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 1, 2020
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
Trading Symbol
CTRN
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 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:
$166,153,095 as of August 3, 2019.
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,
10,841,564 shares outstanding as of March 31, 2020.
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 30, 2020.
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.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
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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: potential risks and uncertainties relating to the ultimate
geographic spread of the coronavirus (COVID-19), the severity of the disease, the duration of the COVID-19 outbreak, actions that may be
taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact, the potential negative impacts of COVID-19 on
the global economy and foreign sourcing, the impacts of COVID-19 on the Company's financial condition, business operation and liquidity,
including the reopening of the Company’s retail stores and distribution facilities, 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 1, 2020 (“fiscal 2019”),
February 2, 2019 (“fiscal 2018”) and February 3, 2018 (“fiscal 2017”).
ITEM 1.
BUSINESS
Overview and History
We are a value-priced retailer of fashion apparel, accessories and home goods for the entire family. Our merchandise offerings are
designed to appeal to the fashion preferences of value-conscious consumers, particularly African-Americans. Our goal is to
provide merchandise at discounts of 20% to 70% compared to department and specialty stores’ regular prices. 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 1, 2020, we operated 571 stores in both urban and rural markets in 33 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
rebranded the stores to “Citi Trends” and implemented several strategies to focus on the growing urban fashion 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.
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Company Strengths and Strategies
Our goal is to be the leading value-priced retailer of fashion apparel, accessories and home goods for the African-American families we
currently serve as our primary target market. We strive to provide our customers with a place to shop that is fashionable, fresh, friendly, fair
and fun. We believe the following business strengths differentiate us from our competitors and are important to our success:
Focus on Fashionable Mix. We focus our merchandise on fashionable apparel that we believe appeals 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 for our target customer. Our merchandising staff tests new emerging merchandise trends before
reordering and actively manages the mix of basic, fashion, trend 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 offer branded product at tremendous value that appeals to our core customer.
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, women and children, as well as
accessories and home goods. 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 similar 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 buying team located in New York,
New York. 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 in a Friendly and Fun 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 music appropriate for our target customer throughout the store. Our
stores are neat, orderly and clean, offering a friendly and fun environment.
Friendly and Helpful Store Associates. Our store associates are trained to provide friendly and helpful customer service to deliver a
positive shopping experience. Many of our store associates live in the neighborhoods where our stores are located and frequently shop our
stores themselves. As a result, our store associates cultivate a unique culture at our stores that enables a high level of connectivity with our
customers. We strive to make our stores a destination where everyone is welcome, and our store associates foster that vision every day
through enriched customer engagement.
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, we 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 fresh and fashionable apparel, accessories and home goods 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 2019 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 décor and functional bedroom, bathroom and kitchen products, as well as beauty and toys.
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The following table sets forth the merchandise assortment by classification as a percentage of net sales for fiscal 2019, 2018 and 2017.
Accessories
Children’s
Ladies’
Men’s
Home
Percentage of Net Sales
2018
32 %
23 %
22 %
17 %
6 %
2019
32 %
23 %
22 %
16 %
7 %
2017
32 %
23 %
23 %
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 fashion positioning and value 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.
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 and a planning and allocation
team.
The buyers on our buying team have, on average, 12 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, travel regularly to the major United States markets, visiting major manufacturers and attending national and regional
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. A store-level planning system assists our team in their efforts to allocate merchandise to individual stores based on sales
performance and planned inventory levels. The buyers also regularly review the age and performance 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.
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.
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Store Operations
Store Format. The average selling space of our 571 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, beauty, sunglasses and
consumables 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
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. Our mission is
to curate the best product at value prices for our core customers. We provide them a place to shop that is fashionable, fresh, friendly, fair
and fun. A critical component of our success is to maintain an environment that is neat, clean and organized, where everyone is welcome.
Store Management. Store operations are managed by our Senior Vice President of Store Operations, four regional vice presidents and
52 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 career 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 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 and 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 reduce the deposit requirement to 10% and waive the service charge in connection with
promotional events. The customer then makes additional payments every two weeks and has 60 days 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 major metropolitan 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. We will be the leading value-priced
retailer within the neighborhoods we proudly serve. We will be an integral part of our customers’ community by providing apparel,
accessories, home furnishings and career opportunities.
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.
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
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(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. Our Facebook
page has nearly 600,000 followers, and our Instagram account has more than 80,000 followers. We use our social media channels to
highlight our brand and engage our customers with compelling digital content on a regular basis. We also maintain a website at
http://www.cititrends.com and a mobile app, both of which advertise our latest in-store products and provide information about our
business, including a store locator.
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 each week from our distribution
centers. The Darlington distribution center has 550,000 square feet of space, while the Roland distribution center has 565,000 square feet of
space.
We engaged a consulting firm to help us identify more efficient and less costly distribution alternatives. We focused on 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 began in the first quarter of 2019 and has continued into 2020.
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.
Prior to the COVID-19 crisis, we were embarking on a systems transformation project with a leading consultant to provide a strategic
roadmap for the future of our information systems. However, due to the negative economic effects of COVID-19, we have delayed this
project. Our top priorities for this project were to reinvent and dramatically improve our planning and allocation systems, as well as
provide robust analytical capabilities that extend visibility to granular levels of the business. We understand the competitive advantage data
provides and will strive to leverage newer technologies such as artificial intelligence and machine learning as enablers for executing
business operations. We will revisit next steps for this project later in 2020.
Aligned with our systems transformation project, we were also engaged in a point-of-sale replacement project which included new
hardware, software and payment systems for our stores. The project was expected to improve our store operational processes, increase
transactional efficiencies and provide enhanced visibility to the business. As an organization focused on being fashionable, friendly, fresh,
fair and fun, we understand that our customer experience is paramount to our success and a new point-of-sale solution will provide the
foundation to enhance our customer engagement journey. This project has also been temporarily suspended due to the uncertainty
stemming from COVID-19.
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,
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,
Continued testing and introduction of new categories of merchandise that meet the needs of our customers,
Continued evolution of our marketing strategies through the use of digital advertising and influencers, and
Future execution of a systems transformation project and point-of-sale replacement project, as described above.
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 20 Citi Trends
stores with the highest level of profit, 14 different metropolitan statistical areas are represented. Also, only six of our stores were not
profitable on a four-wall basis in fiscal 2019.
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We opened 16 new stores in fiscal 2019. We opened three new stores in fiscal 2020 before suspending our new store initiatives due to the
negative economic effects of COVID-19.
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 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 Kohl’s. These chains do not focus on
fashion apparel and, within their apparel offering, lack the specialized focus on fashionable mix that 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 extreme value for 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 1, 2020, we had approximately 3,000 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.
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 financial and operating performance may be materially and adversely affected by the outbreak of the novel coronavirus
(“COVID-19”).
The recent outbreak of COVID-19 in the U.S. has had an unfavorable impact on our business operations. Mandatory closures of businesses
imposed by the federal, state and local governments to control the spread of the virus is disrupting the operations of our management,
business and finance teams. In response to COVID-19, the Company temporarily closed all of its retail stores and distribution facilities as of
March 20, 2020 and temporarily closed its corporate and buying offices with associates working remotely where possible. We cannot
foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact on our
business and our consolidated financial results. The prolonged closure of some or all of our retail stores and distribution facilities,
disruptions in our supply chain and with our transportation providers, the slowdown in consumer spending and other factors resulting from
the pandemic are expected to have an adverse impact on the financial condition, results of operations and liquidity of the Company in fiscal
2020. The extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments
which are highly uncertain and cannot be predicted.
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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 shifting our merchandise mix more towards non-apparel merchandise and potentially
branching out into some new store concepts. There are significant risks associated with our ability to continue to expand successfully and
manage 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 expectations, slow our planned growth or close stores or operations. 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. The extent of the impact from the COVID-19 pandemic on our business and
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financial results could also impact our growth plans and long-term strategic goals. 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, including economic downturns
caused by natural disasters, acts of terror, or public health pandemics (including COVID-19), 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, public health emergencies like the COVID-19 pandemic, 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 depend upon strong cash flows from our operations to supply capital to fund our operations, growth, stock repurchases and
dividends and interest and debt repayment.
Our business depends upon our operations to continue to generate strong cash flow to supply capital to support our general operating
activities, to fund our growth and our return of cash to stockholders through our stock repurchase programs and dividends, and to pay our
interest and debt repayments. For example, as a result of the ongoing COVID-19 pandemic, we temporarily closed our stores beginning in
March 2020. We also suspended both our share repurchase program and the payment of our quarterly cash dividends. Our inability to
continue to generate sufficient cash flows to support these activities could adversely affect our growth plans, capital expenditures, operating
expenses and financial performance, including our earnings per share. Changes in the capital and credit markets, including market
disruptions, limited liquidity, and interest rate fluctuations may increase the cost of financing or restrict our access to these potential sources
of liquidity. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating
performance and maintaining strong credit ratings. In March 2020, we borrowed $43.7 million from our revolving credit facility to add to
our cash balances in order to provide enhanced financial flexibility due to uncertain market conditions arising from the impact of the
COVID-19 pandemic. If our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be
adversely impacted.
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, public health emergencies including the current COVID-19 pandemic, 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, trade restrictions, sanctions, tariffs, quotas, 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;
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concerns about human rights and working conditions in countries where merchandise is manufactured and produced; 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
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 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, public health emergency such as the current COVID-19
pandemic, weather conditions or any other cause could damage a significant portion of our inventory, impair our ability to stock our stores
adequately and may result in increased supply chain costs or lost sales.
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.
We rely upon third-party land-based and air freight carriers for merchandise shipments to our distribution centers and our retail stores.
Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, public health emergencies,
and increased transportation costs, associated with such carriers’ ability to provide delivery services to meet outbound shipping needs. In
addition, if the cost of fuel rises, the cost to deliver merchandise to our distribution centers and our retail stores may rise and such costs
could have an adverse impact on our profitability. Failure to deliver merchandise to our distribution centers and our retail stores in a timely,
effective and economically viable manner 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.
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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.
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.
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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 and $1.0 million in expense as a result of the proxy contest in connection with our
2019 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.
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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,
intellectual property, 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.
Additionally, in response to the COVID-19 pandemic state and local governments have implemented measures to slow the spread of the
virus, which resulted in the Company temporarily closing its stores on March 20, 2020. Extended closures required by law or additional
restrictions on our operations may have adverse effects on our financial condition.
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 point-of-sale, merchandise
planning and allocation, replenishment and markdowns, as well as other key business functions. These functions enhance our ability to
process and 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. Any cyberattack or a breach of our data could expose us to costly fines, private litigation and response measures, credit card
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brand assessments, government enforcement actions, disruption of business operations, negative publicity, erode customer confidence in the
effectiveness of our data security measures, and decrease our current or potential customers’ willingness to shop in our stores which could
adversely affect our business and financial conditions. Furthermore, there can be no assurance that any limitations of liability in our
contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any
particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available
on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as
to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the
occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on our business, operating results and financial condition.
We may be unable to negotiate future leases or renegotiate current leases on the same favorable terms as we had in the past.
Our strategic growth plan depends in part on our ability to renew current leases and enter into new leases for future stores. We currently
lease all of our store locations and are subject to the risks associated with leasing real estate. If we decide to close stores, we may be
required to continue to perform obligations under the applicable leases, including, among other things, paying rent and operating expenses
for the balance of the lease term, or paying to exercise rights to terminate, and the performance of any of these obligations may be
expensive. When the current lease terms for our stores expire, we may be unable to negotiate renewals which could lead to the closing or
relocating stores on less favorable terms or in a less favorable location.
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, public health pandemics like COVID-19, 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.
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, as well as changes in our merchandise mix, 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 7.0% 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.
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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. As part of the actions the Company has taken to increase its cash position and preserve financial
flexibility in light of current uncertainties resulting from the COVID-19 pandemic, the Company suspended the payment of dividends for
the near-term. On March 13, 2020, the Company announced a share repurchase program, however, due in part to the COVID-19 pandemic
and related economic downturn, no repurchases have been made under such program and the Company has suspended any future purchases
and plans to continue to monitor the situation based on business conditions and regard for its financial liquidity needs. 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.
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 five directors will be up for
election at the next annual meeting.
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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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Store Locations
As of February 1, 2020, we operated 571 stores located in 33 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 571 stores, totaling 7.7 million total square
feet and 6.3 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 33 states in
which we operated as of February 1, 2020:
Alabama—31
Arkansas—15
California—8
Connecticut—4
Delaware—2
Florida—52
Georgia—63
Illinois—21
Indiana—17
Iowa—2
Kansas—1
Kentucky—7
Louisiana—34
Maryland—6
Massachusetts—3
Michigan—23
Minnesota—2
Mississippi—27
Missouri—7
Nebraska—1
Nevada—2
New Jersey—1
New York—9
North Carolina—48
Ohio—29
Oklahoma—7
Pennsylvania—8
Rhode Island—2
South Carolina—42
Tennessee—18
Texas—53
Virginia—20
Wisconsin—6
17
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 a 12,300 square-foot office in New York City which is
used for buyer operations and meetings with vendors.
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 14, 2020, there were 37 holders of
record and approximately 2,700 beneficial holders of our common stock.
In 2019, we paid a quarterly dividend of $0.08 per common share on March 19, 2019, June 18, 2019, September 17, 2019 and
December 24, 2019.
On February 18, 2020, the Company’s board of directors declared a quarterly dividend of $0.08 per common share, which was paid on
March 17, 2020 to stockholders of record as of March 3, 2020.
On March 20, 2020, as part of the actions the Company has taken to increase our cash position and preserve financial flexibility in light of
current uncertainties resulting from the COVID-19 pandemic as described further below, the Company drew down $43.7 million under its
revolving credit facility. Pursuant to the terms of the revolving credit facility, the Company is restricted from paying cash dividends if there
were any borrowings outstanding in the 30 days prior to the dividend payment or any borrowings are expected in the 30 days subsequent to
the payment. The Company announced on April 28, 2020, the suspension of future cash dividends.
Determinations 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 2019 and the average price paid per share are
as follows:
Period
November (11/3/19 - 11/30/19)
December (12/1/19 - 1/4/20)
January (1/5/20 - 2/1/20)
Total
Total number of
Average price
shares purchased paid per share (1)
— $
469,146
372,097
841,243
Total number of
Maximum number (or
shares purchased as approximate dollar value)
of shares that may yet be
announced plans or purchased under the plans
part of publicly
programs (2)
or programs (2)
— $
469,146
372,097
841,243
—
14,724,113
6,246,529
—
21.93
22.81
Includes commissions for the shares repurchased under the stock repurchase program.
(1)
(2) On November 22, 2019, the Company’s board of directors approved a $25.0 million stock repurchase program, under which approximately
$6.2 million of shares remained available as of February 1, 2020. This repurchase program was completed in February 2020.
On March 13, 2020, the Company announced that its board of directors approved a $30.0 million stock repurchase program. Due to the
current economic uncertainty stemming from the COVID-19 pandemic, the Company has temporarily suspended any repurchases as of
March 23, 2020 and plans to continue to monitor the situation based on business conditions and regard for its financial liquidity needs.
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 the Russell 2000 Index, (ii) the cumulative total return of companies listed on The
NASDAQ Stock Market and (iii) the cumulative total return of the NASDAQ Retail Trade Index. We have elected to replace the
NASDAQ Composite Index with the Russell 2000 Index because we believe that it is a more appropriate comparison. In this transition
year, the stock performance graph below includes the comparative performance of the new index and the previously reported index. This
graph assumes that $100 was invested on January 31, 2015 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 Russell 2000 Index, the NASDAQ Composite Index and the NASDAQ Retail Trade Index
$350
$300
$250
$200
$150
$100
$50
$0
1/15
1/16
1/17
1/18
1/19
1/20
Citi Trends, Inc.
Russell 2000
NASDAQ Composite
NASDAQ Retail Trade
Copyright© 2020 Russell Investment Group. All rights reserved.
*
$100 invested on 1/31/15 in stock or index, including reinvestment of dividends.
Fiscal year ending on or about January 31.
Total Return Analysis
Citi Trends, Inc.
Russell 2000 Index
NASDAQ Composite
NASDAQ Retail Trade
1/15
1/16
1/17
1/18
1/19
1/20
100.00
100.00
100.00
100.00
90.73
90.08
100.70
126.85
71.43
120.28
124.09
154.96
106.25
140.95
165.58
233.18
93.80
135.98
164.45
257.74
108.55
148.51
208.91
297.18
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 1, 2020. 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 1,
2020
Fiscal Year Ended (1)
January 28,
February 3,
February 2,
2017
2018
2019
(dollars in thousands, except per share amounts)
January 30,
2016
$
$
$
$
781,925
(484,740)
(259,629)
(18,535)
(472)
18,549
1,419
19,968
(3,465)
16,503
1.41
1.41
$
$
$
$
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
11,673,887
11,699,000
0.32
$
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
$
$
$
16
7
571
6,329,597
(0.1)%
1,380
19,923
27,562
15,675
459,145
288,101
171,044
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
(0.4)%
1,319
49,253
38,026
26,691
332,514
108,923
223,591
$
$
13
3
521
5,683,032
(0.1)%
1,325
39,116
32,671
30,890
314,508
102,274
212,234
(1) Our fiscal year ends on the Saturday closest to January 31 of each year. The years ended February 1, 2020, February 2, 2019, February 3, 2018,
January 28, 2017 and January 30, 2016 are referred to as fiscal 2019, 2018, 2017, 2016 and 2015, respectively. Fiscal 2017 is comprised of
53 weeks, while fiscal years 2019, 2018, 2016 and 2015 are each comprised of 52 weeks.
(2)
(3)
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.
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 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 fashion apparel, accessories and home goods for the entire family. Our merchandise offerings are designed
to appeal to the preferences of fashion conscious consumers, particularly African-Americans. As of February 1, 2020, we operated 571
stores in both urban and rural markets in 33 states.
Current Material Development
In December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization
has declared COVID-19 a pandemic resulting in federal, state and local governments and private entities mandating various restrictions,
including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have
been exposed to the virus. After closely monitoring and taking into consideration the guidance from federal, state and local governments, in
an effort to mitigate the spread of COVID-19, along with other retailers, we initially temporarily closed all of our retail store locations
effective March 20, 2020 through April 3, 2020. However, this closure was further extended on March 26 for an indefinite period as a result
of federal, state and local level requirements and recommendations. We also closed our buying and corporate offices, and our distribution
centers, and we instituted “work from home” measures for certain of our associates. The Company continues to monitor developments,
including government requirements and recommendations at the federal, state and local level to evaluate when we will reopen our stores,
offices and facilities. We expect the cadence of store reopenings to vary by state and locality in the U.S. On April 28, 2020, the Company
announced that it has started to re-open stores in some markets in accordance with state and local guidelines. The temporary closure of our
stores is having a significant negative impact on the Company’s financial performance.
We have taken several proactive measures to increase our cash position and preserve financial flexibility in light of current uncertainties
resulting from the COVID-19 pandemic. On March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit
facility. We also implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including
(i) furloughing substantially all of our store and distribution center personnel, as well as about 40% of our corporate staff, starting April 3,
2020; (ii) implementing temporary tiered salary reductions for management level corporate employees, including executive officers;
(iii) temporarily reducing the cash portion of the fees payable to our non-employee board members; (iv) extending payment terms with
vendors and suppliers; (v) abating payments of rent as appropriate; (vi) deferring certain merit based awards; (vii) suspending the 401(k)
company matching program; (viii) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and
other costs, including through reduced inventory purchases; (ix) suspending any repurchases of shares under our stock repurchase program;
and (x) suspending the payment of dividends. On May 12, 2020, we entered into an amendment to our revolving credit facility to, among
other things, extend the maturity date (which had been set to expire August 18, 2020) to August 18, 2021. For discussion of our revolving
credit facility, see “Liquidity Sources and Requirements and Contractual Cash Requirements and Commitments.”
Due to the developing situation, the results of the first quarter ending May 2, 2020 and the full fiscal year ending January 30, 2021 could be
impacted in ways we are not able to predict today. As a result, we withdrew our first quarter and full year fiscal 2020 financial guidance
issued on March 13, 2020.
Given the unprecedented uncertainty of this situation and the unknown impact on consumer demand, the Company cannot reasonably
estimate the full impact of this pandemic on its business. However, the Company expects the impact from the pandemic and the related
economic disruption will have a material adverse effect on its financial condition, results of operations and liquidity in fiscal 2020.
Basis of Presentation
Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and
associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the
consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and
occupancy costs, corporate and distribution center costs and advertising costs. 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
22
quarter every five to six years. The years ended February 1, 2020, February 2, 2019 and February 3, 2018 are referred to as fiscal 2019,
2018 and 2017, respectively. Fiscal years 2019 and 2018 are each comprised of 52 weeks, while fiscal 2017 is comprised of 53 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.
Net Sales and Additional Operating Data
The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:
Statement of Operations Data
Net sales
February 1,
2020
Fiscal Year Ended
February 2,
2019
(dollars in thousands)
February 3,
2018
$ 781,925
100.0 % $ 769,553
100.0 % $ 755,241
100.0 %
Cost of sales (exclusive of depreciation shown separately below)
Selling, general and administrative expenses
Depreciation
Asset impairment
(484,740)
(259,629)
(18,535)
(472)
(62.0)%
(33.2)%
(2.3)%
(0.1)%
(476,326)
(247,938)
(18,886)
(1,274)
(61.9)%
(32.2)%
(2.4)%
(0.2)%
(466,022)
(247,062)
(18,883)
(507)
(61.7)%
(32.7)%
(2.5)%
(0.1)%
Income from operations
Interest income
Interest expense
Income before income taxes
Income tax expense
Net income
18,549
1,577
(158)
19,968
(3,465)
2.4 %
0.2 %
(0.0)%
2.6 %
(0.5)%
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)%
$
16,503
2.1 % $
21,374
2.8 % $
14,574
1.9 %
The following table provides information about the number of total stores open at the beginning of each 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 1,
2020
Fiscal Year Ended
February 2,
2019
February 3,
2018
562
16
(7)
571
549
19
(6)
562
533
20
(4)
549
Comparable store sales (decrease) increase (1)
(0.1)%
1.6 % (2)
4.5 % (2)
(1)
(2)
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.
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.
23
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 2018 and
fiscal 2019 were not considered comparable stores in fiscal 2019. Relocated and expanded stores are included in the comparable store sales
results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy
existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per
square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.
In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a
percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual
store. Finally, we monitor corporate expenses against budgeted amounts. All of the statistics discussed above are critical components of
earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, excluding non-
cash asset impairment expenses, interim CEO related expenses and expenses related to proxy contests), which are considered our most
important operating statistics. We believe that excluding these 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 1, 2020,
February 2, 2019 and February 3, 2018:
Net income
Plus:
Interest expense
Income tax expense
Depreciation
Less:
Interest income
EBITDA
Plus:
Asset impairment
Interim CEO related expenses
Proxy contest expenses
Adjusted EBITDA
February 1,
2020
Fiscal Year Ended
February 2,
2019
(dollars in thousands)
February 3,
2018
$
16,503
$
21,374
$
14,574
158
3,465
18,535
154
4,954
18,886
150
8,926
18,883
(1,577)
37,084
(1,353)
44,015
(883)
41,650
472
571
1,042
39,169
$
1,274
—
—
45,289
$
507
—
2,516
44,673
$
24
Provided below is a reconciliation of net income (the closest comparable GAAP measure) to (i) net income adjusted for non-cash asset
impairment expenses, interim CEO related expenses, proxy contest expenses and the effect of the Tax Cuts and Jobs Act (“Adjusted net
income”) and (ii) diluted Adjusted net income per common share. We believe that excluding these 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
Fiscal Year Ended
February 1, 2020 February 2, 2019 February 3, 2018
(in thousands, except per share data)
$
16,503 $
21,374 $
14,574
Asset impairment and related tax effects
Interim CEO related expenses and related tax effects
Proxy contest expenses and related tax effects
Tax Cuts and Jobs Act effect
Adjusted net income
Diluted Adjusted net income per common share
390
472
861
—
18,226 $
1,035
—
—
—
22,409 $
314
—
1,560
1,609
18,057
1.56 $
1.71 $
1.28
$
$
Diluted shares outstanding
11,699
13,070
14,116
Fiscal 2019 Compared to Fiscal 2018
Net Sales. Net sales increased $12.3 million, or 1.6%, to $781.9 million in fiscal 2019 from $769.6 million in fiscal 2018. The increase in
net sales was due primarily to 16 new store openings in 2019 and 19 new store openings in 2018 for which there was not a full year of sales
in 2018. These sales increases were partially offset by the closing of seven stores in 2019 and six stores in 2018, and a 0.1% decrease in
comparable store sales. The decrease in comparable store sales was reflected in a 1.2% decrease in customer transactions, partially offset
by a 1.1% increase in the average ticket size. Comparable store sales changes, by major merchandise class, were as follows: Home +10%;
Accessories +6%; Men’s -3%; Children’s -4%; and Ladies’ -5%.
Store opening and closing activity resulted in a net increase of $13.2 million in sales in fiscal 2019, while the 0.1% decrease in comparable
store sales in the 536 comparable stores caused sales to decrease $0.9 million.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $8.4 million, or 1.8%, to $484.7 million in
fiscal 2019 from $476.3 million in fiscal 2018 due to the effect of the increase in sales discussed above and an increase in cost of sales as a
percentage of sales to 62.0% in 2019 from 61.9% in 2018. The increase in cost of sales as a percentage of sales was due primarily to a 20
basis points increase in freight costs as a result of pressures in the trucking industry, partially offset by a 10 basis points increase in the core
merchandise margin (initial mark-up, net of markdowns).
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $11.7 million, or 4.7% to $259.6
million in fiscal 2019 from $247.9 million in fiscal 2018 due to the opening of 16 new stores in 2019 and 19 stores in 2018, along with
normal inflationary pressure on expenses such as payroll and rent, $2.1 million in costs associated with the CEO transition and changes to
the Company’s board of directors, and $1.0 million of expenses incurred in connection with a proxy contest in 2019. These factors that
caused the increase in selling, general and administrative expenses were partially offset by a $1.3 million decrease in incentive
compensation expense resulting from unfavorable operating results in relation to budget, as well as a $1.2 million gain on insurance claims
received in fiscal 2019. Selling, general and administrative expenses as a percentage of sales increased to 33.2% in 2019 from 32.2% in
2018.
Depreciation. Depreciation expense decreased $0.4 million to $18.5 million in 2019 from $18.9 million in fiscal 2018 due to the slowing of
our store opening pace in relation to previous years.
Asset Impairment. Impairment charges related to an underperforming store totaled $0.5 million in fiscal 2019, comprised of $0.3 million for
leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset. In fiscal 2018, impairment
charges related to underperforming stores totaled $1.3 million, comprised of leasehold improvements and fixtures and equipment.
25
Income Tax Expense. Income tax expense decreased $1.5 million to $3.5 million in fiscal 2019 from $5.0 million in fiscal 2018 due
primarily to pretax income decreasing $6.4 million.
Net Income. Net income decreased $4.9 million to $16.5 million in fiscal 2019 compared to $21.4 million in fiscal 2018, due to the factors
discussed above.
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 2.5%
increase in the average ticket size, 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 $0.5million 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.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital and for capital expenditures for our stores, distribution infrastructure and
information systems. We also use cash to repurchase stock under our stock repurchase program and to pay dividends. Historically, we have
met these cash requirements using cash flow from operations and short-term trade credit. As further noted below, due to the COVID-19
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pandemic and related economic disruptions, and with the temporary closure of all store locations for an extended period of time, we
anticipate that we will be required to rely far more heavily on our existing balances of cash and investment securities and borrowings under
our revolving credit facility (described below), and we expect to carefully monitor and manage our cash position in light of ongoing
conditions and results of operations.
Cash Flows
Fiscal 2019 Compared to Fiscal 2018
As of February 1, 2020, we had total cash and cash equivalents of $19.9 million, compared with $17.9 million as of February 2, 2019.
Additionally, we had $27.6 million and $15.7 million of short-term and long-term investment securities, respectively, as of February 1,
2020, compared with $50.4 million and $8.9 million, respectively, as of February 2, 2019. These securities are comprised of bank
certificates of deposit and obligations of the U.S. Treasury, states and municipalities.
Inventory represented 30.1% of our total assets as of February 1, 2020, compared with 46.9% as of February 2, 2019. 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 $42.6 million in fiscal 2019 compared with
$30.4 million in fiscal 2018. Net income, adjusted for non-cash expenses such as depreciation, non-cash operating lease costs, 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 $84.0 million in fiscal 2019 (compared with $44.0 million in fiscal 2018). Other significant
sources of cash in fiscal 2019 included (1) a $5.6 million increase in account payable (compared to a $2.8 million decrease in fiscal 2018)
due to improved inventory turns in the fourth quarter of 2019 as reflected in higher sales and lower inventory, which resulted in more
merchandise purchases in January 2020; since this higher level of purchases occurred in the last month of the fiscal year, all such purchases
were still in accounts payable at the end of the fiscal year; and (2) a $1.2 million decrease in inventory (compared to a $2.3 million increase
in fiscal 2018) due to efforts to improve inventory turns and maintain as much inventory liquidity as possible in order to take advantage of
opportunistic deals and trend changes.
Significant uses of cash from operating activities in fiscal 2019 included (1) a $1.6 million change in the income tax payable/receivable
(compared to a $1.5 million change in fiscal 2018) due to estimated tax payments made during the year; and (2) a $1.6 million increase in
prepaid and other current assets (compared to a $2.1 million increase in fiscal 2018) due primarily to increases in tenant improvement
allowances for new stores that opened in the fourth quarter of fiscal 2019.
Cash Flows Used in Investing Activities. Cash used in investing activities was $7.6 million in fiscal 2019 compared with $15.3 million in
fiscal 2018. Cash used for the purchase of property and equipment was $24.2 million in fiscal 2019 and $13.3 million in fiscal 2018, with
the increase due primarily to (1) purchases of equipment for our point-of-sale replacement project, (2) capital expenditures to complete
major remodels in 20 of our stores; and (3) purchases of store fixtures needed to facilitate a shift towards more home merchandise and
enhanced holiday merchandise presentation. Sales/redemptions of investment securities, net of purchases, provided cash of $16.0 million in
fiscal 2019 and used cash of $2.3 million in fiscal 2018.
Cash Flows Used in Financing Activities. Cash used in financing activities was $32.9 million in fiscal 2019 compared with $45.7 million in
fiscal 2018. Cash used for the repurchase of common stock totaled $28.4 million in fiscal 2019 and $40.4 million in fiscal 2018. Dividends
paid to stockholders used cash of $3.8 million in fiscal 2019 and $4.2 million in fiscal 2018.
Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.
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.
27
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 non-cash 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.
Liquidity Sources and Requirements and Contractual Cash Requirements and Commitments
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $19.9 million as of February 1, 2020); (ii) short-
term and long-term investment securities (which equaled $27.5 million and $15.7 million, respectively, as of February 1, 2020); (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.
As part of the actions we have taken to increase our cash position and preserve financial flexibility in light of current uncertainties resulting
from the COVID-19 pandemic, as described above in “Current Material Developments,” on March 20, 2020, we borrowed $43.7 million in
principal amount under our revolving credit facility. In addition, on May 12, 2020, we entered into an amendment to our revolving credit
facility to, among other things, extend the maturity date to August 18, 2021. See “Indebtedness” below for more information.
In addition to the drawdown on our credit facility, we have reduced our operating expenses, capital expenditure plans and inventory
receipts, as appropriate. Additionally, we previously announced a share repurchase program on March 13, 2020, but no repurchases have
been made under such program as of the date of this filing and the Company does not intend to repurchase any shares for the time being.
The Company has also suspended the payment of quarterly dividends.
We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Should the
reopening of our stores and recovery of our sales fall materially below our expectations, we may be required to take other actions that could
include material changes in our operations and seeking additional debt or equity capital. We plan to continue to monitor the rapidly
developing situation and to take further action to reduce our expenses and preserve our financial flexibility, as necessary
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The following table discloses aggregate information about our contractual obligations as of February 1, 2020 and the periods in which
payments are due:
Payments Due by Period
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
(in thousands)
Contractual obligations:
Operating leases (1)
Purchase obligations
Total contractual cash obligations
$ 195,089 $
114,003
48,182 $ 76,588 $ 42,817 $ 27,502
—
114,003
$ 309,092 $ 162,185 $ 76,588 $ 42,817 $ 27,502
—
—
(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 2019 incremental percentage rent was approximately $0.3 million, which represented 0.6% 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. On March 20, 2020, in response to the COVID-19
pandemic, we borrowed $43.7 million on our revolving credit facility to enhance our liquidity position. Such borrowings accrued interest
ranging from 1.625% to 3.5%.
On May 12, 2020, the Company entered into a Second Amendment to Credit Agreement and Waiver (the “Second Amendment”) with Bank
of America and the Company’s wholly-owned subsidiary, Citi Trends Marketing Solutions, Inc., as guarantor (the “Second Amendment”)
to amend the credit facility (as amended, the “Revolving Credit Facility”) as described below.
The Revolving Credit 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. The Revolving Credit Facility is 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.
The Second Amendment amends the Revolving Credit Facility to, among other things, extend the maturity date (which had been set to
expire August 18, 2020) to August 18, 2021, increase the pricing for the loans and modify certain covenant and reporting terms. Following
the effective date of the Second Amendment, borrowings under the Revolving Credit Facility will bear interest (a) for Eurodollar Loans, at
a rate equal to LIBOR plus either 2.25% or 2.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the
Federal Funds Rate plus 0.5%, or (iii) LIBOR for a period of one month plus 1.0%, plus, in each case either 1.25% or 1.5%, based in any
such case on the average daily availability for borrowings under the facility.
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 2019, rent expense was $58.1 million compared with $55.3 million in fiscal 2018 (including
contingent rent of $0.3 million and $0.5 million in fiscal 2019 and 2018, respectively).
Purchase Obligations. As of February 1, 2020, we had purchase obligations of $114.0 million, all of which were for less than one year.
These purchase obligations consist of outstanding merchandise orders.
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
29
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 2019, compared to 1.3% in fiscal 2018 and 1.5% in fiscal 2017. The allowance for estimated
inventory shrinkage was $3.0 million as of February 1, 2020 and $3.1 million as of February 2, 2019. 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 2019.
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 operating lease right-of-use assets, leasehold improvements and fixtures and equipment at underperforming
stores totaled $0.5 million, $1.3 million and $0.5 million in fiscal 2019, 2018 and 2017, 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 2019.
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 $2.6 million ($1.5 million current and $1.1 million noncurrent) as of
February 1, 2020 and $2.4 million ($1.4 million current and $1.0 million noncurrent) as of February 2, 2019. There were no material
changes in the estimates or assumptions related to insurance liabilities during fiscal 2019.
Operating Leases
We lease all of our retail store locations and certain office space and equipment. All leases are classified as operating leases. We record
right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term. In determining the
present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to
pay to borrow on a collateralized basis over a similar term. Our lessors do not provide an implicit rate, nor is one readily available,
therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s
existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. We
record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of
being exercised, starting when possession of the property is taken from the landlord. Lease expense for fixed lease payments is recognized
on a straight-line basis over the lease term. In addition, 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 can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be
amortized on a straight-line basis over the remaining lease term.
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
30
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 $6.7 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 2019.
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.
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 2019. 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 2019 because we did not borrow
during the year. As described in Item 7 above in “Current Material Development,” on March 20, 2020, we borrowed $43.7 million in
principal amount under our revolving credit facility.
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 12 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 principal executive officer and
the principal 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 principal executive
officer and the principal 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.
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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 1, 2020 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
On May 12, 2020, the Company entered into a Second Amendment to Credit Agreement and Waiver (the “Second Amendment”) among
the Company, as Borrower, the Company’s wholly-owned subsidiary, Citi Trends Marketing Solutions, Inc., as Guarantor, and Bank of
America, N.A., as Lender. The Second Amendment amends that certain Credit Agreement, dated as of October 27, 2011, among the
Company, the Guarantor and the Lender, as amended by that certain First Amendment to Credit Agreement dated as of August 18, 2015,
(as amended, the “Credit Facility”) to, among other things, extend the maturity date (which had been set to expire August 18, 2020) to
August 18, 2021, increase the pricing for the loans by 1.0% (which rate varies depending on availability under the Credit Facility), waive
certain events of default that occurred on May 1, 2020 related to delivery of our audited financials and the related compliance certificate,
and modify certain covenant and reporting terms.
The foregoing description of the Credit Facility, including the Second Amendment, is only a summary of, and does not purport to be a
complete statement of, the Credit Facility and the rights and obligations of the parties thereunder, and is qualified in its entirety by reference
to the full text of the Credit Facility, including the Second Amendment, which are filed as exhibits to this Report and incorporated herein by
this reference.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
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 2020 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 2020 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 2020 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 1, 2020
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 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)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (3) (c)
— $
—
— $
—
—
—
775,541
—
775,541
(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
171,979 shares. No options were outstanding as of February 1, 2020.
(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.
33
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 2020 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 2020
Annual Meeting of Stockholders and possibly elsewhere in the proxy statement (or will be filed by amendment to this Report).
34
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 No.
Exhibit Index
Description
3.1 Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed with the SEC on June 7, 2018)
3.2 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)
4.1 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)
+4.2 Description of Registrant’s Securities
10.1 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)
10.2 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)
*10.3 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)
*10.4 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)
*10.5 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)
*10.6 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)
*10.7 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)
35
Exhibit No.
Description
*10.8 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)
*10.9 Form of Restricted Stock Unit Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan
(Performance Based Vesting – Average Stock Price) (incorporated by reference to Exhibit 10.41 to the Company’s Annual
Report on Form 10-K filed with the SEC on April 17, 2019)
*10.10 Form of Restricted Stock Unit Award Agreement for Employees under the Citi Trends, Inc. 2012 Incentive Plan
(Performance Based Vesting – EBITDA Target) (incorporated by reference to Exhibit 10.42 to the Company’s Annual
Report on Form 10-K filed with the SEC on April 17, 2019)
*10.11 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)
*10.12 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)
*10.13 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)
*10.14 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)
*10.15 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)
*10.16 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)
*10.17 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)
*10.18 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)
*10.19 Separation Agreement between the Company and Bruce D. Smith dated June 11, 2019 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2019)
+*10.20 Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Lisa Powell dated
August 16, 2019
+*10.21 Severance Agreement between the Company and Lisa Powell dated August 16, 2019
+*10.22 Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and Charles Hynes dated
October 25, 2019
+*10.23 Severance Agreement between the Company and Charles Hynes dated October 25, 2019
36
Exhibit No.
Description
*10.24 Employment Non-Compete, Non-Solicit and Confidentiality Agreement between the Company and David N. Makuen
dated February 17, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the SEC on February 21, 2020)
*10.25 Severance Agreement between the Company and David N. Makuen dated February 17, 2020 (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 21, 2020)
*10.26 Agreement by and among the Company, Macellum SPV III, LP, Macellum Management, LP, Macellum Advisors
GP, LLC, and Jonathan Duskin dated April 11, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on April 11, 2019)
+10.28 Second Amendment to Credit Agreement and Waiver, dated as of May 12, 2020, by and among Citi Trends, Inc., as
Borrower, Citi Trends Marketing Solutions, Inc., as Guarantor, and Bank of America, N.A., as Lender
+21.1 Subsidiary of the Registrant
+23.1 Consent of KPMG LLP
+31.1 Certification of Principal Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
+31.2 Certification of Principal Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
+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
+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
101 The following financial statements from Citi Trends, Inc.’s Annual Report on Form 10-K for the year ended February 1,
2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations, (ii)
Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’
Equity and (v) Notes to Consolidated Financial Statements.
+
*
Filed herewith
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: May 14, 2020
CITI TRENDS, INC.
(Registrant)
By /s/ David N. Makuen
David N. Makuen
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/ David N. Makuen
David N. Makuen
/s/ Jason B. Moschner
Jason B. Moschner
/s/ Peter R. Sachse
Peter R. Sachse
/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/ Kenneth D. Seipel
Kenneth D. Seipel
Chief Executive Officer
(Principal Executive Officer) and Director
Vice President of Finance
(Principal Financial and Accounting Officer)
Date
May 14, 2020
May 14, 2020
Executive Chairman of the Board of Directors
May 14, 2020
Director
Director
Director
Director
Director
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
May 14, 2020
38
Citi Trends, Inc.
Index to Consolidated Financial Statements
Management’s Annual Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
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, as amended. 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 principal executive officer and principal financial
officer, we assessed the effectiveness of our internal control over financial reporting as of February 1, 2020, 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 1, 2020.
Our independent registered public accounting firm, KPMG LLP, audited the effectiveness of our internal control over financial
reporting as of February 1, 2020, 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 1,
2020 and February 2, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the
years ended February 1, 2020, February 2, 2019, and February 3, 2018, 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 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the years ended
February 1, 2020, February 2, 2019, and February 3, 2018, 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 1, 2020, 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 May 14, 2020 an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2(q) to the consolidated financial statements, the Company has changed its method of accounting for leases as of
February 3, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), as amended.
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
May 14, 2020
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 1, 2020,
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 1, 2020, 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 1, 2020 and February 2, 2019, the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the years ended February 1, 2020, February 2, 2019, and
February 3, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated May 14, 2020
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
May 14, 2020
F-4
Citi Trends, Inc.
Consolidated Balance Sheets
February 1, 2020 and February 2, 2019
(in thousands, except share data)
Assets
February 1,
2020
February 2,
2019
$
$
19,923
27,562
138,258
14,278
1,186
201,207
64,985
169,854
15,675
6,669
755
17,863
50,350
139,841
17,544
—
225,598
56,224
—
8,883
6,539
745
$ 459,145 $ 297,989
$
79,596 $
42,944
14,755
13,013
—
554
150,862
135,316
1,923
288,101
73,391
—
15,311
12,746
395
526
102,369
—
8,195
110,564
157
93,180
186,772
157
91,794
176,094
(109,065)
171,044
(80,620)
187,425
$ 459,145
$ 297,989
Current assets:
Cash and cash equivalents
Short-term investment securities
Inventory
Prepaid and other current assets
Income tax receivable
Total current assets
Property and equipment, net of accumulated depreciation
Operating lease right of use assets
Long-term investment securities
Deferred tax asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Operating lease liabilities
Accrued expenses
Accrued compensation
Income tax payable
Layaway deposits
Total current liabilities
Noncurrent operating lease liabilities
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 32,000,000 shares; 15,907,666 shares issued as of
February 1, 2020 and 15,827,713 shares issued as of February 2, 2019; 10,834,134 shares
outstanding as of February 1, 2020 and 12,158,237 shares outstanding as of February 2, 2019
Paid in capital
Retained earnings
Treasury stock, at cost; 5,073,532 shares held as of February 1, 2020 and 3,669,476 shares held as
of February 2, 2019
Total stockholders’ equity
Commitments and contingencies (note 9)
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements
F-5
Citi Trends, Inc.
Consolidated Statements of Operations
Years Ended February 1, 2020, February 2, 2019, and February 3, 2018
(in thousands, except per share data)
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
Fiscal 2019
Fiscal 2017
Fiscal 2018
$ 781,925 $ 769,553 $ 755,241
(484,740)
(259,629)
(18,535)
(472)
18,549
1,577
(158)
19,968
(3,465)
16,503 $
(476,326)
(247,938)
(18,886)
(1,274)
25,129
1,353
(154)
26,328
(4,954)
21,374 $
(466,022)
(247,062)
(18,883)
(507)
22,767
883
(150)
23,500
(8,926)
14,574
1.41 $
1.41 $
1.64 $
1.64 $
1.04
1.03
$
$
$
11,674
11,699
13,030
13,070
14,058
14,116
F-6
Citi Trends, Inc.
Consolidated Statements of Cash Flows
Years Ended February 1, 2020, February 2, 2019, and February 3, 2018
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Non-cash operating lease costs
Asset impairment
Loss on disposal of property and equipment
Deferred income taxes
Insurance proceeds related to operating activities
Non-cash stock-based compensation expense
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:
Sales/redemptions of investment securities
Purchases of investment securities
Purchases of property and equipment
Insurance proceeds related to investing activities
Net cash used in investing activities
Financing activities:
Fiscal 2019
Fiscal 2018
Fiscal 2017
$ 16,503
$ 21,374
$ 14,574
18,535
45,463
472
23
(130)
1,012
2,121
1,216
(1,588)
(10)
5,560
(45,282)
267
(1,581)
28
42,609
18,886
—
1,274
471
(762)
475
2,238
(2,330)
(2,135)
(25)
(2,844)
(418)
(4,267)
(1,521)
(6)
30,410
18,883
—
507
130
2,729
1,349
1,632
(3,948)
(2,398)
5
230
(3,093)
8,092
3,551
61
42,304
59,836
(43,840)
(24,175)
573
(7,606)
41,600
(43,882)
(13,256)
195
(15,343)
45,420
(37,654)
(20,986)
443
(12,777)
Cash used to settle withholding taxes on the vesting of nonvested restricted stock
Dividends paid to stockholders
Repurchase of common stock
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
(733)
(3,765)
(28,445)
(32,943)
2,060
(1,048)
(4,207)
(40,400)
(45,655)
(30,588)
(1,062)
(4,232)
(25,035)
(30,329)
(802)
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 non-cash investing activities:
Accrual for purchases of property and equipment
See accompanying notes to consolidated financial statements
17,863
$ 19,923
48,451
$ 17,863
49,253
$ 48,451
$
$
127
4,477
$
$
127
7,237
$
$
127
2,646
$
4,000
$
2,017
$
1,474
F-7
Citi Trends, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended February 1, 2020, February 2, 2019, and February 3, 2018
(in thousands, except share amounts)
Balances —January 28, 2017
Vesting of nonvested shares and restricted stock units
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 —February 3, 2018
Vesting of nonvested shares
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
Adoption of lease accounting standard (See Note 10)
Vesting of nonvested restricted stock units
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 1, 2020
See accompanying notes to consolidated financial statements
Common Stock
Shares
2
—
—
—
(1)
—
—
—
156
1
—
—
—
—
—
—
157
Paid in Retained
Amount Capital Earnings
155 $ 90,036 $ 148,585
—
—
—
—
—
—
—
1,632
—
(1,063)
—
—
(4,232)
—
14,574
—
158,927
90,605
—
—
—
—
—
2,238
—
(1,049)
—
—
(4,207)
—
21,374
—
176,094
91,794
(2,060)
1
—
—
—
—
—
—
—
—
—
2,121
—
(1)
(735)
—
—
—
—
—
—
(3,765)
16,503
—
—
157 $ 93,180 $ 186,772
Treasury Stock
Total
—
—
—
—
—
(25,035)
—
—
(40,220)
—
—
—
—
(40,400)
—
—
(80,620)
—
—
—
—
—
1,200,982
—
—
2,034,170
—
—
—
—
1,635,306
—
—
3,669,476
Amount
Shares
833,188 $ (15,185) $ 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
187,425
(2,060)
1
—
—
2,121
(736)
(28,445)
(3,765)
16,503
5,073,532 $ (109,065) $ 171,044
—
—
—
—
—
1,404,056
—
—
—
—
—
—
—
(28,445)
—
—
15,732,339 $
12,982
118,676
(31,303)
—
(54,748)
—
—
—
15,777,946
10,663
80,045
—
(40,941)
—
—
—
15,827,713
18,851
122,816
(24,359)
—
(37,355)
—
—
—
15,907,666 $
F-8
Citi Trends, Inc.
Notes to Consolidated Financial Statements
February 1, 2020, February 2, 2019 and February 3, 2018
(1) Organization and Business
Citi Trends, Inc. and its subsidiary (the “Company”) operate as a value-priced retailer of fashion apparel, accessories and home goods
for the entire family. As of February 1, 2020, the Company operated 571 stores in 33 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 1, 2020,
February 2, 2019 and February 3, 2018 are referred to as fiscal 2019, fiscal 2018 and fiscal 2017, respectively, in the accompanying
consolidated financial statements. Fiscal years 2019 and 2018 are each comprised of 52 weeks, while fiscal 2017 is comprised of
53 weeks.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include those used in the valuation of inventory, property and equipment, self-
insurance liabilities, leases and income taxes. Management periodically evaluates estimates used in the preparation of the
consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based on such periodic evaluations.
(d) 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.
(e) 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.
(f) 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
F-9
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.
(g) 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 $0.5 million, $1.3 million and
$0.5 million in fiscal 2019, 2018 and 2017, respectively.
(h) 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.
(i) 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 and earnings target-based nonvested restricted stock
are valued based on the closing stock price on the grant date, while grants of stock price 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.
(j) 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. 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. The refund liability for merchandise returns is included in the
line item “Accrued expenses” on the consolidated balance sheet and totaled $0.3 million as of both February 1, 2020 and February 2,
2019. The corresponding asset for the recoverable cost of expected refunds is included in “Prepaid and other current assets” and
totaled $0.1 million and $0.2 million as of February 1, 2020 and February 2, 2019 respectively.
Disaggregation of Revenue
The Company’s retail operations represent a single operating segment based on the way the Company manages its business.
F-10
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 2019, 2018 and 2017 was as follows:
Accessories
Children’s
Ladies’
Men’s
Home
(k) Cost of Sales
Percentage of Net Sales
2019 2018 2017
32 % 32 % 32 %
23 % 23 % 23 %
22 % 22 % 23 %
16 % 17 % 17 %
5 %
6 %
7 %
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 2019, 2018 and
2017 were $20.8 million, $17.6 million and $17.4 million, respectively.
(l) Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the
period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding
plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock. During loss periods, diluted loss
per share amounts are based on the weighted average number of common shares outstanding because the inclusion of common stock
equivalents would be antidilutive.
The 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 2019, 2018 and 2017:
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
2019
11,673,887
25,113
11,699,000
2018
13,030,063
39,631
13,069,694
2017
14,058,008
57,887
14,115,895
The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. The Company
includes as assumed proceeds the amount of compensation costs attributed to future services and not yet recognized. For fiscal 2019,
2018 and 2017, respectively, there were 128,000, 124,000 and 125,000 shares of nonvested restricted stock, respectively, excluded
from the calculation of diluted earnings per share because of antidilution.
(m) Advertising
The Company expenses advertising as incurred. Advertising expense for fiscal 2019, 2018 and 2017 was $1.8 million, $1.7 million
and $2.0 million, respectively.
(n) Operating Leases
The Company leases all of its retail store locations and certain office space and equipment. All leases are classified as operating
leases. The Company records right-of-use assets and lease liabilities based on the present value of future minimum lease payments
over the lease term. In determining the present value of lease payments, the Company uses an incremental borrowing rate that
approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. The
Company’s lessors do not provide an implicit rate, nor is one readily available, therefore the incremental borrowing rate is determined
based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing facility with adjustments to bridge
for impacts to the rate due to differences in collateral, terms and payments. The Company records operating lease cost over the
estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when
possession of the property is taken from the landlord. Lease expense for fixed lease payments is recognized on a straight-line basis
over the lease term. In addition, certain leases provide for contingent rents that are not measurable at inception. These contingent rents
F-11
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 can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized
on a straight-line basis over the remaining lease term.
(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) Business Reporting Segments
The Company is a value-priced retailer of fashion apparel, accessories and home goods 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.
(q) Recent Accounting Pronouncements
Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), as amended.
The new standard established a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the
balance sheet for all leases with terms longer than 12 months. The Company adopted ASU 2016-02 on February 3, 2019 using the
optional transition method, which allows for the prospective application of the standard. In addition, the Company elected the package
of practical expedients for transition, which permitted it to not reassess prior conclusions regarding lease classification, identification
or initial direct costs. Further, the Company elected a short-term lease exception policy which permitted it to not apply the recognition
requirements of the new standard to short-term leases (leases with terms of 12 months or less). The Company also elected an
accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company
did not elect an optional hindsight practical expedient. Operating lease ROU assets and lease liabilities are recognized based on the
present value of lease payments over the lease term. The present value of lease payments was determined using the Company’s
incremental borrowing rate. Our lessors do not provide an implicit rate, nor is one readily available, therefore we determined an
incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing
facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. Adoption of the new
standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $133.6 million
and $141.0 million, respectively, as of February 3, 2019. The difference between the lease assets and lease liabilities was primarily
due to reclassification of lease incentives, as well as impairment of operating lease right-of-use assets for stores previously impaired as
of the effective date. Lease impairment, net of the related deferred taxes, totaled approximately $2.1 million and is reflected as an
adjustment to retained earnings at the transition date.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing
revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. The
Company adopted ASU 2014-09 on 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 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 or systems.
F-12
(3)
Property and Equipment, net
The components of property and equipment as of February 1, 2020 and February 2, 2019 are as follows (in thousands):
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Computer equipment
Construction in progress
Accumulated depreciation
February 1,
2020
February 2,
2019
$
479 $
31,158
103,919
142,953
40,096
8,950
327,555
(262,570)
$
64,985 $
479
30,779
97,825
132,067
38,039
2,993
302,182
(245,958)
56,224
(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 1, 2020, 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) $
Bank certificates of deposit (Level 2)
$
Long-term:
Obligations of the U.S. Treasury and U.S. government agencies (Level 1) $
Bank certificates of deposit (Level 2)
$
$
17,277
10,285
27,562 $
$
1,908
13,767
15,675 $
$
8
—
8 $
— $
—
— $
(2) $
—
(2) $
17,283
10,285
27,568
(1) $
—
(1) $
1,907
13,767
15,674
The amortized cost and fair market value of investment securities as of February 1, 2020 by contractual maturity are as follows (in
thousands):
Mature in one year or less
Mature after one year through five years
Amortized
Cost
27,562
15,675
43,237
$
$
Fair
Market
Value
27,568
15,674
43,242
$
$
F-13
As of February 2, 2019, 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
$
$
$
$
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 were as follows
(in thousands):
Mature in one year or less
Mature after one year through five years
Amortized
Cost
50,350
8,883
59,233
$
$
Fair
Market
Value
50,317
8,867
59,184
$
$
There were no changes among the levels in the two fiscal years ended February 1, 2020.
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. On March 20, 2020, in response to the COVID-19
pandemic, the Company borrowed $43.7 million on the credit facility to enhance its liquidity position. Such borrowings accrued
interest ranging from 1.625% to 3.5%.
On May 12, 2020, the Company entered into a Second Amendment to Credit Agreement and Waiver (the “Second Amendment”) with
Bank of America and the Company’s wholly-owned subsidiary, Citi Trends Marketing Solutions, Inc., as guarantor (the “Second
Amendment”) to amend the credit facility (as amended, the “Revolving Credit Facility”) as described below.
The Revolving Credit Facility provides a $50 million credit commitment and a $25 million uncommitted “accordion” feature that
under certain circumstances could allow the Company to increase the size of the facility to $75 million. The Revolving Credit Facility
is secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it
contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances. The
facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a
requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected
in the 30 days subsequent to the payment.
The Second Amendment amends the Revolving Credit Facility to, among other things, extend the maturity date (which had been set to
expire August 18, 2020) to August 18, 2021, increase the pricing for the loans and modify certain covenant and reporting terms.
Following the effective date of the Second Amendment, borrowings under the Revolving Credit Facility will bear interest (a) for
Eurodollar Loans, at a rate equal to LIBOR plus either 2.25% or 2.5%, or (b) for Base Rate Loans, at a rate equal to the highest of
(i) the prime rate, (ii) the Federal Funds Rate plus 0.5%, or (iii) LIBOR for a period of one month plus 1.0%, plus, in each case either
1.25% or 1.5%, based in any such case on the average daily availability for borrowings under the facility.
F-14
(6)
Income Taxes
Income tax expense for fiscal 2019, 2018 and 2017 consists of the following (in thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
2019
2018
2017
$ (2,650) $ (4,326) $ (5,249)
(948)
(1,390)
(6,197)
(5,716)
(945)
(3,595)
104
26
130
(3,078)
349
(2,729)
$ (3,465) $ (4,954) $ (8,926)
619
143
762
Income tax expense computed using the federal statutory rate is reconciled to the reported income tax expense as follows for fiscal
2019, 2018 and 2017 (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
(Deficit) Excess tax benefits from stock based compensation
Other
Income tax expense
2019
2017
2018
$ (4,193) $ (5,529) $ (7,924)
(1,925)
(549)
252
(79)
24
1,273
70
(68)
$ (3,465) $ (4,954) $ (8,926)
—
(1,250)
276
10
16
1,409
140
(26)
—
(791)
308
(99)
34
1,456
(83)
(97)
The components of deferred tax assets and deferred tax liabilities as of February 1, 2020 and February 2, 2019 are as follows
(in thousands):
Deferred tax assets:
Deferred rent amortization
Inventory capitalization
Book and tax depreciation differences
Vacation liability
Operating lease liabilities
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:
Right of use asset
Book and tax depreciation differences
Prepaid expenses
Total deferred tax liabilities
Net deferred tax asset
F-15
February 1, February 2,
2020
2019
$
— $
2,176
—
705
46,595
3,038
796
128
541
659
54,638
(1,714)
52,924
652
1,953
853
653
—
2,863
843
178
319
412
8,726
(1,615)
7,111
(45,095)
(373)
(787)
(46,255)
—
—
(572)
(572)
6,669 $ 6,539
$
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 2014. 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 1, 2020, 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
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 1, 2020, the valuation allowance, net of federal tax benefit, totaled $2.1 million.
The effective income tax rate for fiscal 2019, 2018 and 2017 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 2019, $1.7 million related to such
credits in fiscal 2018 and $1.3 million related to such credits in fiscal 2017.
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 and 2019, 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 1, 2020 and February 2, 2019 are as follows (in thousands):
Deferred rent (1)
Tenant improvement allowances (1)
Other
February 1,
2020
$
$
—
—
1,923
1,923
$
February 2,
2019
2,344
4,037
1,814
8,195
$
(1) Commencing February 3, 2019, deferred rent and tenant improvement allowances are included as part of the Company’s operating
lease right of use assets (see Note 10 regarding the Company’s adoption of the lease accounting standard).
F-16
(8)
Stockholders’ Equity
Repurchases of common stock
In November 2018, the Company’s board of directors approved a program that authorized the repurchase of up to $25.0 million in
shares of the Company’s common stock. Under this program in fiscal 2018, the Company repurchased 768,558 shares of its common
stock in the open market at an aggregate cost of $15.4 million. During the first three quarters of fiscal 2019, the Company
repurchased 562,813 shares of its common stock in the open market at an aggregate cost of $9.6 million.
In November 2019, 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 1, 2020, the Company repurchased 841,243
shares of its common stock in the open market at an aggregate cost of $18.8 million. At February 1, 2020, $6.2 million of shares
remained available for purchase under this program.
Dividends
In fiscal 2019, the Company paid four quarterly dividends of $0.08 per common share on March 19, 2019, June 18, 2019,
September 17, 2019 and December 24, 2019. On February 18, 2020, the Company’s board of directors declared a dividend of
$0.08 per common share, which was paid on March 17, 2020 to stockholders of record as of March 3, 2020. Any determination to
declare and pay cash dividends for future quarters will be made by the Company’s board of directors. The Company announced on
April 28, 2020, the suspension of future cash dividends.
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 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 $1.8 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 stock
price performance-based restricted stock units (“RSUs”) are recorded in full on the date of grant using a lattice model to estimate fair
market value. In March 2019, the Company granted 51,490 RSUs to 19 employees. The RSUs had performance vesting criteria
which were based upon the Company achieving adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) of
$63.0 million for the Company’s fiscal year ending January 29, 2022. The number of units earned and vested will be increased by
20% if the Company’s EBITDA for the same period equals or exceeds $69.0 million. The award will be forfeited upon the
termination of employment by the recipient prior to January 29, 2022. During 2019, no expense was attributable to the grants.
During fiscal 2019, 2018 and 2017, compensation expense arising from nonvested restricted stock grants and performance-based
RSUs totaled $2.1 million, $2.2 million and $1.6 million, respectively.
A summary of activity related to time-based nonvested restricted stock grants during fiscal 2019 is as follows:
Outstanding as of February 2, 2019
Granted
Vested
Forfeited
Outstanding as of February 1, 2020
F-17
Nonvested
Restricted
Shares
163,220 $
122,816
(89,698)
(24,359)
171,979 $
Weighted Average
Grant Date
Fair Value
24.09
18.60
23.11
21.42
21.06
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 or upon the termination of employment of the recipient. 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. No vesting targets were achieved in 2019
and the grant expired January 31, 2020, the date the recipient left the Company.
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 EBITDA. The shares vest one-third upon achieving trailing 12-month
adjusted EBITDA levels of $51.4 million, $59.1 million, and $67.9 million, respectively. The awards expire three years from the date
of grant or upon the termination of employment of the recipient. During 2018, the Company expensed $78,000 which was the
estimated fair market value. None of these thresholds were achieved in 2018 or in 2019 and the grant expired January 31, 2020, the
date the recipient left the Company. No expense was incurred in 2019 related to this grant.
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 or upon the termination of employment of the recipient. 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 prior to
vesting. For one recipient, three of these thresholds were achieved in 2017 and the final threshold was 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 expense (benefits) totaled $83,000, ($140,000) and (70,000) in fiscal 2019, 2018 and 2017, respectively.
(9)
Commitments and Contingencies
The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by
customers, 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) Leases
The Company leases its retail store locations and certain office space and equipment. The Company analyzes all leases at inception to
determine if a right-of-use asset and lease liability should be recognized. Leases with an initial term of 12 months or less and leases
with mutual termination clauses are not included on the consolidated balance sheet. The lease liability is measured at the present value
of future lease payments as of the lease commencement date, or as of the date of adoption of ASU 2016-02 for leases existing at the
adoption date. Leases for store locations are typically for a term of five years with options to extend for one or more five-year periods.
Total lease cost is comprised of operating lease costs, short-term lease costs and variable lease costs, which include rent paid as a
percentage of sales, common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Lease expense
for the fiscal year ended February 1, 2020 is as follows (in thousands):
Operating lease cost
Variable lease cost
Short term lease cost
Total lease cost
$
$
2019
51,213
5,791
1,061
58,065
F-18
Future minimum lease payments as of February 1, 2020 are as follows (in thousands):
Fiscal Year
Lease Costs
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less: imputed interest
Total present value of lease liabilities
(1) Calculated using the discount rate for each lease.
(2)
Includes short-term and long-term operating leases.
$
$
48,182
43,766
32,822
25,276
17,541
27,502
195,089
(16,829)(1)
178,260 (2)
Adoption of the lease accounting standard (Topic 842) using the effective transition method requires the Company to provide relevant
disclosures in accordance with ASC Topic 840, Leases for all prior periods presented. Future minimum lease payments as of
February 2, 2019 were as follows (in thousands):
Fiscal Year
Lease Costs
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.
Supplemental cash flow and other information related to operating leases for the fiscal year ended February 1, 2020 is as follows (in
thousands, except for weighted average amounts):
Cash paid for operating leases
Right of use assets obtained in exchange for new operating lease liabilities
$
$
Weighted average remaining lease term (years) - operating leases
Weighted average discount rate - operating leases
2019
49,704
82,954
5.13
3.49%
F-19
(11)
Valuation and Qualifying Accounts
The following table summarizes the allowances for inventory shrinkage and deferred tax assets (in thousands):
Allowance for Allowance for
Deferred Tax
Inventory
Shrinkage
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
Additions charged to costs and expenses
Deductions
Balance as of February 1, 2020
$
$
3,099 $
11,103
—
(10,698)
3,504
9,643
(10,033)
3,114
9,759
(9,919)
2,954 $
Assets
1,272
79
273
—
1,624
—
(9)
1,615
99
—
1,714
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.
(12)
Unaudited Quarterly Results of Operations
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: (1)
Basic
Diluted
Feb. 1
2020
Nov. 2
2019
Aug. 3
2019
May 4
2019
Feb. 2
2019
Nov. 3
2018
Aug. 4
2018
May 5
2018
(in thousands, except per share and share amounts)
Quarter Ended
$
211,013 $
183,050 $
182,830 $
205,032 $
201,158 $
175,364 $
181,999 $
211,032
(127,311)
(67,654)
(4,794)
—
11,254
322
(114,579)
(65,539)
(4,520)
—
(1,588)
382
(114,612)
(62,989)
(4,607)
(472)
150
374
(128,238)
(63,447)
(4,614)
—
8,733
341
(126,095)
(61,459)
(4,636)
(152)
8,816
334
(110,420)
(61,189)
(4,600)
(180)
(1,025)
282
(110,398)
(62,285)
(4,676)
(942)
3,698
325
(129,413)
(63,005)
(4,974)
—
13,640
258
11,576
(2,154)
9,422 $
(1,206)
122
(1,084) $
524
(147)
377 $
9,074
(1,286)
7,788 $
9,150
(1,802)
7,348 $
(743)
237
(506) $
4,023
(788)
3,235 $
13,898
(2,601)
11,297
0.84 $
0.84 $
(0.09) $
(0.09) $
0.03 $
0.03 $
0.65 $
0.65 $
0.59 $
0.59 $
(0.04) $
(0.04) $
0.24 $
0.24 $
0.83
0.83
$
$
$
Weighted average shares used to compute net
income (loss) per common share:
Basic
Diluted
11,201,804
11,270,762
11,635,707
11,635,707
11,881,896
11,881,896
11,976,142
12,006,306
12,447,209
12,470,560
12,780,472
12,780,472
13,314,470
13,351,321
13,578,100
13,631,266
(1) 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.
F-20
(13)
Subsequent Events
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a pandemic and
recommended containment and mitigation measures. In response, federal, state and local governments and private entities have
implemented travel restrictions, restrictions on public gatherings, stay at home orders and quarantining of people exposed to the virus.
The Company temporarily closed all of its store locations and distribution centers effective March 20, 2020. Other measures taken to
mitigate the operating and financial impact of the pandemic include (i) furloughing substantially all store and distribution center
personnel and a significant portion of the corporate staff; (ii) implementing temporary tiered salary reductions for management level
corporate employees and reducing the cash portion of non-employee director fees; (iii) extending payment terms with vendors and
suppliers; (iv) abating payments of rent as appropriate; (v) executing substantial reductions in operating expenses, store occupancy
costs, capital expenditures and other costs, including through reduced inventory purchases and eliminating the 401(k) plan match; and
(vi) suspending repurchases of shares and payment of dividends.
In March 2020, the Company drew down $43.7 million on its revolving credit facility as a proactive measure taken by the Company to
increase its cash position and preserve financial flexibility in light of current uncertainties resulting from COVID-19. The interest rate
for such borrowings accrued interest ranging from 1.625% to 3.5%. The proceeds from such borrowing may in the future be used for
working capital, general corporate purposes or other purposes permitted by the credit facility.
On May 12, 2020, the Company entered into a Second Amendment to Credit Agreement and Waiver (the “Second Amendment”),
with Bank of America and the Company’s wholly-owned subsidiary, Citi Trends Marketing Solutions, Inc., as guarantor (the “Second
Amendment”) to amend the credit facility (as amended, the “Revolving Credit Facility”) to, among other things, extend the maturity
date (which had been set to expire August 18, 2020) to August 18, 2021, increase the pricing for the loans by 1.0% (which rate varies
depending on availability under the Revolving Credit Facility), waive certain events of default that occurred on May 1, 2020 related to
delivery of our audited financials and the related compliance certificate, and modify certain covenant and reporting terms. Following
the effective date of the Second Amendment, borrowings under the Revolving Credit Facility will bear interest (a) for Eurodollar
Loans, at a rate equal to LIBOR plus either 2.25% or 2.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime
rate, (ii) the Federal Funds Rate plus 0.5%, or (iii) LIBOR for a period of one month plus 1.0%, plus, in each case either 1.25% or
1.5%, based in any such case on the average daily availability for borrowings under the facility.
The Company continues to monitor developments, including government requirements and recommendations at the federal, state and
local level to evaluate when it will reopen its stores, offices and facilities. On April 28, 2020, the Company announced that it has
started to reopen stores in some markets in accordance with state and local guidelines. Given the unprecedented uncertainty of this
situation and the unknown impact on consumer demand, the Company cannot reasonably estimate the full impact of this pandemic on
its business. However, the Company expects the impact from the pandemic and the related economic disruption will have a material
adverse effect on its financial condition, results of operations and liquidity in fiscal 2020.
F-21
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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 1
2020, 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.
BOARD OF DIRECTORS
Brian P. Carney
Executive Vice President and
Chief Financial Officer,
Southeastern Grocers, LLC
Jonathan Duskin
Chief Executive Officer,
Macellum Capital Management, LLC
ANNUAL MEETING
The 2020 Annual Meeting of Shareholders will
be held as a virtual meeting at 9:00 a.m., EDT
on June 30, 2020.
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 1, 2020, 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.
Laurens M. Goff
Managing Partner,
Stone-Goff Partners, a private equity firm
Margaret L. Jenkins
Former Chief Marketing Officer,
Denny’s Corporation
David N. Makuen
Chief Executive Officer,
Citi Trends, Inc.
Peter R. Sachse
Executive Chairman of the Board of Directors,
Citi Trends, Inc.
Former Chairman and Chief Executive Officer,
macys.com division of Macy’s, Inc.
Kenneth D. Seipel
Chief Executive Officer,
West Marine, Inc.
OFFICERS
David N. Makuen
Chief Executive Officer
James A. Dunn
Senior Vice President of Store Operations
Ivy D. Council
Executive Vice President of Human Resources
and Chief Compliance Officer
Charles J. Hynes
Senior Vice President of Supply Chain
Lisa A. Powell
Executive Vice President and
Chief Merchandising Officer
Christina K. Short
Senior Vice President and
General Merchandise Manager