UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 2, 2013
OR
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-51315
CITI TRENDS, INC.
(Exact name of registrant as specified in its charter)
|
DELAWARE |
|
52-2150697 |
|
(State or other jurisdiction of |
|
(I.R.S. Employer |
|
incorporation or organization) |
|
Identification No.) |
|
104 Coleman Boulevard |
|
|
|
Savannah, Georgia |
|
31408 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code (912) 236-1561
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large Accelerated Filer o |
|
Accelerated Filer x |
|
|
|
|
|
Non-Accelerated Filer o (Do not check if a smaller reporting company) |
|
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
|
Class |
|
Outstanding as of November 19, 2013 |
|
Common Stock, $.01 par value |
|
15,450,197 shares |
CITI TRENDS, INC.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Citi Trends, Inc.
Condensed Consolidated Balance Sheets
November 2, 2013 and February 2, 2013
(Unaudited)
(in thousands, except share data)
|
|
|
November 2, |
|
February 2, |
| ||
|
|
|
2013 |
|
2013 |
| ||
|
Assets |
|
|
|
|
| ||
|
Current assets: |
|
|
|
|
| ||
|
Cash and cash equivalents |
|
$ |
47,585 |
|
$ |
37,263 |
|
|
Short-term investment securities |
|
18,218 |
|
12,771 |
| ||
|
Inventory |
|
123,203 |
|
141,473 |
| ||
|
Prepaid and other current assets |
|
12,737 |
|
10,648 |
| ||
|
Income tax receivable |
|
1,442 |
|
1,134 |
| ||
|
Deferred tax asset |
|
4,703 |
|
6,088 |
| ||
|
Assets held for sale |
|
— |
|
1,415 |
| ||
|
Total current assets |
|
207,888 |
|
210,792 |
| ||
|
Property and equipment, net of accumulated depreciation and amortization of $156,635 and $142,770 as of November 2, 2013 and February 2, 2013, respectively |
|
60,979 |
|
70,995 |
| ||
|
Long-term investment securities |
|
20,052 |
|
5,754 |
| ||
|
Deferred tax asset |
|
6,250 |
|
3,863 |
| ||
|
Other assets |
|
700 |
|
741 |
| ||
|
Total assets |
|
$ |
295,869 |
|
$ |
292,145 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
|
Current liabilities: |
|
|
|
|
| ||
|
Accounts payable |
|
$ |
58,929 |
|
$ |
62,690 |
|
|
Accrued expenses |
|
17,408 |
|
14,435 |
| ||
|
Accrued compensation |
|
12,080 |
|
8,129 |
| ||
|
Layaway deposits |
|
2,397 |
|
660 |
| ||
|
Total current liabilities |
|
90,814 |
|
85,914 |
| ||
|
Other long-term liabilities |
|
8,416 |
|
10,260 |
| ||
|
Total liabilities |
|
99,230 |
|
96,174 |
| ||
|
Stockholders’ equity: |
|
|
|
|
| ||
|
Common stock, $0.01 par value. Authorized 32,000,000 shares; 15,616,665 shares issued as of November 2, 2013 and 15,295,780 shares issued as of February 2, 2013; 15,450,915 shares outstanding as of November 2, 2013 and 15,130,030 outstanding as of February 2, 2013 |
|
150 |
|
149 |
| ||
|
Paid-in-capital |
|
82,048 |
|
80,380 |
| ||
|
Retained earnings |
|
114,606 |
|
115,607 |
| ||
|
Treasury stock, at cost; 165,750 shares as of November 2, 2013 and February 2, 2013 |
|
(165 |
) |
(165 |
) | ||
|
Total stockholders’ equity |
|
196,639 |
|
195,971 |
| ||
|
Commitments and contingencies (note 10) |
|
|
|
|
| ||
|
Total liabilities and stockholders’ equity |
|
$ |
295,869 |
|
$ |
292,145 |
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
Thirty-Nine Weeks Ended November 2, 2013 and October 27, 2012
(Unaudited)
(in thousands, except per share data)
|
|
|
Thirty-Nine Weeks Ended |
| ||||
|
|
|
November 2, |
|
October 27, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
Net sales |
|
$ |
465,011 |
|
$ |
478,997 |
|
|
Cost of sales |
|
294,878 |
|
308,739 |
| ||
|
Gross profit |
|
170,133 |
|
170,258 |
| ||
|
Selling, general and administrative expenses |
|
(155,976 |
) |
(154,733 |
) | ||
|
Depreciation and amortization |
|
(16,716 |
) |
(18,153 |
) | ||
|
Asset impairment |
|
(1,237 |
) |
(660 |
) | ||
|
Gain on sale of former distribution center |
|
1,526 |
|
— |
| ||
|
Loss from operations |
|
(2,270 |
) |
(3,288 |
) | ||
|
Interest income |
|
213 |
|
194 |
| ||
|
Interest expense |
|
(145 |
) |
(163 |
) | ||
|
Loss before income tax benefit |
|
(2,202 |
) |
(3,257 |
) | ||
|
Income tax benefit |
|
(1,201 |
) |
(1,736 |
) | ||
|
Net loss |
|
$ |
(1,001 |
) |
$ |
(1,521 |
) |
|
|
|
|
|
|
| ||
|
Basic net loss per common share |
|
$ |
(0.07 |
) |
$ |
(0.10 |
) |
|
Diluted net loss per common share |
|
$ |
(0.07 |
) |
$ |
(0.10 |
) |
|
|
|
|
|
|
| ||
|
Weighted average number of shares outstanding |
|
|
|
|
| ||
|
Basic |
|
14,789 |
|
14,662 |
| ||
|
Diluted |
|
14,789 |
|
14,662 |
| ||
Citi Trends, Inc.
Condensed Consolidated Statements of Operations
Thirteen Weeks Ended November 2, 2013 and October 27, 2012
(Unaudited)
(in thousands, except per share data)
|
|
|
Thirteen Weeks Ended |
| ||||
|
|
|
November 2, |
|
October 27, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
Net sales |
|
$ |
145,362 |
|
$ |
148,985 |
|
|
Cost of sales |
|
92,074 |
|
97,808 |
| ||
|
Gross profit |
|
53,288 |
|
51,177 |
| ||
|
Selling, general and administrative expenses |
|
(52,148 |
) |
(51,132 |
) | ||
|
Depreciation and amortization |
|
(5,454 |
) |
(5,970 |
) | ||
|
Asset impairment |
|
(556 |
) |
(660 |
) | ||
|
Gain on sale of former distribution center |
|
1,526 |
|
— |
| ||
|
Loss from operations |
|
(3,344 |
) |
(6,585 |
) | ||
|
Interest income |
|
78 |
|
66 |
| ||
|
Interest expense |
|
(49 |
) |
(50 |
) | ||
|
Loss before income tax benefit |
|
(3,315 |
) |
(6,569 |
) | ||
|
Income tax benefit |
|
(1,643 |
) |
(2,869 |
) | ||
|
Net loss |
|
$ |
(1,672 |
) |
$ |
(3,700 |
) |
|
|
|
|
|
|
| ||
|
Basic net loss per common share |
|
$ |
(0.11 |
) |
$ |
(0.25 |
) |
|
Diluted net loss per common share |
|
$ |
(0.11 |
) |
$ |
(0.25 |
) |
|
|
|
|
|
|
| ||
|
Weighted average number of shares outstanding |
|
|
|
|
| ||
|
Basic |
|
14,815 |
|
14,677 |
| ||
|
Diluted |
|
14,815 |
|
14,677 |
| ||
See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Condensed Consolidated Statements of Cash Flows
Thirty-Nine Weeks Ended November 2, 2013 and October 27, 2012
(Unaudited)
(in thousands)
|
|
|
Thirty-Nine Weeks Ended |
| ||||
|
|
|
November 2, |
|
October 27, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
Operating activities: |
|
|
|
|
| ||
|
Net loss |
|
$ |
(1,001 |
) |
$ |
(1,521 |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
| ||
|
Depreciation and amortization |
|
16,716 |
|
18,153 |
| ||
|
Asset impairment |
|
1,237 |
|
660 |
| ||
|
Gain on sale of former distribution center |
|
(1,526 |
) |
— |
| ||
|
Loss on disposal of property and equipment |
|
1 |
|
14 |
| ||
|
Deferred income taxes |
|
(1,002 |
) |
(601 |
) | ||
|
Noncash stock-based compensation expense |
|
2,572 |
|
1,980 |
| ||
|
Excess tax benefits from stock-based payment arrangements |
|
294 |
|
463 |
| ||
|
Changes in assets and liabilities: |
|
|
|
|
| ||
|
Inventory |
|
18,270 |
|
(15,174 |
) | ||
|
Prepaid and other current assets |
|
(2,089 |
) |
(478 |
) | ||
|
Other assets |
|
41 |
|
42 |
| ||
|
Accounts payable |
|
(3,761 |
) |
(11,843 |
) | ||
|
Accrued expenses and other long-term liabilities |
|
1,020 |
|
917 |
| ||
|
Accrued compensation |
|
3,951 |
|
(1,615 |
) | ||
|
Income tax receivable/payable |
|
(602 |
) |
7,850 |
| ||
|
Layaway deposits |
|
1,737 |
|
1,941 |
| ||
|
Net cash provided by operating activities |
|
35,858 |
|
788 |
| ||
|
Investing activities: |
|
|
|
|
| ||
|
Sales/redemptions of investment securities |
|
3,736 |
|
51 |
| ||
|
Purchases of investment securities |
|
(23,481 |
) |
— |
| ||
|
Proceeds from sale of former distribution center |
|
2,941 |
|
— |
| ||
|
Purchases of property and equipment |
|
(7,829 |
) |
(5,798 |
) | ||
|
Net cash used in investing activities |
|
(24,633 |
) |
(5,747 |
) | ||
|
Financing activities: |
|
|
|
|
| ||
|
Excess tax benefits from stock-based payment arrangements |
|
(294 |
) |
(463 |
) | ||
|
Proceeds from the exercise of stock options |
|
44 |
|
— |
| ||
|
Shares acquired to settle withholding taxes on the vesting of nonvested restricted stock |
|
(653 |
) |
(369 |
) | ||
|
Net cash used in financing activities |
|
(903 |
) |
(832 |
) | ||
|
Net increase (decrease) in cash and cash equivalents |
|
10,322 |
|
(5,791 |
) | ||
|
Cash and cash equivalents: |
|
|
|
|
| ||
|
Beginning of period |
|
37,263 |
|
41,986 |
| ||
|
End of period |
|
$ |
47,585 |
|
$ |
36,195 |
|
|
|
|
|
|
|
| ||
|
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
|
Cash paid for interest |
|
$ |
95 |
|
$ |
109 |
|
|
Cash payments (refunds) of income taxes |
|
$ |
404 |
|
$ |
(8,985 |
) |
|
Supplemental disclosures of noncash investing activities: |
|
|
|
|
| ||
|
Increase (decrease) in accrual for purchases of property and equipment |
|
$ |
109 |
|
$ |
(1,315 |
) |
See accompanying notes to the condensed consolidated financial statements (unaudited).
Citi Trends, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
November 2, 2013
1. Basis of Presentation
Citi Trends, Inc. and its subsidiary (the “Company”) operate as a value-priced retailer of urban fashion apparel and accessories for the entire family. As of November 2, 2013, the Company operated 505 stores in 29 states.
The condensed consolidated balance sheet as of November 2, 2013, the condensed consolidated statements of operations for the thirty-nine and thirteen week periods ended November 2, 2013 and October 27, 2012, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 2, 2013 and October 27, 2012 have been prepared by the Company without audit. The condensed consolidated balance sheet as of February 2, 2013 has been derived from the audited financial statements as of that date, but does not include all required year-end disclosures. In the opinion of management, such statements include all adjustments considered necessary to present fairly the Company’s financial position as of November 2, 2013 and February 2, 2013, and its results of operations and cash flows for all periods presented. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended February 2, 2013.
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the interim periods ended November 2, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2014.
The following contains references to years 2013 and 2012, which represent fiscal years ending or ended on February 1, 2014 and February 2, 2013, respectively. Fiscal 2013 has a 52-week accounting period and fiscal 2012 had a 53-week accounting period.
2. Use of Estimates
The preparation of financial statements in conformity with 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.
3. Cash and Cash Equivalents/Concentration of Credit Risk
For purposes of the condensed consolidated balance sheets and condensed consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds. The Company maintains cash accounts that exceed federally insured limits.
4. Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock and stock options. During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding, because the inclusion of common stock equivalents would be antidilutive.
The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. This method assumes that the proceeds the Company receives from the exercise of stock options are used to repurchase common shares in the market. The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of outstanding options and vesting of nonvested restricted stock. For the thirty-nine weeks ended November 2, 2013 and October 27, 2012, there were 43,000 and 46,000 stock options, respectively, and 619,000 and 393,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution. For the thirteen weeks ended November 2, 2013 and October 27, 2012, there were 36,000 and 48,000 stock options, respectively, and 639,000 and 476,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.
The following table provides a reconciliation of the average number of common shares outstanding used to calculate basic earnings per share to the number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share for the thirty-nine and thirteen week periods ended November 2, 2013 and October 27, 2012:
|
|
|
Thirty-Nine Weeks Ended |
| ||
|
|
|
November 2, 2013 |
|
October 27, 2012 |
|
|
Average number of common shares outstanding |
|
14,789,320 |
|
14,661,910 |
|
|
Incremental shares from assumed exercises of stock options |
|
— |
|
— |
|
|
Incremental shares from assumed vesting of nonvested restricted stock |
|
— |
|
— |
|
|
Average number of common shares and common stock equivalents outstanding |
|
14,789,320 |
|
14,661,910 |
|
|
|
|
Thirteen Weeks Ended |
| ||
|
|
|
November 2, 2013 |
|
October 27, 2012 |
|
|
Average number of common shares outstanding |
|
14,815,107 |
|
14,676,817 |
|
|
Incremental shares from assumed exercises of stock options |
|
— |
|
— |
|
|
Incremental shares from assumed vesting of nonvested restricted stock |
|
— |
|
— |
|
|
Average number of common shares and common stock equivalents outstanding |
|
14,815,107 |
|
14,676,817 |
|
5. Fair Value Measurement
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 November 2, 2013, 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 |
|
Gross |
|
Fair Market |
| ||||
|
Short-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of states and municipalities (Level 2) |
|
$ |
2,407 |
|
$ |
1 |
|
$ |
— |
|
$ |
2,408 |
|
|
Obligations of the U. S. Treasury (Level 1) |
|
4,999 |
|
8 |
|
— |
|
5,007 |
| ||||
|
Bank certificates of deposit (Level 2) |
|
10,812 |
|
— |
|
(1 |
) |
10,811 |
| ||||
|
|
|
$ |
18,218 |
|
$ |
9 |
|
$ |
(1 |
) |
$ |
18,226 |
|
|
Long-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of the U. S. Treasury (Level 1) |
|
$ |
15,177 |
|
$ |
15 |
|
$ |
(1 |
) |
$ |
15,191 |
|
|
Bank certificates of deposit (Level 2) |
|
4,875 |
|
— |
|
— |
|
4,875 |
| ||||
|
|
|
$ |
20,052 |
|
$ |
15 |
|
$ |
(1 |
) |
$ |
20,066 |
|
The amortized cost and fair market value of investment securities as of November 2, 2013 by contractual maturity are as follows (in thousands):
|
|
|
Amortized |
|
Fair Market |
| ||
|
Mature in one year or less |
|
$ |
18,218 |
|
$ |
18,226 |
|
|
Mature after one year through five years |
|
20,052 |
|
20,066 |
| ||
|
|
|
$ |
38,270 |
|
$ |
38,292 |
|
As of February 2, 2013, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
|
Short-term: |
|
|
|
|
|
|
|
|
| ||||
|
Obligations of the U. S. Treasury (Level 1) |
|
$ |
4,993 |
|
$ |
39 |
|
$ |
— |
|
$ |
5,032 |
|
|
Obligations of states and municipalities (Level 2) |
|
1,731 |
|
9 |
|
— |
|
1,740 |
| ||||
|
Bank certificates of deposit (Level 2) |
|
6,047 |
|
— |
|
— |
|
6,047 |
| ||||
|
|
|
$ |
12,771 |
|
$ |
48 |
|
$ |
— |
|
$ |
12,819 |
|
|
Long-term: |
|
|
|
|
|
|
|
|
| ||||
|
Bank certificates of deposit (Level 2) |
|
$ |
5,754 |
|
$ |
6 |
|
$ |
— |
|
$ |
5,760 |
|
The amortized cost and fair market value of investment securities as of February 2, 2013 by contractual maturity were as follows (in thousands):
|
|
|
Amortized |
|
Fair |
| ||
|
Mature in one year or less |
|
$ |
12,771 |
|
$ |
12,819 |
|
|
Mature after one year through five years |
|
5,754 |
|
5,760 |
| ||
|
|
|
$ |
18,525 |
|
$ |
18,579 |
|
There were no changes among the levels in the thirty-nine weeks ended November 2, 2013.
Fair market values of Level 2 investments are determined by management with the assistance of a third party pricing service. Because 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.
6. 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 to leasehold improvements and fixtures and equipment at underperforming stores totaled $1.2 million and $0.6 million, respectively, in the thirty-nine and thirteen-week periods ended November 2, 2013. Impairment expense totaled $0.7 million in the thirty-nine and thirteen-week periods ended October 27, 2012.
7. Revolving Line of Credit
On October 27, 2011, the Company entered into a five-year, $50 million credit facility with Bank of America to replace its prior $20 million credit facility. The facility includes a $25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $75 million. Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus 0.5%, (ii) the Federal Funds Rate plus 1.0%, or (iii) LIBOR plus 1.5%. The facility is secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings under either the existing or prior facility.
8. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
For the thirty-nine week periods ended November 2, 2013 and October 27, 2012, the Company has utilized the discrete effective tax rate method, as allowed by ASC 740-270, “Income Taxes - Interim Reporting,” to calculate income taxes. Under the discrete method, the Company determines its tax expense based upon actual results as if the interim period were an annual period. ASC 740 requires companies to apply their estimated full-year tax rate on a year-to-date basis in each interim period unless the estimated full-year tax rate is not reliably predictable. For the thirty-nine-week periods ended November 2, 2013 and October 27, 2012, the Company concluded that the use of the discrete method was more appropriate than the annual effective tax rate method, because the annual rate method would not be reliable due to its sensitivity to minimal changes in forecasted annual pre-tax earnings.
The effective tax rates reflected in income tax benefit for the thirty-nine and thirteen-week periods ended November 2, 2013 and October 27, 2012 include the benefit of various tax credits. Such tax credits are higher during the interim periods of fiscal 2013 than 2012 because they include Work Opportunity Tax Credits (WOTC) which have been available throughout fiscal 2013, but were not extended by Congress in fiscal 2012 until after the third quarter. The benefit from tax credits in the thirty-nine weeks ended November 2, 2013 is partially offset by income tax expense of $0.4 million which resulted from an increase in a valuation allowance in the second quarter of 2013. Such increase occurred when the Company concluded that its ability to utilize certain tax credits in one state was no longer more likely than not.
9. Other Long-Term Liabilities
The components of other long-term liabilities as of November 2, 2013 and February 2, 2013 are as follows (in thousands):
|
|
|
November 2, |
|
February 2, |
| ||
|
Deferred rent |
|
$ |
2,389 |
|
$ |
3,342 |
|
|
Tenant improvement allowances |
|
4,339 |
|
5,384 |
| ||
|
Other |
|
1,688 |
|
1,534 |
| ||
|
|
|
$ |
8,416 |
|
$ |
10,260 |
|
10. Commitments and Contingencies
On August 12, 2011, the Company received a letter of determination from the U.S. Equal Employment Opportunity Commission (the “EEOC”) commencing a conciliation process regarding alleged discrimination against males by the Company in its hiring and promotion practices during the years 2004 through 2006. In its letter of determination, the EEOC sought recovery in the amount of $0.2 million on behalf of a former male employee and in the additional amount of $3.8 million in a settlement fund for a class of unidentified males who sought or considered seeking manager or assistant manager positions in the Company’s stores. The EEOC also seeks certain undertakings by the Company with regard to its employment policies and procedures and a reporting obligation to the EEOC with respect to the Company’s compliance with these undertakings.
The Company has not received full documentation or information from the EEOC in support of its letter of determination, but has undertaken its own internal analysis of the EEOC’s claims and defenses to such claims and has had discussions with the EEOC in that regard. Following discussions with the EEOC regarding possible settlement, the EEOC has proposed a settlement amount to be paid by the Company of $2.5 million, with any unclaimed funds following efforts to identify and compensate claimants to be directed to one or more charities. In the interest of reaching a satisfactory conciliation agreement with the EEOC, the Company has proposed a total economic settlement offer of $1.0 million to cover all claims and the expenses of administering and complying with the settlement (excluding professional fees), with no reversion of unclaimed funds back to the Company. The Company continues to await the EEOC’s response to the Company’s most recent proposal regarding settlement. The Company is also evaluating other aspects of the conciliation process established by the EEOC.
On February 24, 2012, a suit was filed in the United States District Court for the Northern District of Alabama, Middle Division, by certain individuals as a purported collective action on behalf of current and former employees of the Company holding store managerial positions. The plaintiffs allege that store managers have been improperly classified as exempt from the obligation to pay overtime in violation of the Fair Labor Standards Act. The Company intends to vigorously defend the claims that have been asserted in this lawsuit. The trial court conditionally certified a class of store managers and ruled that the store managers are not subject to arbitration. The size and scope of the class remains undetermined, however, and the decision on arbitration is expected to be subject to appellate review. Also, notwithstanding the initial actions by the trial court, the conditional class may be subject to decertification at the close of discovery. Because no discovery has been conducted to date, the Company is unable to determine the probability of any particular outcome and it is not reasonably possible to estimate a range of loss with respect to this matter. Accordingly, no accrual for costs has been recorded, and the potential impact of this matter on the Company’s financial position, results of operations and cash flows cannot be determined at this time.
The Company from time to time is also involved in various other 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 other 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, or statements regarding the outcome or impact of pending or threatened litigation. These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.
The factors that may result in actual results differing from such forward-looking information include, but are not limited to: transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; changes in consumer spending on apparel; changes in product mix; interruptions in suppliers’ businesses; a deterioration in general economic conditions caused by acts of war or terrorism or other factors; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening and operating new stores; delays associated with building, opening or expanding new or existing distribution centers; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K.
Overview
We are a value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. We operated 505 stores in both urban and rural markets in 29 states as of November 2, 2013.
We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been opened for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13th month of operation at the earliest or until its 24th month at the latest. As an example, stores opened in fiscal 2012 and fiscal 2013 are not considered comparable stores in fiscal 2013. 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 gross profit 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, as adjusted for non-cash asset impairment expense and infrequent significant items, such as the gain on sale of our former distribution center in fiscal 2013), which are considered our most important operating statistics. Although EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense. Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under U.S. GAAP and should not be used as a singular measure of operating performance or as a substitute for U.S. GAAP results. Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the thirty-nine and thirteen week periods ended November 2, 2013 and October 27, 2012:
|
|
|
Thirty-Nine Weeks Ended |
|
Thirteen Weeks Ended |
| ||||||||
|
|
|
November 2, 2013 |
|
October 27, 2012 |
|
November 2, 2013 |
|
October 27, 2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net loss |
|
$ |
(1,001 |
) |
$ |
(1,521 |
) |
$ |
(1,672 |
) |
$ |
(3,700 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Plus: |
|
|
|
|
|
|
|
|
| ||||
|
Interest expense |
|
145 |
|
163 |
|
49 |
|
50 |
| ||||
|
Income tax expense |
|
— |
|
— |
|
— |
|
— |
| ||||
|
Depreciation and amortization |
|
16,716 |
|
18,153 |
|
5,454 |
|
5,970 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Less: |
|
|
|
|
|
|
|
|
| ||||
|
Interest income |
|
(213 |
) |
(194 |
) |
(78 |
) |
(66 |
) | ||||
|
Income tax benefit |
|
(1,201 |
) |
(1,736 |
) |
(1,643 |
) |
(2,869 |
) | ||||
|
EBITDA |
|
14,446 |
|
14,865 |
|
2,110 |
|
(615 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Asset impairment |
|
1,237 |
|
660 |
|
556 |
|
660 |
| ||||
|
Gain on sale of former distribution center |
|
(1,526 |
) |
— |
|
(1,526 |
) |
— |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Adjusted EBITDA |
|
$ |
14,157 |
|
$ |
15,525 |
|
$ |
1,140 |
|
$ |
45 |
|
Accounting Periods
The following discussion contains references to fiscal years 2013 and 2012, which represent fiscal years ending or ended on February 1, 2014 and February 2, 2013, respectively. Fiscal 2013 has a 52-week accounting period and fiscal 2012 had a 53-week accounting period. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto.
Results of Operations
The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. The nature of the Company’s business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of the Company’s business may affect comparisons between periods.
Thirty-nine Weeks Ended November 2, 2013 and October 27, 2012
Net Sales. Net sales decreased $14.0 million, or 2.9%, to $465.0 million in the thirty-nine weeks ended November 2, 2013 from $479.0 million in the thirty-nine weeks ended October 27, 2012. The sales comparison to the prior year for the thirty-nine weeks ended November 2, 2013 is affected by the calendar shift created by fiscal 2012 having 53 weeks. The thirty-nine weeks ended November 2, 2013 began and ended one week later on the calendar than the thirty-nine weeks ended October 27, 2012. This calendar shift had a significant impact on the thirty-nine week sales comparison because the beginning and ending weeks of the period affected by the shift had varying levels of sales volume. In the thirty-nine weeks ended November 2, 2013, the comparison of sales to last year’s fiscal thirty-nine weeks was adversely affected by $8.9 million due to the difference in the sales levels of such beginning and ending weeks. In addition to the effect of the calendar shift, sales declined $4.6 million due to a 1.0% decrease in comparable store sales on a comparable weeks basis. This sales decrease in the 500 comparable stores was reflected in an average unit sale that was 8% lower, partially offset by a 5% increase in the number of customer transactions and a 2% increase in the average number of items per transaction. Comparable store sales changes by major merchandise class were as follows in the thirty-nine weeks ended November 2, 2013: Accessories +15%; Home +15%; Kids 0%; Men’s -6%; and Ladies’ -12%. Lastly, the eleven stores closed in 2012 and 2013, net of five new stores, accounted for a decrease of $0.5 million in sales.
Gross Profit. Gross profit decreased $0.2 million, or 0.1%, to $170.1 million in the thirty-nine weeks ended November 2, 2013 from $170.3 million in the thirty-nine weeks ended October 27, 2012. The decrease in gross profit is a result of the decrease in sales discussed above, almost entirely offset by an increase in the gross margin to 36.6% from 35.5% in last year’s first thirty-nine weeks. The higher gross margin was due primarily to an 80 basis points increase in the core merchandise margin (initial mark-up, net of markdowns) as a result of the need for a lower level of markdowns this year due to a much more conservative inventory level in 2013. The remainder of the gross margin improvement was due to lower freight costs resulting from a change to a new carrier with lower rates and lower shipping volume associated with the reduction in inventory levels.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.3 million, or 0.8%, to $156.0 million in the first thirty-nine weeks of 2013 from $154.7 million in the first thirty-nine weeks of 2012. As a percentage of sales, selling, general and
administrative expenses increased to 33.5% in the first thirty-nine weeks of fiscal 2013 from 32.3% in the first thirty-nine weeks of fiscal 2012, due to (1) the deleveraging effect associated with the $14.0 million decline in sales discussed above; in particular, the calendar shift that adversely impacted the sales comparison by $8.9 million had very little effect on expenses, resulting in expense deleverage of approximately 60 basis points, and (2) higher incentive compensation in the first thirty-nine weeks of this year totaling $1.1 million due to improved financial performance relative to budget in 2013.
Depreciation and Amortization. Depreciation and amortization expense decreased $1.5 million, or 7.9%, to $16.7 million in the thirty-nine weeks ended November 2, 2013 from $18.2 million in the thirty-nine weeks ended October 27, 2012, due to the slowing of our store opening pace in 2012 and 2013 in relation to previous years.
Asset Impairment. Impairment charges for property and equipment at certain underperforming stores increased $0.5 million to $1.2 million in the first thirty-nine weeks of 2013 from $0.7 million in the first thirty-nine weeks of 2012.
Gain on Sale of Former Distribution Center. During the third quarter, we sold a previously closed distribution center in Savannah, Georgia for $2.9 million, resulting in a gain of $1.5 million.
Income Tax Benefit. Income tax benefit decreased $0.5 million to $1.2 million in this year’s first thirty-nine weeks from $1.7 million in the first thirty-nine weeks of 2012 due to a reduction in pretax loss, partially offset by an increase in the effective income tax rate to 54.5% from 53.3%. The income tax rate for the first thirty-nine weeks of 2013 was higher than the rate for last year’s first thirty-nine weeks because of a benefit from Work Opportunity Tax Credits (WOTC), which were were not available in last year’s first thirty-nine weeks. In 2012, Congress did not extend WOTC legislation allowing for such benefits until after the third quarter, therefore, no benefit from such credits was recorded through the third quarter of 2012. The benefit from WOTC in 2013 was partially offset by an increase in income tax expense of $0.4 million which resulted from an increase in a valuation allowance in the second quarter of 2013. Such increase occurred when the Company concluded that its ability to utilize certain tax credits in one state was no longer more likely than not.
Net Loss. Net loss decreased to $1.0 million in the first thirty-nine weeks of 2013 from $1.5 million in the first thirty-nine weeks of 2012 due to the factors discussed above.
Thirteen Weeks Ended November 2, 2013 and October 27, 2012
Net Sales. Net sales decreased $3.6 million, or 2.4%, to $145.4 million in the third quarter of 2013 from $149.0 million in the third quarter of 2012. Sales comparisons to the prior year for each quarter of 2013 are affected by the calendar shift created by fiscal 2012 having 53 weeks. Each of the first three quarters in 2013 begins and ends one week later on the calendar than the same quarter of 2012. This calendar shift can have a significant impact on quarterly sales comparisons if the beginning and ending weeks of the period affected by the shift have varying levels of sales volume. In the third quarter of 2013, the comparison of sales to last year’s third quarter was adversely impacted by $3.4 million due to the difference in the sales levels of such beginning and ending weeks. In addition to the effect of the calendar shift, the eleven stores closed in 2012 and 2013, net of five new stores, accounted for a decrease of $0.9 million in sales. Partially offsetting these sales decreases, comparable store sales improved 0.6%, or $0.7 million, on a comparable weeks basis. This sales increase in the 500 comparable stores was reflected in a 6% increase in the number of customer transactions, partially offset by an average unit sale that was more than 5% lower than the previous year. Comparable store sales changes by major merchandise class were as follows in the third quarter of 2013: Home +15%; Accessories +13%; Kids -1%; Men’s -2%; and Ladies’ -9%.
Gross Profit. Gross profit increased $2.1 million, or 4.1%, to $53.3 million in the third quarter of 2013 from $51.2 million in last year’s third quarter. The increase in gross profit is a result of an improvement in the gross margin to 36.7% from 34.4% in last year’s third quarter, partially offset by the decrease in sales discussed above. The higher gross margin was due primarily to an increase in the core merchandise margin (initial mark-up, net of markdowns) of 150 basis points as a result of the need for a lower level of markdowns this year due to a much more conservative inventory level in 2013. The remainder of the gross margin improvement was due to lower freight costs resulting from a change to a new carrier with lower rates and lower shipping volume associated with the reduction in inventory levels.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.0 million, or 2.0%, to $52.1 million in the third quarter of 2013 from $51.1 million in last year’s third quarter. As a percentage of sales, selling, general and administrative expenses increased to 35.9% in the third quarter of 2013 from 34.3% in the third quarter of 2012, due to (1) the deleveraging effect associated with the $3.6 million decline in sales discussed above; in particular, the calendar shift that adversely impacted the sales comparison by $3.4 million had very little effect on expenses, resulting in expense deleverage of approximately 80 basis points, and (2) higher incentive compensation in the third quarter of this year totaling $0.8 million due to improved financial performance relative to budget in 2013.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.5 million, or 8.6%, to $5.5 million in the third quarter of 2013 from $6.0 million in the third quarter of 2012, due to the slowing of our store opening pace in 2012 and 2013 in relation to previous years.
Asset Impairment. Impairment charges for property and equipment at certain underperforming stores decreased $0.1 million to $0.6 million in the third quarter of 2013 from $0.7 million in the third quarter of 2012.
Gain on Sale of Former Distribution Center. During the third quarter, we sold a previously closed distribution center in Savannah, Georgia for $2.9 million, resulting in a gain of $1.5 million.
Income Tax Benefit. Income tax benefit decreased $1.3 million to $1.6 million in this year’s third quarter from $2.9 million in the third quarter of 2012 due to a decrease in pretax loss, partially offset by an increase in the effective income tax rate to 49.6% from 43.7%. The increase in the effective tax rate is due primarily to WOTC benefits, which were not available in the third quarter of 2012, as federal legislation to renew the program was not extended by Congress until later.
Net Loss. Net loss decreased to $1.7 million in the third quarter of 2013 from $3.7 million in the third quarter of 2012 due to the factors discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, opening of new stores, remodeling of our existing stores and the improvement of our information systems. In recent years, we have met these cash requirements using cash flow from operations and short-term trade credit. We expect to be able to meet future cash requirements with cash flow from operations, short-term trade credit, existing balances of cash and investment securities and, if necessary, borrowings under our revolving credit facility.
Current Financial Condition. As of November 2, 2013, we had total cash and cash equivalents of $47.6 million compared to $37.3 million as of February 2, 2013. Additionally, we had $18.2 million and $20.1 million of short-term and long-term investment securities, respectively, as of November 2, 2013, compared to $12.8 million and $5.8 million, respectively, as of February 2, 2013. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 41.6% of our total assets as of November 2, 2013, compared to 48.4% of total assets as of February 2, 2013. Management’s ability to manage our inventory can have a significant impact on our cash flows from operations during a given interim period or fiscal year. In addition, inventory purchases can be seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise.
Cash Flows From Operating Activities. Net cash provided by operating activities was $35.9 million in the thirty-nine weeks ended November 2, 2013 compared to $0.8 million in the same period of 2012. Sources of cash provided during the thirty-nine weeks ended November 2, 2013 included net income adjusted for noncash expenses such as depreciation and amortization, asset impairment, gain on sale of a former distribution center, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling $17.0 million (compared to $18.7 million in the thirty-nine weeks ended October 27, 2012). The other significant sources of cash in the thirty-nine weeks ended November 2, 2013 included (1) an $18.3 million decrease in inventory (compared to an increase of $15.2 million in the thirty-nine weeks ended October 27, 2012) due to an effort to maintain a much more conservative level of inventory this year in light of the challenging sales environment in recent years, and (2) a $4.0 million increase in accrued compensation (compared to a decrease of $1.6 million in the thirty-nine weeks ended October 27, 2012) due primarily to our balance sheet as of the end of the third quarter of 2013 including accrued payroll for two weeks, while our 2012 year-end balance sheet included accrued payroll for only one week due to the timing of our bi-weekly payroll. In addition, accrued compensation increased as a result of higher incentive compensation accruals this year due to improved financial performance relative to budget in 2013.
A decrease in accounts payable of $3.8 million (compared to $11.8 million in the thirty-nine weeks ended October 27, 2012) partially offset the sources of cash discussed above. This reduction in payables was related to the decrease in inventory, although at a lower rate than inventory due to the fact that the decline in inventory was more heavily weighted towards next-season-buy (NSB) merchandise. Such merchandise is purchased at heavy discounts near the end of a season and held until the beginning of the same season the following year. As a result, it tends to have a lower level of accounts payable associated with it since it has often been paid for well before it is ultimately sold. Therefore, when NSB inventory declines, there is not a similar rate of decline in payables.
Cash Flows From Investing Activities. Cash used in investing activities was $24.6 million in the thirty-nine weeks ended November 2, 2013 compared to $5.7 million in the thirty-nine weeks ended October 27, 2012. Cash used for purchases of property and equipment totaled $7.8 million and $5.8 million in the first thirty-nine weeks of 2013 and 2012, respectively. Purchases of investment securities, net of sales/redemptions, used cash of $19.7 million, while proceeds from the sale of our former distribution center provided cash of $2.9 million in the thirty-nine weeks ended November 2, 2013.
Cash Flows From Financing Activities. Cash flows from financing activities were insignificant in the first thirty-nine weeks of both 2013 and 2012.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $47.6 million as of November 2, 2013); (ii) short-term and long-term investment securities (which equaled $18.2 million and $20.1 million, respectively, as of November 2, 2013); (iii) short-term trade credit; (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) a $50 million revolving credit facility. Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors. Historically, our principal liquidity requirements have been for working capital and capital expenditure needs.
We believe that our existing sources of liquidity will be sufficient to fund our operations and anticipated capital expenditures for at least the next 12 months.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended February 2, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the thirty-nine weeks ended November 2, 2013 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 2, 2013.
Item 4. Controls and Procedures.
We have carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 2, 2013 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended November 2, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On August 12, 2011, we received a letter of determination from the U.S. Equal Employment Opportunity Commission (the “EEOC”) commencing a conciliation process regarding alleged discrimination against males by us in our hiring and promotion practices during the years 2004 through 2006. In its letter of determination, the EEOC sought recovery in the amount of $0.2 million on behalf of a former male employee and in the additional amount of $3.8 million in a settlement fund for a class of unidentified males who sought or considered seeking manager or assistant manager positions in our stores. The EEOC also seeks certain undertakings by us with regard to our employment policies and procedures and a reporting obligation to the EEOC with respect to our compliance with these undertakings.
We have not received full documentation or information from the EEOC in support of its letter of determination, but have undertaken our own internal analysis of the EEOC’s claims and defenses to such claims and have had discussions with the EEOC in that regard. Following discussions with the EEOC regarding possible settlement, the EEOC has proposed a settlement amount to be paid by us of $2.5 million, with any unclaimed funds following efforts to identify and compensate claimants to be directed to one or more charities. In the interest of reaching a satisfactory conciliation agreement with the EEOC, we have proposed a total economic settlement offer of $1.0 million to cover all claims and the expenses of administering and complying with the settlement (excluding professional fees), with no reversion of unclaimed funds back to us. We continue to await the EEOC’s response to our most recent proposal regarding settlement. We are also evaluating other aspects of the conciliation process established by the EEOC.
On February 24, 2012, a suit was filed in the United States District Court for the Northern District of Alabama, Middle Division, by certain individuals as a purported collective action on behalf of current and former employees of the Company holding store managerial positions. The plaintiffs allege that store managers have been improperly classified as exempt from the obligation to pay overtime in violation of the Fair Labor Standards Act. We intend to vigorously defend the claims that have been asserted in this lawsuit. The trial court conditionally certified a class of store managers and ruled that the store managers are not subject to arbitration. The size and scope of the class remains undetermined, however, and the decision on arbitration is expected to be subject to appellate review. Also, notwithstanding the initial actions by the trial court, the conditional class may be subject to decertification at the close of discovery. Because no discovery has been conducted to date, we are unable to determine the probability of any particular outcome and it is not reasonably possible to estimate a range of loss with respect to this matter. Accordingly, no accrual for costs has been recorded, and the potential impact of this matter on our financial position, results of operations and cash flows cannot be determined at this time.
We are from time to time also involved in various other 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 other 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.
There are no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
|
|
32.1 |
|
Certification 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 information from Citi Trends, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 2, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets as of November 2, 2013 and February 2, 2013, (ii) the Condensed Consolidated Statements of Operations for the thirty-nine and thirteen-week periods ended November 2, 2013 and October 27, 2012, (iii) the Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended November 2, 2013 and October 27, 2012, and (iv) Notes to the Condensed Consolidated Financial Statements.^ |
* Filed herewith.
† Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934 and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.
^ In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and the undersigned also has signed this report in his capacity as the Registrant’s Chief Financial Officer (Principal Financial Officer).
|
|
CITI TRENDS, INC. | |
|
|
|
|
|
Date: December 11, 2013 |
|
|
|
|
|
|
|
|
By: |
/s/ Bruce D. Smith |
|
|
Name: |
Bruce D. Smith |
|
|
Title: |
Executive Vice President, Chief Financial Officer and Secretary |
Exhibit 31.1
CERTIFICATION
I, R. Edward Anderson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended November 2, 2013 of Citi Trends, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: December 11, 2013 |
|
|
|
|
|
/s/ R. Edward Anderson |
|
|
R. Edward Anderson |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
Exhibit 31.2
CERTIFICATION
I, Bruce D. Smith, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended November 2, 2013 of Citi Trends, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: December 11, 2013 |
|
|
|
|
|
/s/ Bruce D. Smith |
|
|
Bruce D. Smith |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
Exhibit 32.1
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted).
I, R. Edward Anderson, Chief Executive Officer of Citi Trends, Inc.,
and
I, Bruce D. Smith, Chief Financial Officer of Citi Trends, Inc., certify that:
1. We have reviewed this quarterly report on Form 10-Q of Citi Trends, Inc. for the period ended November 2, 2013;
2. Based on our knowledge, this quarterly report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
3. Based on our knowledge, the financial statements, and other information included in this quarterly report, fairly present in all material respects the financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report.
|
Date: December 11, 2013 |
|
|
|
|
|
|
|
|
|
/s/ R. Edward Anderson |
|
|
R. Edward Anderson |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
Date: December 11, 2013 |
|
|
|
|
|
|
|
|
|
/s/ Bruce D. Smith |
|
|
Bruce D. Smith |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
A signed original of this written statement required by Section 906 has been provided to Citi Trends, Inc. and will be retained by Citi Trends, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
|
Fair Value Measurement (Tables)
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nov. 02, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurement | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of investment securities classified as held-to-maturity | As of November 2, 2013, 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):
As of February 2, 2013, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of amortized cost and fair market value of investment securities by contractual maturity | The amortized cost and fair market value of investment securities as of November 2, 2013 by contractual maturity are as follows (in thousands):
The amortized cost and fair market value of investment securities as of February 2, 2013 by contractual maturity were as follows (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||