted EBITDA levels of $51.4 million, $59.1 million, and $67.9, respectively.
The awards expire three years from the date of grant. During 2018, the Company expensed $78,000 which was the estimated fair market
value. None of these thresholds were achieved in 2018.
In March 2017, the Company granted 23,551 RSUs to two employees. The RSUs had performance vesting criteria which were based
upon the closing price of the Company’s stock achieving certain thresholds. The shares vest one-fourth upon achieving a closing stock
price for a 20 consecutive day period of $19.10; $21.70; $24.30; and $26.90, respectively. The awards expire three years from the date
of grant. On the date of grant, the Company expensed $306,000 which was the estimated fair market value. One of the two employees
resigned after the date of grant and forfeited his shares. Three of these thresholds were achieved in 2017 and the final threshold was
achieved in 2018.
In March 2016, the Company granted 24,816 RSUs to two employees. The RSUs had performance vesting criteria which were based
upon the closing price of the Company’s stock achieving certain thresholds. The shares vest one-fourth upon achieving a closing stock
price for a 20 consecutive day period of $20.75; $23.50; $26.25; and $29.00, respectively. The awards expire three years from the date
of grant. On the date of grant, the Company expensed $238,000 which was the estimated fair market value. Two of these thresholds
were achieved in 2017 and the other two thresholds were achieved in 2018.
Income tax benefits or deficiencies arising from the fair market value of restricted stock shares at vesting versus the cumulative
compensation cost of such shares are recorded as a component of income tax expense in the Company’s consolidated statement of
operations. Such income tax benefits totaled $140,000 in fiscal 2018 and $70,000 in fiscal 2017.
F-18
(9) Commitments and Contingencies
The Company leases its stores under operating leases, which generally have an initial term of five years with renewal options. Future
minimum rent payments under operating leases having noncancellable lease terms as of February 2, 2019 are as follows (in thousands):
Fiscal Year:
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
$
47,289
39,294
28,228
16,880
9,440
7,836
$ 148,967
Certain operating leases provide for fixed monthly rents, while others provide for contingent rents computed as a percentage of net sales
and others provide for a combination of both fixed monthly rents and contingent rents computed as a percentage of net sales. Rent
expense was $55.3 million, $53.0 million and $50.7 million in fiscal 2018, 2017 and 2016 (including $0.5 million, $0.5 million and $0.4
million of contingent rent), respectively.
The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by
customers, employees or former employees. Once it becomes probable that the Company will incur costs in connection with a legal
proceeding and such costs can be reasonably estimated, it establishes appropriate reserves. While legal proceedings are subject to
uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any 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.
(10) Valuation and Qualifying Accounts
The following table summarizes the allowances for inventory shrinkage and deferred tax assets (in thousands):
Balance as of January 30, 2016
Additions charged to costs and expenses
Deductions
Balance as of January 28, 2017
Additions charged to costs and expenses
Impact of tax reform
Deductions
Balance as of February 3, 2018
Additions charged to costs and expenses
Deductions
Balance as of February 2, 2019
Allowance for Allowance for
Deferred Tax
Assets
Inventory
Shrinkage
$
2,584 $
9,351
(8,836)
3,099
11,103
—
(10,698)
3,504
9,643
(10,033)
$
3,114 $
1,272
—
—
1,272
79
273
—
1,624
—
(9)
1,615
For the allowance for inventory shrinkage, additions charged to costs and expenses are the result of estimated inventory shrinkage, while
deductions represent actual inventory shrinkage incurred from physical inventories taken during the fiscal year.
For the deferred tax asset valuation allowance, additions charged to costs and expenses represent the establishment of a valuation
allowance when management determines that its ability to utilize certain tax credits included in deferred tax assets is no longer more
likely than not. In fiscal 2017, the Company revalued its deferred tax assets and liabilities to reflect the reduced federal income tax rate
expected to be in effect at the time of future reversals including the future utilization of tax credits. Such reduction was the result of the
Tax Cuts and Jobs Act tax reform legislation enacted in December 2017 which reduced the federal statutory rate from 35% to 21%. The
revaluation necessitated an increase in the valuation allowance related to the future realization of state income tax credits due to the
reduction of the associated federal income tax benefit.
F-19
(11) Unaudited Quarterly Results of Operations
Feb. 2
2019
Nov. 3
2018
Quarter Ended
May 5
2018
(in thousands, except per share and share amounts)
Feb. 3
2018 (1)
Aug. 4
2018
Oct. 28
2017
Jul. 29
2017
Apr. 29
2017
$
201,158 $
175,364 $
181,999 $
211,032 $
212,143 $
176,943 $
166,200 $
199,955
Statement of Operations Data:
Net sales
Cost of sales (exclusive of depreciation
shown separately below)
Selling, general and administrative
expenses
Depreciation
Asset impairment
Income (loss) from operations
Interest, net
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
$
Net income (loss) per common share: (2)
$
$
Basic
Diluted
Weighted average shares used to compute
net income (loss) per common share:
(126,095)
(110,420)
(110,398)
(129,413)
(131,363)
(110,094)
(102,175)
(122,390)
(61,459)
(4,636)
(152)
8,816
334
9,150
(1,802)
7,348 $
(61,189)
(4,600)
(180)
(1,025)
282
(62,285)
(4,676)
(942)
3,698
325
(63,005)
(4,974)
—
13,640
258
(65,623)
(5,020)
(430)
9,707
228
(61,118)
(4,976)
—
755
178
(59,834)
(4,589)
(77)
(475)
178
(60,487)
(4,298)
—
12,780
149
(743)
237
(506) $
4,023
(788)
3,235 $
13,898
(2,601)
11,297 $
9,935
(4,688)
5,247 $
933
(286)
647 $
(297)
87
(210) $
12,929
(4,039)
8,890
0.59 $
0.59 $
(0.04) $
(0.04) $
0.24 $
0.24 $
0.83 $
0.83 $
0.39 $
0.38 $
0.05 $
0.05 $
(0.01) $
(0.01) $
0.60
0.60
Basic
Diluted
12,447,209 12,780,472 13,314,470 13,578,100 13,567,870 13,563,295 14,381,738 14,719,130
12,470,560 12,780,472 13,351,321 13,631,266 13,652,330 13,614,404 14,381,738 14,779,930
(1) Fourth quarter includes the impact of the Tax Cuts and Jobs Act enacted in December 2017. See Note 6 to the consolidated
financial statements for additional information.
(2) Net income (loss) per share is computed independently for each period presented. As a result, the total of net income (loss)
per share for the four quarters may not equal the annual amount.
(12)
Subsequent Events
On April 11, 2019, the Company entered into a Settlement Agreement with Macellum SPV III, LP, Macellum Management, LP,
Macellum Advisors GP, LLC, and Jonathan Duskin, a member of our board of directors (collectively, “Macellum”), to settle the
Company’s election contest with such persons in connection with the Company’s 2019 annual meeting of stockholders. Pursuant to the
Settlement Agreement, the Company agreed to reimburse Macellum for certain documented out-of-pocket costs, fees and expenses
incurred and paid in connection with proxy solicitation activities in an amount not to exceed $500,000.
F-20
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce D. Smith, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Citi Trends, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 17, 2019
/s/ Bruce D. Smith
Bruce D. Smith
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart C. Clifford, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Citi Trends, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 17, 2019
/s/ Stuart C. Clifford
Stuart C. Clifford
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report of Citi Trends, Inc. (the “Company”) on Form 10-K for the fiscal year ending February
2, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce D. Smith, President
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 17, 2019
/s/ Bruce D. Smith
Bruce D. Smith
President and Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Citi Trends, Inc. and will be retained
by Citi Trends, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report of Citi Trends, Inc. (the “Company”) on Form 10-K for the fiscal year ending February
2, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stuart C. Clifford, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 17, 2019
/s/ Stuart C. Clifford
Stuart C. Clifford
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to Citi Trends, Inc. and will be retained
by Citi Trends, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
CORPORATE DATA
HOME OFFICE
Citi Trends, Inc.
104 Coleman Boulevard
Savannah, GA 31408
912-236-1561
912-443-3674 Fax
www.cititrends.com
STOCK TRANSFER AGENT AND
REGISTRAR
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
800-937-5449
www.amstock.com
Shareholders seeking information concerning
stock transfers, change of address, and lost
certificates should contact American Stock
Transfer & Trust Company directly.
GENERAL COUNSEL
Alston & Bird, LLP
Washington, DC
ANNUAL REPORT ON FORM 10-K
A copy of the Company’s Annual Report on
Form 10-K for the fiscal year ended February 2,
2019, as filed with the Securities and Exchange
Commission, may be obtained without charge
upon written request to the Company’s Corporate
Secretary at the home office
address listed above.
ANNUAL MEETING
The 2019 Annual Meeting of Stockholders will
be held at 9:00 a.m., EDT on June 5, 2019, at
the Embassy Suites - Airport, 145 West Mulberry
Boulevard, Savannah, Georgia.
MARKET INFORMATION
Citi Trends’ common stock has been quoted
on the NASDAQ Global Select Market under the
symbol “CTRN” since its initial public offering
on May 18, 2005.
FORWARD-LOOKING STATEMENTS
Some statements in, or incorporated by reference
into, this annual report may constitute “forward-
looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended,
and section 21E of the Securities Exchange
Act of 1934, as amended. All statements other
than historical facts contained in this annual
report, including statements regarding our
future financial results and position, business
policy and plans, objectives and expectations of
management for future operations and capital
allocation expectations, are forward-looking
statements that are subject to material risks and
uncertainties. The words “believe,” “may,” “could,”
“estimate,” “continue,” “anticipate,” “project,”
“plan,” “objective,” “forecast,” “goal,” “could,” “will
likely result,” “will continue,” “intend,” “expect”
and similar expressions, as they relate to Citi
Trends, are intended to identify forward-looking
statements, although not all forward-looking
statements contain such language. Investors
are cautioned that any such forward-looking
statements are not guarantees of future
performance or results and are inherently subject
to risks and uncertainties, some of which cannot
be predicted or quantified, and that actual results
or developments may differ materially from those
in the forward-looking statements as a result of
various factors which are discussed in Item 1A,
Risk Factors, in the Citi Trends, Inc. Annual Report
on Form 10-K for the fiscal year ended February
2, 2019, and in other filings that we make with
the Securities and Exchange Commission. These
risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions,
growth risks, consumer spending patterns,
competition within the industry, competition in
our markets, actions of our competitors or anchor
tenants in the strip shopping centers where our
stores are located, anticipated fluctuations in
our operating results, expected cash position,
the ability to anticipate and respond to fashion
trends and the outcome of any actions of activist
investors. Any forward-looking statements by
the Company are intended to speak only as of
the date such statements are made. Except
as required by applicable law, including the
securities laws of the United States and the rules
and regulations of the Securities and Exchange
Commission, Citi Trends does not undertake to
publicly update any forward-looking statements
in this annual report or with respect to matters
described herein, whether as a result of any new
information, future events or otherwise.
BOARD OF DIRECTORS
John S. Lupo
Chairman of the Board of Directors,
Citi Trends, Inc.
Laurens M. Goff
Managing Partner,
Stone-Goff Partners, a private equity firm
Barbara Levy
Former Executive Vice President,
Ross Stores, Inc.
Brian P. Carney
Executive Vice President & Chief Financial Officer,
Southeastern Grocers, LLC
Margaret L. Jenkins
Former Chief Marketing Officer,
Denny’s Corporation
Bruce D. Smith
President and Chief Executive Officer,
Citi Trends, Inc.
Jonathan Duskin
Chief Executive Officer,
Macellum Capital Management, LLC
OFFICERS
Bruce D. Smith
President and Chief Executive Officer
Stuart C. Clifford
Senior Vice President and Chief Financial Officer
Ivy D. Council
Executive Vice President of Human Resources
and Chief Compliance Officer
Charles D. Crowell
Senior Vice President of Supply Chain
James A. Dunn
Senior Vice President of Store Operations
Brian D. Lattman
Senior Vice President and
General Merchandise Manager
Christina K. Short
Senior Vice President and
General Merchandise Manager
Citi Trends, Inc.
104 Coleman Boulevard
Savannah, GA 31408
912.236.1561
www.cititrends.com