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 3, 2007
|
|
|
|
|
|
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.)
|
|
|
|
102
Fahm Street
|
|
|
Savannah,
Georgia
|
|
31401
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
Registrants 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 is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer as defined in Rule 12b-2 of the
Exchange Act.
(Check one): Large
Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated Filer
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 issuers
classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding
at December 3, 2007
|
Common Stock, $.01 par
value
|
|
14,090,865 shares
|
CITI TRENDS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATIO
N
Item 1. Financial Statements.
Citi
Trends, Inc.
Condensed Balance Sheets
November 3, 2007 and February 3, 2007
(Unaudited)
|
|
November 3,
2007
|
|
February 3,
2007
|
|
|
|
(in
thousands, except share data)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,679
|
|
$
|
11,702
|
|
Marketable securities
|
|
43,721
|
|
65,956
|
|
Inventory
|
|
93,886
|
|
73,360
|
|
Prepaid and other current assets
|
|
5,367
|
|
4,810
|
|
Income tax receivable
|
|
1,038
|
|
|
|
Deferred tax asset
|
|
2,883
|
|
2,190
|
|
Total current assets
|
|
155,574
|
|
158,018
|
|
Property and equipment,
net
|
|
43,895
|
|
34,753
|
|
Goodwill
|
|
1,371
|
|
1,371
|
|
Deferred tax asset
|
|
3,487
|
|
1,681
|
|
Other assets
|
|
318
|
|
279
|
|
Total assets
|
|
$
|
204,645
|
|
$
|
196,102
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
49,207
|
|
$
|
50,889
|
|
Accrued expenses
|
|
10,093
|
|
9,393
|
|
Accrued compensation
|
|
4,197
|
|
6,194
|
|
Current portion of long-term debt
|
|
|
|
109
|
|
Current portion of capital lease obligations
|
|
1,569
|
|
1,659
|
|
Income tax payable
|
|
|
|
830
|
|
Layaway deposits
|
|
2,352
|
|
576
|
|
Total current liabilities
|
|
67,418
|
|
69,650
|
|
Capital lease obligations,
less current portion
|
|
1,806
|
|
2,983
|
|
Other long-term
liabilities
|
|
6,433
|
|
5,260
|
|
Total liabilities
|
|
75,657
|
|
77,893
|
|
Commitments and
contingencies (note 7)
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized 32,000,000 shares;
14,256,615 shares issued as of November 3, 2007 and 13,972,437 shares
issued as of February 3, 2007; 14,090,865 shares outstanding as of
November 3, 2007 and 13,806,687 outstanding as of February 3, 2007
|
|
142
|
|
140
|
|
Additional paid-in-capital
|
|
67,495
|
|
62,855
|
|
Retained earnings
|
|
61,516
|
|
55,379
|
|
Treasury stock, at cost; 165,750 shares as of November 3, 2007
and February 3, 2007
|
|
(165
|
)
|
(165
|
)
|
Total stockholders equity
|
|
128,988
|
|
118,209
|
|
Total liabilities and stockholders equity
|
|
$
|
204,645
|
|
$
|
196,102
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed
financial statements (unaudited).
3
Citi
Trends, Inc.
Condensed Statements of Operations
Thirty-nine Weeks Ended November 3, 2007 and October 28, 2006
(Unaudited)
|
|
November 3,
2007
|
|
October 28,
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Net sales
|
|
$
|
302,944
|
|
$
|
255,130
|
|
Cost of sales
|
|
191,638
|
|
157,640
|
|
Gross profit
|
|
111,306
|
|
97,490
|
|
Selling, general and
administrative expenses
|
|
94,578
|
|
76,161
|
|
Depreciation and
amortization
|
|
9,095
|
|
5,963
|
|
Income from operations
|
|
7,633
|
|
15,366
|
|
Interest income
|
|
1,703
|
|
1,429
|
|
Interest expense
|
|
(372
|
)
|
(169
|
)
|
Income before provision for income taxes
|
|
8,964
|
|
16,626
|
|
Provision for income taxes
|
|
3,128
|
|
5,647
|
|
Net income
|
|
$
|
5,836
|
|
$
|
10,979
|
|
Basic net income per
common share
|
|
$
|
0.42
|
|
$
|
0.81
|
|
Diluted net income per
common share
|
|
$
|
0.41
|
|
$
|
0.78
|
|
Weighted average number of
shares outstanding
|
|
|
|
|
|
Basic
|
|
13,917
|
|
13,516
|
|
Diluted
|
|
14,235
|
|
14,032
|
|
See accompanying notes to the condensed financial
statements (unaudited).
Citi
Trends, Inc.
Condensed Statements of Operations
Thirteen Weeks Ended November 3, 2007 and October 28, 2006
(Unaudited)
|
|
November 3,
2007
|
|
October 28,
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Net sales
|
|
$
|
99,542
|
|
$
|
87,118
|
|
Cost of sales
|
|
65,026
|
|
54,155
|
|
Gross profit
|
|
34,516
|
|
32,963
|
|
Selling, general and
administrative expenses
|
|
32,455
|
|
27,139
|
|
Depreciation and
amortization
|
|
3,265
|
|
2,063
|
|
Income (loss) from operations
|
|
(1,204
|
)
|
3,761
|
|
Interest income
|
|
521
|
|
475
|
|
Interest expense
|
|
(107
|
)
|
(90
|
)
|
Income (loss) before provision (benefit) for income taxes
|
|
(790
|
)
|
4,146
|
|
Provision (benefit) for
income taxes
|
|
(277
|
)
|
1,337
|
|
Net income (loss)
|
|
$
|
(513
|
)
|
$
|
2,809
|
|
Basic net income (loss)
per common share
|
|
$
|
(0.04
|
)
|
$
|
0.21
|
|
Diluted net income (loss)
per common share
|
|
$
|
(0.04
|
)
|
$
|
0.20
|
|
Weighted average number of
shares outstanding
|
|
|
|
|
|
Basic
|
|
14,023
|
|
13,583
|
|
Diluted
|
|
14,023
|
|
14,083
|
|
See accompanying notes to the condensed
financial statements (unaudited).
4
Citi
Trends, Inc.
Condensed Statements of Cash Flows
Thirty-nine Weeks Ended November 3, 2007 and October 28, 2006
(Unaudited)
|
|
November 3,
2007
|
|
October 28,
2006
|
|
|
|
(in
thousands)
|
|
Operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
5,836
|
|
$
|
10,979
|
|
Adjustment to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
9,095
|
|
5,963
|
|
Loss (gain) on disposal of property and equipment
|
|
48
|
|
(283
|
)
|
Deferred income taxes
|
|
(2,499
|
)
|
(90
|
)
|
Noncash compensation expense
|
|
1,088
|
|
662
|
|
Excess tax benefits from share-based payment arrangements
|
|
(3,172
|
)
|
(8,419
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
Inventory
|
|
(20,526
|
)
|
(20,478
|
)
|
Prepaid and other current assets
|
|
(557
|
)
|
(1,194
|
)
|
Other assets
|
|
(39
|
)
|
(69
|
)
|
Accounts payable
|
|
(1,682
|
)
|
(2,345
|
)
|
Accrued expenses and other long-term liabilities
|
|
1,873
|
|
1,383
|
|
Accrued compensation
|
|
(1,997
|
)
|
648
|
|
Income tax payable/receivable
|
|
1,605
|
|
4,746
|
|
Layaway deposits
|
|
1,776
|
|
1,589
|
|
Net cash used in operating activities
|
|
(9,151
|
)
|
(6,908
|
)
|
Investing activities:
|
|
|
|
|
|
Investments in marketable securities
|
|
(11,198
|
)
|
(20,134
|
)
|
Sales of marketable securities
|
|
33,433
|
|
24,688
|
|
Insurance proceeds received
|
|
|
|
269
|
|
Purchases of property and equipment
|
|
(18,285
|
)
|
(10,024
|
)
|
Net cash provided by (used in) investing activities
|
|
3,950
|
|
(5,201
|
)
|
Financing activities:
|
|
|
|
|
|
Repayments on long-term debt and capital lease obligations
|
|
(1,376
|
)
|
(508
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
3,172
|
|
8,419
|
|
Proceeds from the exercise of stock options
|
|
382
|
|
786
|
|
Net cash provided by financing activities
|
|
2,178
|
|
8,697
|
|
Net decrease in cash and cash equivalents
|
|
(3,023
|
)
|
(3,412
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
|
11,702
|
|
9,079
|
|
End of period
|
|
$
|
8,679
|
|
$
|
5,667
|
|
|
|
|
|
|
|
Supplemental disclosures
of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
394
|
|
$
|
139
|
|
Cash paid for income taxes
|
|
$
|
3,700
|
|
$
|
991
|
|
Supplemental disclosures
of noncash activities:
|
|
|
|
|
|
Increase to retained earnings upon adoption of FIN 48
|
|
$
|
301
|
|
$
|
|
|
Purchases of property and equipment financed by entering into capital
leases
|
|
$
|
|
|
$
|
2,820
|
|
See accompanying notes to the condensed financial
statements (unaudited).
5
Citi Trends, Inc.
Notes to the Condensed Financial Statements
(unaudited)
November 3, 2007
1.
Basis of
Presentation
The condensed balance sheet as of November 3,
2007, the condensed statements of operations for the thirty-nine and
thirteen-week periods ended November 3, 2007 and October 28, 2006,
and the statements of cash flows for the thirty-nine week periods ended November 3,
2007 and October 28, 2006 have been prepared by Citi Trends, Inc.
(the Company), without audit. In the opinion of management, such statements
include all adjustments (which are of a normal recurring nature) considered
necessary to present fairly the Companys financial position as of November 3,
2007 and February 3, 2007 and its results of operations and cash flows for
all periods presented. The condensed balance sheet as of February 3, 2007
has been derived from the audited financial statements as of that date, but
does not include all required year end disclosures. It is suggested that
these condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Companys latest shareholders
annual report (Form 10-K).
The accompanying unaudited Condensed Financial
Statements are also prepared in accordance with U.S. generally accepted
accounting principles 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. generally accepted accounting principles
for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included.
Operating results for the interim period ended November 3, 2007 are
not necessarily indicative of the results that may be expected for the fiscal
year ending February 2, 2008.
The following contains references to years 2007 and
2006, which represent fiscal years ending or ended on February 2, 2008
(fiscal 2007) and February 3, 2007 (fiscal 2006), respectively. Fiscal
2007 has a 52-week accounting period and fiscal 2006 had a 53-week accounting
period.
2.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and 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.
3.
Stock-Based Compensation
In 1999, the Company established the 1999 Citi Trends, Inc.
Stock Option Plan (the 1999 Plan). The 1999 Plan provided for the grant
of incentive and nonqualified options to key employees and directors. The Board
of Directors determined the exercise price of the option grants. The
option grants generally vested in equal installments over four years from the
date of grant and are generally exercisable up to ten years from the date of
grant, which is the contractual life of the options. The Company authorized up
to 1,950,000 shares of common stock for issuance under the 1999 Plan.
On March 8, 2005, the Company adopted the 2005
Citi Trends, Inc. Long Term Incentive Plan (the Incentive Plan),
which became effective upon the consummation of the Companys initial public
offering in May 2005. The Incentive Plan superseded and replaced
the 1999 Plan. The Incentive Plan provides for the grant of incentive and
nonqualified options as well as other forms of stock-based compensation to key
employees and directors including the issuance of nonvested stock. The
Board of Directors determines the date of the option grants and sets the
exercise price to be equal to the closing market price of the Companys stock
on the date of grant. Grants of options and nonvested shares generally
vest in equal installments over four years from the date of grant and options
are generally exercisable up to ten years from the date of grant.
Under the Incentive Plan, the Company may issue up to 1,300,000 shares of
common stock upon the exercise of stock options and other equity incentive
awards. In August 2006, the plan was amended to permit the exercise
price of stock options to be satisfied through net share settlements.
For fiscal years prior to fiscal 2006, the Company
applied the intrinsic-value-based method of accounting prescribed by APB
Opinion No. 25 and related interpretations including Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 44,
Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25,
to
account for its fixed-plan stock options. Under this method, compensation
expense was recorded on the date of grant only if the then-current fair value
of the underlying stock exceeded the exercise price. The Company
recognized the fair value of stock rights granted to non-employees in the
financial statements. Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation,
and SFAS No. 148,
Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB statement No. 123,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by the accounting standards, the Company continued to apply the intrinsic-value
based method of accounting as described previously and adopted only the
disclosure requirements of SFAS No. 123, as amended.
6
Effective January 29, 2006, the Company began
recording compensation expense associated with all stock options and other
forms of equity compensation in accordance with SFAS No. 123 (revised
2004)
Share-Based Payment
(SFAS No. 123R),
as interpreted by SEC Staff Accounting Bulletin No. 107. The Company
selected the Modified Prospective transition approach for adoption of SFAS No. 123R.
Under the Modified Prospective approach, prior periods were not restated.
Compensation expense for the unvested portions of grants awarded prior to January 29,
2006 will be recognized over the grants remaining service periods using the
compensation cost calculated previously for pro-forma disclosure under SFAS
123. For awards granted after January 28, 2006, the Company is
recognizing compensation expense based on the grant-date fair value calculated
in accordance with SFAS No. 123R. Such expense will be recognized on a
straight-line basis over the service period of the option recipients which is
generally equal to four years for employees and one year for non-employee
directors.
Under SFAS No. 123R, the fair value of each
option award is estimated on the date of grant using the Black-Scholes-Merton
option pricing model, which uses the assumptions described herein. Expected volatility is based on estimated
future volatility of the Companys common stock price. Having completed its
initial public offering in May 2005, the Company has limited historical
data regarding the price of its publicly traded shares. To estimate
future volatility of the Companys stock price, the stock price volatility of
similar entities for which shares have been publicly traded for a period of
seven years or more was measured. (Seven years is used because the weighted
average expected life of the Companys stock options is between six and seven
years). The Company uses historical data to estimate forfeitures used in the
model. The expected term of options granted is based on guidance provided by
the SEC Staff Accounting Bulletin 107 (simplified method for plain vanilla
options). The simplified method (available for entities which do not have
sufficient historical exercise data available for making a refined estimate of
expected term) assumes a 10 year contractual term with vesting at a rate of 25%
per year. Accordingly, expected term = ((vesting term + original contractual
term)/2). The risk-free interest rate for the periods which corresponds with
the expected life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
A summary of the status of stock options under the
Companys stock option plans and changes during the thirty-nine weeks ended November 3,
2007 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Wtd Avg
Exercise
Price
|
|
Wtd Avg
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning
of year
|
|
818,104
|
|
$
|
7.66
|
|
5.7
|
|
$
|
|
|
Granted
|
|
0
|
|
0
|
|
0
|
|
|
|
Exercised
|
|
(224,813
|
)
|
1.74
|
|
4.0
|
|
|
|
Net shares settled
|
|
(1,505
|
)
|
8.40
|
|
6.3
|
|
|
|
Forfeited
|
|
(22,770
|
)
|
17.15
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 3, 2007
|
|
569,016
|
|
$
|
9.61
|
|
5.3
|
|
$
|
5,778,933
|
|
|
|
|
|
|
|
|
|
|
|
Vested at November 3,
2007
|
|
422,105
|
|
$
|
4.57
|
|
4.4
|
|
$
|
5,437,578
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at
November 3, 2007
|
|
548,446
|
|
$
|
9.16
|
|
5.2
|
|
$
|
5,736,229
|
|
At November 3, 2007, the range of exercise prices
was $0.38 to $44.03. At October 28, 2006, the range of exercise
prices and weighted-average remaining contractual life of outstanding options
was $0.38 to $42.51 and 5.5 years, respectively.
During the thirty-nine weeks ended November 3,
2007 and October 28, 2006, excess tax benefits realized from the exercise
of stock options were $3,172,000 and $8,419,000, respectively. Such benefits were $113,000 and $1,074,000
for the thirteen-weeks ended November 3, 2007 and October 28, 2006,
respectively. No grants of options were
made during the thirty-nine weeks ended November 3, 2007. The weighted average grant-date fair value of
options granted during the thirty-nine and thirteen weeks ended October 28,
2006 was $21.96 and $16.65 per share, respectively, or $1,970,000 and $54,000,
respectively, for all options granted, net of estimated forfeitures. Cash received from options exercised totaled
$383,000 and $786,000 for the thirty-nine weeks ended November 3, 2007 and
October 28, 2006, respectively, and $34,000 and $47,000 for the thirteen
weeks ended November 3, 2007 and October 28, 2006, respectively.
The Company recognized $379,000 and $247,000 in
compensation expense for option grants for the quarters ended November 3,
2007 and October 28, 2006, respectively.
For the first thirty-nine weeks of the year, such expense totaled
$690,000 and $662,000 in fiscal 2007 and fiscal 2006, respectively.
As of November 3, 2007, the total compensation
cost related to nonvested stock option grants that will be incurred in future
periods amounts to $1,623,000. The weighted-average period over which
this amount is expected to be recognized is 24 months. The Companys
stock option plan allows the Company to issue new shares from shares authorized
for issuance or repurchase shares on the open market to satisfy employee stock
option exercises. The Company does not currently plan to repurchase shares.
7
The Companys Incentive Plan allows for grants of
nonvested stock having a fixed number of shares. On March 26, 2007, the Company issued
its initial grant of shares of nonvested stock to key employees and
directors. Shares granted to employees
vest in equal installments over four years from the date of grant. Shares issued to directors vest one year from
the date of grant. The Company records
compensation expense 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 is calculated based
on the fair market value of the shares on the date of grant times the number of
shares granted. In accordance with the
provisions of SFAS No. 123R, the fair market value of the shares is equal
to the closing market price on the date of grant. Using an estimated forfeiture rate equal to
8.5%, the Company expects to recognize $1,745,000 in compensation expense from
the grants of nonvested stock over the requisite service period. Accordingly, $398,000 in compensation expense
arising from nonvested stock grants was recognized during the thirty-nine weeks
ended November 3, 2007, including $164,000 in the third quarter.
A summary of activity related to nonvested share
awards during the thirty-nine week period ended November 3, 2007 is as
follows:
|
|
Nonvested Shares
|
|
Wtd Avg
Grant Date
Fair Value
|
|
|
|
|
|
|
|
Outstanding at beginning
of year
|
|
|
|
$
|
|
|
Granted
|
|
62,774
|
|
43.52
|
|
Forfeited
|
|
(3,409
|
)
|
43.57
|
|
Outstanding at
November 3, 2007
|
|
59,365
|
|
$
|
43.52
|
|
4.
Earnings per Share
Basic earnings per share is based on the weighted
average number of common shares outstanding.
Diluted earnings per share is based on the weighted average number of
common shares outstanding plus the incremental shares that would have been
outstanding upon the assumed exercise of all dilutive stock options and
unvested stock. During loss periods,
diluted earnings per share is based on the weighted average number of common
shares outstanding.
The following table is 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 share equivalents outstanding used in
calculating diluted earnings per share for the thirteen weeks and the
thirty-nine weeks ended November 3, 2007 and October 28, 2006:
|
|
Thirty-nine Weeks Ended
|
|
|
|
November 3, 2007
|
|
October 28, 2006
|
|
Weighted average number of
common shares outstanding
|
|
13,917,271
|
|
13,515,645
|
|
Incremental shares from
assumed exercises of stock options
|
|
317,745
|
|
516,088
|
|
Weighted average number of
common shares and common stock equivalents outstanding
|
|
14,235,016
|
|
14,031,733
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
November 3, 2007
|
|
October 28, 2006
|
|
Weighted average number of
common shares outstanding
|
|
14,022,549
|
|
13,583,263
|
|
Incremental shares from
assumed exercises of stock options
|
|
|
|
499,371
|
|
Weighted average number of
common shares and common stock equivalents outstanding
|
|
14,022,549
|
|
14,082,634
|
|
According to SFAS No. 128,
Earnings per Share
, the dilutive effect of
stock-based compensation arrangements is determined using the treasury stock
method. This method assumes that the proceeds the Company
receives from the exercise of stock options and nonvested stock are used
to repurchase common shares in the market. The adoption of SFAS
No. 123R,
Share-Based Payment,
requires the Company to include as assumed proceeds the amount of stock-based
compensation cost attributed to future services and not yet recognized, and the
amount of tax benefits (both deferred and current), if any, that would be
credited to additional paid-in capital assuming exercise of the options and
vesting of nonvested stock. For the thirty-nine weeks ended November 3,
2007 and October 28, 2006, there were 76,500 and 75,800 options
outstanding, respectively, to purchase shares of common stock excluded from the
calculation of diluted earnings per share because of antidilution. For the thirty-nine weeks ended November 3,
2007 and October 28, 2006, there were no shares of nonvested stock
included in the calculation of diluted earnings per share because of
antidilution.
5.
Marketable Securities
Marketable securities consist of highly liquid,
auction rate municipal securities of at least grade AA by Standard and Poors
or Aa by Moodys. While the underlying security has a long-term nominal
maturity, the interest rate is periodically reset through Dutch Auctions
typically every seven to forty-nine days. As of November 3, 2007,
all auction rate securities held by the Company were purchased with reset
periods of 35 days. The Company has the opportunity to sell its
investment during such periodic auctions subject
8
to the availability of buyers. Since these
auction rate securities are priced and subsequently trade at short-term
intervals, they are classified as current assets.
The Company classifies all investments as
available-for-sale. Available-for-sale securities are carried at
estimated fair value, based on available market information, with unrealized
gains and losses, if any, reported as a component of stockholders
equity. As a result of the resetting variable rates, the carrying
value of available-for-sale securities approximates fair market value due to
their short maturities. For these reasons, the Company has no cumulative
gross unrealized or realized gains or losses from these investments. All
income generated from these investments is recorded as interest income.
The Company has no investments considered to be trading securities.
6.
Revolving Lines of Credit
In September 2003,
the Company entered into an annual unsecured revolving line of credit with Bank
of America that expired on June 26, 2007. This facility was renewed for a
period of one year, expiring June 30, 2008. The line of credit provides for aggregate
cash borrowings up to $3,000,000. Borrowings under the credit agreement bear
interest at the London Interbank Offered Rate (LIBOR) plus 2.00%. At November 3,
2007, there were no outstanding borrowings on the unsecured revolving line of
credit.
7.
Commitments and Contingencies
Legal
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. While litigation is subject
to uncertainties and the outcome of any litigated 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 cash flows.
Construction
The Company has executed
various agreements with a construction company and certain other providers of
services and equipment, which commit the Company to the expansion of its
distribution center in Darlington, South Carolina and the later implementation
of a new warehouse management system.
The distribution center is expected to be substantially completed in the
spring of 2008, while implementation of the new warehouse management system is
anticipated in the last half of 2008.
The aggregate cost of these projects is presently expected to range from
$14 million to $15 million. Through November 3,
2007, approximately $2.3 million of the cost of the projects has been paid.
8.
Shelf Registration Statement
On April 5, 2007,
the Company filed a shelf registration statement on Form S-3, which
registration statement was amended on May 9, 2007, to cover the offer and
sale, from time to time of up to 3,000,000 shares of the Companys common
stock, by Hampshire Equity Partners II, L.P. and its affiliates and up to an
additional 300,000 shares of the Companys common stock by other possible
selling stockholders consisting of certain officers and directors and other
stockholders of the Company. The
registration statement was filed pursuant to the terms of a registration rights
agreement between Hampshire Equity Partners II, L.P. and the Company. On June 18, 2007, the Company closed an
underwritten offering of 2,455,250 shares of the Companys common stock, by
certain stockholders at a public offering price of $37.92 per share, pursuant
to the shelf registration statement. The Company did not receive any
proceeds from the offering. On September 18,
2007, the Company filed a shelf registration statement on Form S-3, which
registration statement was amended on October 9, 2007, to cover the
resale, from time to time, of up to 4,048,868 shares of the Companys common
stock, by Hampshire Equity Partners II, L.P. and its affiliates. Such shares include those from the earlier
registration that remain unsold. The
registration statement was filed pursuant to the terms of a registration rights
agreement between Hampshire Equity Partners II, L.P. and the Company. The
selling stockholders may sell any, all or none of their respective shares from
time to time in one or more transactions.
The Company will not receive any proceeds from the sale of these shares.
9.
Adoption of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
On February 4, 2007, the Company adopted the
provisions of FASB interpretation 48,
Accounting
for Uncertainty in Income Taxes
(FIN 48). FIN 48 requires that each tax position be
reviewed and assessed with recognition and measurement of the 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. The Company has completed its review and assessment
of all tax positions and in the thirty-nine weeks ended November 3, 2007
recorded a net benefit to retained earnings and a decrease to current
liabilities of $301,000 in accordance with the new accounting guidance.
The Company files income tax returns in U.S. Federal
and state jurisdictions and is subject to examinations by the IRS and other
taxing authorities. At November 3,
2007, there are no benefits taken on the Companys income tax returns that do
not qualify for financial statement recognition under FIN 48.
Under FIN 48, 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, FIN 48 allows companies to elect whether to classify such
9
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.
10.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measures
. SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and
requires additional disclosures about fair value measurements. SFAS No. 157
applies to fair value measurements that are already required or permitted by
other accounting standards, except for measurements of share-based payments and
measurements that are similar to, but not intended to be, fair value and does
not change existing guidance as to whether or not an instrument is carried at
fair value. The provisions of SFAS No. 157 are effective for the specified
fair value measures for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact,
if any, that the adoption of SFAS No. 157 will have on the Companys
financial statements.
In February 2007,
the FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities
. SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 applies to all entities that
elect the fair value option. The provisions of SFAS No. 159 are
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact, if any, that the adoption of SFAS No. 159
will have on the Companys financial statements.
10
Item 2. Managements 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 Companys ability to negotiate
effectively the cost and purchase of merchandise; inventory risks due to shifts
in market demand; the Companys ability to gauge fashion trends and changing
consumer preferences; changes in consumer spending on apparel; changes in
product mix; interruptions in suppliers businesses; interest rate
fluctuations; a continued rise in insurance costs; a deterioration in general
economic conditions caused by acts of war or terrorism; temporary changes in
demand due to weather patterns; seasonality of the Companys business; delays
associated with building, opening and operating new stores; delays associated
with building, opening, expanding or converting new or existing distribution
centers; and other factors described in the section titled Item 1A. Risk
Factors and elsewhere in the Companys Annual Report on Form 10-K for the
fiscal year ended February 3, 2007 and in Part II, Item 1A. Risk
Factors and elsewhere in the Companys Quarterly Report on Form 10-Q and
in the other documents the Company files with the Securities and Exchange
Commission (SEC), including other reports on Form 8-K and 10-Q, and any
amendments thereto.
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.
Overview
The Company is a
rapidly growing, value-priced retailer of urban fashion apparel and accessories
for the entire family. The Companys merchandise offerings are designed to
appeal to the preferences of fashion conscious consumers, particularly African-Americans.
Stores are located in the Southeast, Mid-Atlantic and Midwest regions and the
state of Texas. At November 3, 2007, there were 306 stores in operation in
both urban and rural markets in eighteen states.
The Company
measures its performance using key operating statistics. One of the main
performance measures is comparable store sales growth. A comparable store is
defined 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 its 24th
month at the latest. As an example, stores
opened in fiscal 2006 and fiscal 2007 are not considered comparable stores in
fiscal 2007. Relocated and expanded stores are included in the comparable store
sales results. Other operating statistics, most notably average sales per
store, are utilized in managing the Company. The Company typically occupies
existing space in established shopping centers rather than sites built
specifically for its stores, and, therefore, store square footage (and sales
per square foot) varies by store. The Company focuses on the overall store
sales volume as the critical driver of profitability. Average sales per store
have increased from approximately $0.8 million in fiscal 2000 to
approximately $1.5 million in fiscal 2006. The Company also measures 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 is used to evaluate overall performance of each
individual store. Corporate expenses are monitored against budgeted amounts.
Accounting
Periods
The following discussion
contains references to years 2007 and 2006, which represent fiscal years ending
or ended on February 2, 2008 (fiscal 2007) and February 3, 2007
(fiscal 2006), respectively. Fiscal 2007 has a 52-week accounting period and
fiscal 2006 had a 53-week accounting period. This discussion and analysis
should be read with the condensed financial statements and the notes thereto.
11
Results
of Operations
The following discussion
of the Companys financial performance is based on the condensed financial
statements set forth herein. The nature of the Companys 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 Companys business may
affect comparisons between periods.
Thirty-Nine
Weeks Ended November 3, 2007 and October 28, 2006
Net
Sales.
Net sales increased $47.8 million, or 18.7%, to $302.9
million in the thirty-nine weeks ended November 3, 2007 from $255.1
million in the thirty-nine weeks ended October 28, 2006. The increase in net sales was due primarily to
40 new stores opened since last years third quarter, 31 new stores opened in
the first three quarters of 2006 for which there was not a full thirty-nine
weeks of sales in 2006, and a comparable store sales increase of 0.7% on a
fiscal basis.
Comparable
stores include locations that have been relocated or expanded. There have been 12 stores relocated or
expanded in the thirty-nine weeks ended November 3, 2007 and 7 stores
relocated or expanded in fiscal 2006, all of which have impacted comparable
store sales. Sales in these comparable
relocated and expanded stores increased 18.0% in the thirty-nine weeks ended November 3,
2007, whiles sales in all other comparable stores decreased 0.9%.
Sales in each period of 2007 are affected by the
calendar shift caused by the last fiscal year having 53 weeks. Each period in 2007 begins and ends one week
later than the same period of 2006, which can have a significant impact on
sales comparisons if those two beginning and ending weeks of the period have
different levels of sales volume. In the
first thirty-nine weeks of 2007, sales in comparable stores for comparable
calendar weeks increased 1.9% due to an increase in the average transaction
size, partially offset by a slight decrease in the number of customer transactions. Comparable store sales changes by major
merchandise class were as follows in the first thirty-nine weeks of 2007: Childrens +5%; Home +3%; Womens +1%;
Accessories 0% and Mens 0%.
The new stores opened in
2006 and 2007, which are not yet included in comparable store sales, accounted
for $46.1 million of the total increase in sales, while the sales increase in
the 235 comparable stores contributed $1.7 million.
Gross Profit.
Gross profit increased $13.8 million, or 14.2%, to
$111.3 million in the first thirty-nine weeks of 2007 from $97.5 million last
year. The increase in gross profit is a
result of the increase in sales, partially offset by a reduction in the gross
margin. As a percentage of net sales,
gross profit decreased to 36.7% from 38.2% in last years first three quarters,
due to a 150 basis points increase in merchandise markdowns as a percent of
sales. Most of this increase in
markdowns occurred in the third quarter due to negative comparable store sales
during the months of September and October. These two months are critical in terms of
clearing Spring/Summer merchandise and preparing for the upcoming
Fall/Winter/Holiday season. With
comparable store sales being negative during those months, higher clearance
markdowns were necessary. Inventory
shrinkage was approximately 40 basis points higher year-over-year during the
first thirty-nine weeks of 2007; however, this was offset by a slightly higher
initial merchandise mark-up and slightly lower freight costs.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $18.4 million, or 24.2%, to $94.6 million in the first
thirty-nine weeks of 2007 from $76.2 million last year. The increase in these expenses was due
primarily to additional store level, distribution and corporate costs arising
from the opening of 40 new stores since October 28, 2006, and
approximately $600,000 of expenses related to a secondary stock offering and
stock registration. As a percentage of
sales, selling, general and administrative expenses increased in the first
thirty-nine weeks of 2007 to 31.2% from 29.9% last year, due primarily to the
deleveraging effect that occurs on expenses as a percentage of sales when
comparable store sales increase at a rate, 0.7%, that is lower than the rate of
inflation on expenses. In particular,
occupancy expenses as a percentage of sales were up 60 basis points and payroll
was up 50 basis points. Additionally,
the stock offering and registration expenses amounted to 20 basis points of
sales.
Depreciation and
Amortization.
Depreciation and amortization expense
increased $3.1 million, or 52.9%, to $9.1 million in the first thirty-nine
weeks of 2007 from $6.0 million in the first thirty-nine weeks of 2006, as the
result of capital expenditures incurred for new and relocated/expanded stores
and for new scanning technology used in the stores.
Interest
Income.
Interest income increased to $1.7 million from $1.4
million in last years first thirty-nine weeks, due primarily to having a
higher level of cash and marketable securities this year as a result of cash
flows since October 28, 2006.
Interest
Expense.
Interest expense increased to $372,000 in the first
thirty-nine weeks of 2007 from $168,000 last year due to the addition of a $4.8
million capital equipment lease in 2006.
Provision
for Income Taxes.
The provision for income taxes decreased
to $3.1 million in this years first thirty-nine weeks from $5.6 million in
2006. The effective income tax rate in
the first thirty-nine weeks of 2007 was 34.9% compared to 34.0% last year. In 2007, taxable income is expected to be
taxed for federal purposes at a rate of approximately 35% versus the 34% rate
used in 2006, because the significant tax deductions for stock option exercises
realized in 2006 are not expected to occur in 2007 at the same level as last
year. The Companys effective tax rate
tends to be below the combined statutory federal and state rate due to
tax-exempt interest income and various tax credits.
Net
Income.
Net income decreased 46.8% to $5.8 million in the
first thirty-nine weeks of 2007 from $11.0 million last year due to the factors
discussed above.
12
Thirteen
Weeks Ended November 3, 2007 and October 28, 2006
Net
Sales.
Net sales increased $12.4 million, or 14.2%, to $99.5
million for the thirteen weeks ended November 3, 2007 from $87.1 million
in the thirteen weeks ended October 28, 2006. The increase in net sales was due primarily
to 40 new stores opened since last years third quarter, net of the effect of a
comparable store sales decrease of 2.7% on a fiscal quarter basis, which
consisted of a decline in customer transactions, partially offset by a slight
increase in the average transaction size.
Comparable stores include locations that have
been relocated or expanded. There have
been 12 stores relocated or expanded in the thirty-nine weeks ended November 3,
2007 and 7 stores relocated or expanded in fiscal 2006, all of which have
impacted comparable store sales. Sales
in these comparable relocated and expanded stores increased 24.3% in the
thirteen weeks ended November 3, 2007, while sales in all other comparable
stores decreased 5.2%.
Sales in each quarter of 2007 are affected by
the calendar shift caused by last year having 53 weeks. Each quarter in 2007 begins and ends one week
later than the same quarter of 2006, which can have a significant impact on
quarterly sales comparisons if those two beginning and ending weeks of the
quarter have different levels of sales volume.
In the third quarter of 2007, sales in comparable stores for comparable
calendar weeks increased 1.9%.
Comparable store sales changes by major merchandise class were as
follows in the third quarter of 2007:
Womens +2%; Childrens +6%; Home +1%; Mens +1% and Accessories -2%.
The new stores opened in
2006 and 2007, which are not yet included in comparable store sales, accounted
for $14.5 million of the total increase in sales, while the sales decrease in
the 235 comparable stores totaled $2.1 million.
Gross Profit.
Gross profit increased $1.5 million, or 4.7%, to $34.5
million in the third quarter of 2007 from $33.0 million in last years third
quarter. The increase in gross profit is
a result of the increase in sales, partially offset by a reduction in the gross
margin. As a percentage of net sales,
gross profit decreased to 34.7% from 37.8% in the third quarter of 2006. This decrease was primarily a result of a 380
basis point increase in merchandise markdowns as a percentage of sales,
partially offset by slight improvements in the initial merchandise mark-up and
freight costs. The higher markdowns were
caused by negative comparable store sales during the months of September and
October. These two months are critical
in terms of clearing Spring/Summer merchandise and preparing for the upcoming
Fall/Winter/Holiday season. With
comparable store sales being negative during those months, higher clearance
markdowns were necessary.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses increased $5.3 million, or 19.5%, to $32.5 million in the third
quarter of 2007 from $27.2 million in last years third quarter. The increase in these expenses was due
primarily to additional store level, distribution and corporate costs arising
from the opening of 40 new stores since October 28, 2006. As a percentage of sales, selling, general
and administrative expenses increased in the third quarter of 2007 to 32.6%
from 31.2% last year, due to the deleveraging effect that occurs on expenses as
a percentage of sales when comparable store sales decrease 2.7%, while expenses
continue to increase as a result of normal inflationary pressures. In particular, occupancy expenses as a
percentage of sales were up 80 basis points and payroll was up 40 basis points.
Depreciation and
Amortization.
Depreciation and amortization expense
increased $1.2 million, or 59.3%, to $3.3 million in the third quarter of 2007
from $2.1 million in the third quarter of 2006, as the result of capital
expenditures incurred for new and relocated/expanded stores and for new
scanning technology used in the stores.
Interest
Income.
Interest income increased to $521,000 in the third
quarter of 2007 from $476,000 in the third quarter of 2006, due primarily to
having a higher level of cash and marketable securities this year as a result
of cash flows since October 28, 2006.
Interest
Expense.
Interest expense increased to $107,000 in the third
quarter of 2007 from $90,000 in the third quarter of 2006 due to the addition
of a $4.8 million capital equipment lease during the third quarter of 2006.
Provision
(Benefit) for Income Taxes.
Due to a loss in this years
third quarter, the Company recognized an income tax benefit of $277,000,
whereas the third quarter of 2006 included an income tax provision of
$1,337,000.
The effective income tax rate in the third quarter of
2007 was 35.0% compared to 32.2% last year.
In 2007, taxable income is expected to be taxed for federal purposes at
a rate of approximately 35% versus the 34% rate used in 2006, because the
significant tax deductions for stock option exercises realized in 2006 are not
expected to occur in 2007 at the same level as last year. The Companys effective tax rate tends to be
below the combined statutory federal and state rate due to tax-exempt interest
income and various tax credits.
Net
Income (Loss).
A net loss of
$513,000
was
recognized in the third quarter of 2007 compared to net income of $2,809,000 in
last years third quarter due to the factors discussed above.
Liquidity
and Capital Resources
Current
Financial Condition
.
As of November 3, 2007, the Company had total cash and marketable
securities of $52.4 million compared with total cash and marketable securities
of $77.7 million at February 3, 2007. The most significant factors in the
change in the Companys net liquidity position during the first thirty-nine
weeks of 2007 were the seasonal build of inventory associated with the
Fall/Winter selling season and the addition of inventory and fixed assets for
new stores, partially offset by net income adjusted for depreciation and other
non-cash charges. Accounts payable did
not increase as would typically be the case when inventory increases, because
inventory turns slowed down, particularly in the last two months of the third
quarter when comparable store sales were
13
negative. The decline in inventory turns caused the
Company to take more merchandise markdowns, as discussed in the Gross Profit
section above, and slow down purchases in the third quarter, which resulted in
less accounts payable as of November 3, 2007.
Inventory represented
approximately 46% of the Companys total assets as of November 3, 2007.
Managements ability to manage its inventory can have a significant impact on
the Companys cash flows from operations during a given interim period or
fiscal year. In addition, inventory purchases can be somewhat seasonal in
nature, such as the purchase of warm-weather, back-to-school or
Christmas-related merchandise.
Operating
Cash Flows
. Net
cash used in operating activities was $9.2 million in the thirty-nine
weeks ended November 3, 2007 compared to $6.9 million in the thirty-nine
weeks ended October 28, 2006. The main sources of cash provided during the
thirty-nine weeks ended November 3, 2007 were $13.5 million of net income
adjusted for depreciation and other non-cash charges. The main uses of
cash consisted of the increase in inventory of $20.5 million.
Investing
Cash Flows
. Net
cash provided by investing activities was $4.0 million in the thirty-nine weeks
ended November 3, 2007, compared to net cash used in investing activities
of $5.2 million in the thirty-nine weeks ended October 28, 2006. Investment activities in marketable
securities include net redemptions of $22.2 million of municipal auction rate
securities primarily for use in the purchase of inventory. Capital expenditure
activities consisted of $18.2 million used for the purchase of property and equipment
for the build out of 29 new stores, 12 store relocations/expansions, the
purchase of one of the Companys distribution center/office building locations
that had previously been leased, the start-up of construction work on the
expansion of the Darlington, South Carolina distribution center, and other
general corporate purposes. Capital
expenditures during fiscal 2007 are projected to be approximately $32 million
to $34 million. The Company anticipates funding its fiscal 2007 and longer term
capital requirements with cash flows from operations and cash and marketable
securities held on the balance sheet.
Financing
Cash Flows
. Net
cash provided by financing activities was $2.2 million in the thirty-nine weeks
ended November 3, 2007 and $8.7 million in the thirty-nine weeks ended October 28,
2006. Financing activities in the thirty-nine weeks ended November 3, 2007
included the tax benefit from stock option exercises of $3.2 million, the
receipt of $382,000 from options exercised, and scheduled repayments of $1.4
million on outstanding capital leases.
Cash
Requirements
The Companys cash
requirements are primarily for working capital, construction of new stores,
remodeling of existing stores, improvements to its distribution infrastructure
and improvements to its information systems.
The Company is in the process of expanding its distribution center in
Darlington, South Carolina and implementing a new warehouse management
system. The aggregate cost of these
projects is expected to range from $14 million to $15 million, of which
approximately $2.3 million has been paid through November 3, 2007. Historically, the Company has met its cash
requirements from cash flow from operations, short-term trade credit,
borrowings under the revolving lines of credit, long-term debt, capital leases
and cash held on the balance sheet. The Company expects to be able to meet its
cash requirements for at least the next twelve months using cash flow from
operations and existing cash balances.
Critical
Accounting Policies
The preparation of
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. The
Company believes the following critical accounting policies describe the more
significant judgments and estimates used in the preparation of the financial
statements:
Revenue Recognition
While the recognition of
revenue is predominantly derived from routine retail transactions and does not
involve significant judgment, revenue recognition represents an important
accounting policy of the Company. The Company recognizes retail sales, net of
sales taxes, at the time the customer takes possession of the merchandise and
purchases are paid for, less an allowance for returns. The Company allows for
returns up to ten days after the date of sale and the estimate for returns
is based on actual observed return activity ten days after the period
ends. Revenue from layaway sales is recognized when the customer has paid for
and received the merchandise. Layaway service charges, which are
non-refundable, are recognized in revenue when collected. All sales are from
cash, check or major credit card company transactions.
Inventory
Inventory is stated at
the lower of cost (first-in, first-out basis) or market as determined by the
retail inventory method less a provision for estimated inventory shrinkage.
Under the retail inventory method, the cost value of inventory and gross
margins are determined by calculating a cost-to-retail ratio and applying it to
the retail value of inventory. Inherent in the retail inventory calculation are
certain significant management judgments and estimates, including, among
others, merchandise markups, markdowns and shrinkage, which impact the ending
inventory valuation at cost as well as resulting gross margins. The Company
estimates shrinkage for the period between the last physical count and the
balance sheet date. The estimate for the shrinkage reserve can be affected by
changes in actual shrinkage trends. The Company believes the first-in,
first-out retail inventory method results in an inventory valuation that is
fairly
14
stated. Many retailers
have arrangements with vendors that provide for rebates and allowances under
certain conditions, which ultimately affect the value of the inventory. The
Company does not generally enter into such arrangements with its vendors.
Property and Equipment, net
The Company has a
significant investment in property and equipment. Property and equipment are
stated at cost less accumulated depreciation. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation and
amortization are computed using the straight-line method over the lesser of the
estimated useful lives (primarily three to five years for computer equipment
and furniture, fixtures and equipment, five years for leasehold improvements
and fifteen years for buildings) of the related assets or the relevant
lease term, whichever is shorter. Any reduction in these estimated useful lives
would result in a higher annual depreciation expense for the related assets.
Impairment of Long-Lived Assets
The Company continually
evaluates whether events and changes in circumstances warrant revised estimates
of the useful lives or recognition of an impairment loss for long-lived assets.
Future adverse changes in market and legal conditions, or poor operating
results of underlying assets could result in losses or an inability to recover
the carrying value of the long-lived asset, thereby possibly requiring an
impairment charge in the future. If facts and circumstances indicate that a
long-lived asset, including property and equipment, 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. Impairment losses in the
future are dependent on a number of factors such as site selection and general
economic trends, and thus could be significantly different from historical
results. To the extent the Companys estimates for net sales, gross profit and
store expenses are not realized, future assessments of recoverability could
result in impairment charges.
Stock-Based Compensation
The Company adopted SFAS No. 123
(revised 2004)
Share-Based Payment
(SFAS
No. 123R) at the start of the first quarter of fiscal 2006. SFAS No. 123R
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees based on estimated fair value of the
award. The determination of the fair value of the Companys stock options
on the date of grant using an option-price model is affected by the stock price
as well as assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, the expected
stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors. The fair values of options issued
pursuant to the stock based compensation plans at each grant date were
estimated using the Black-Scholes Merton option pricing model. Total stock-based compensation costs related
to nonvested shares is calculated based on the fair market value of the shares
on the date of grant times the number of shares granted. The compensation expense is recorded on a
straight line basis over the requisite service period of the stock recipients
which is equal to the vesting period of the stock. If factors change and
the Company employs different assumptions in the application of SFAS No. 123R
in future periods, the compensation expense recorded under SFAS No. 123R
may differ significantly from the amount recorded in the current period.
Operating Leases
The Company leases all of
its store properties and accounts for the leases as operating leases in
accordance with SFAS No. 13,
Accounting
for Leases.
Many lease agreements contain tenant improvement
allowances, rent holidays, rent escalation clauses and/or contingent rent
provisions. For purposes of recognizing incentives and minimum rental expenses
on a straight-line basis over the terms of the leases, the Company uses the
date of initial possession to begin amortization, which is generally when the
Company enters the space and begins to make improvements in preparation of
intended use.
For scheduled rent
escalation clauses during the lease terms or for rental payments commencing rent
holidays at a date other than the date of initial occupancy, the Company
records minimum rental expenses on a straight-line basis over the terms of the
leases. For tenant improvement allowances, the Company records a deferred rent
liability on the balance sheet and amortizes the deferred rent over the terms
of the leases.
Certain leases provide
for contingent rents that are not measurable at inception. These contingent
rents are primarily based on a percentage of sales that are in excess of a
predetermined level. These amounts are excluded from minimum rent and are
included in the determination of total rent expense when it is probable that
the expense has been incurred and the amount is reasonably estimable.
Accounting for Income Taxes
The Company accounts for
income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
. 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. The Company adjusts its income tax
provision in the period it is determined that actual results will differ from
its estimates. Tax law and rate changes are reflected in the income tax provision
in the year in which such changes are enacted.
15
The above listing is not
intended to be a comprehensive list of all the Companys accounting policies.
In many cases the accounting treatment of a particular transaction is
specifically dictated by U.S. generally accepted accounting principles, with no
need for managements judgment in their application. There are also areas in
which managements judgment in selecting any available alternative would not
produce a materially different result.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
The market risk of the Companys financial instruments
as of November 3, 2007 has not significantly changed since February 3,
2007. The Companys risk profile as of February 3, 2007 is disclosed
in Quantitative and Qualitative Disclosures About Market Risk included in the
Companys Annual Report on Form 10-K for the fiscal year ended February 3,
2007.
Item
4. Controls and Procedures.
The Company has carried out an evaluation, under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures as of November 3, 2007 pursuant to Rule 13a-15 and
15d-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer each concluded that the Companys disclosure controls and procedures
are effective in ensuring that all information required to be disclosed in the
reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. There were no
changes in internal controls over financial reporting during the fiscal quarter
ended November 3, 2007 identified in connection with the Chief Executive
Officers and Chief Financial Officers evaluation that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
16
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
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. While litigation is subject
to uncertainties and the outcome of any litigated 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 cash flows.
Item 1A. Risk Factors.
There are no material changes to the Risk Factors
described under the sections ITEM 1A. RISK FACTORS in the Companys Annual
Report on Form 10-K for the fiscal year ended February 3, 2007 and
the Companys Quarterly Report on Form 10-Q for the quarter ended May 5,
2007.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior
Securities.
Not applicable.
Item 4. Submission of Matters to a
Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibits
|
|
|
|
|
|
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.*
|
|
|
|
*
|
|
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 1934, except to the extent that the registrant
specifically incorporates it by reference.
|
17
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, and the undersigned also has signed this report in
his capacity as the Registrants Secretary and Chief Financial Officer
(Principal Financial Officer).
|
|
|
CITI TRENDS,
INC.
|
Date: December 11, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Bruce D. Smith
|
|
|
|
Name:
|
Bruce D. Smith
|
|
|
|
Title:
|
Secretary and
Chief Financial Officer
|
18
Citi Trends (NASDAQ:CTRN)
Historical Stock Chart
From Jun 2024 to Jul 2024
Citi Trends (NASDAQ:CTRN)
Historical Stock Chart
From Jul 2023 to Jul 2024