UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended July 29, 2017May 5, 2018

OR

Commission File Number  000-51315

CITI TRENDS, INC.

(Exact name of registrant as specified in its charter)

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  ☒   No  ☐

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  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

CITI TRENDS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Citi Trends, Inc.

Condensed Consolidated Balance Sheets

July 29, 2017May 5, 2018 and January 28, 2017February 3, 2018

(Unaudited)

(in thousands, except share data)

Citi Trends, Inc.

Condensed Consolidated Statements of OperationsIncome

Twenty-SixThirteen Weeks Ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016

(Unaudited)

(in thousands, except per share data)

Citi Trends, Inc.

Condensed Consolidated Statements of Operations

Thirteen Weeks Ended July 29, 2017 and July 30, 2016

(Unaudited)

(in thousands, except per share data)

Citi Trends, Inc.

Condensed Consolidated Statements of Cash Flows

Twenty-SixThirteen Weeks Ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016

(Unaudited)

(in thousands)

Citi Trends, Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

July 29, 2017May 5, 2018

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 July 29, 2017,May 5, 2018, the Company operated 545553 stores in 31 states.

The condensed consolidated balance sheet as of July 29, 2017, the condensed consolidated statements of operations for the twenty-six and thirteen week periods ended July 29, 2017 and July 30, 2016,May 5, 2018 and the condensed consolidated statements of income and cash flows for the twenty-sixthirteen week periods ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016 have been prepared by the Company without audit. The condensed consolidated balance sheet as of January 28, 2017February 3, 2018 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 July 29, 2017May 5, 2018 and January 28, 2017,February 3, 2018, and its results of operations and cash flows for all periods presented.  These condensed consolidated financial statements should 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 January 28, 2017 and July 30, 2016, respectively.February 3, 2018.

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 twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending February 3, 2018.2, 2019.

The following contains references to fiscal years 20172018 and 2016,2017, which represent fiscal years ending or ended on February 2, 2019 and February 3, 2018, and January 28, 2017, respectively.  Fiscal 20172018 has a 53-week52-week accounting period and fiscal 20162017 had a 52-week53-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.stock.  During loss

The amortized cost and fair market value of investment securities as of July 29, 2017May 5, 2018 by contractual maturity are as follows (in thousands):

borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings under the credit facility.

8.7.  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. 

ASC 740-270, Income Taxes – Interim Reporting, requires companies to calculate income taxes by applying their estimated full-year tax rate in each interim period unless the estimated full-year tax rate is not reliably predictable.  For the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, the Company utilized this annual effective tax rate method to calculate income taxes.

For the three months ended May 5, 2018, the effective income tax rate was 18.7%.  This compares with a rate of 31.2% for the three months ended April 29, 2017.  The decrease in the effective income tax rate was due primarily to the decrease in the federal income tax rate from 35% to 21% which was the result of the Tax Cuts and Jobs Act tax reform legislation that was effective January 1, 2018.

9.8. Other Long-Term Liabilities

The components of other long-term liabilities as of July 29, 2017May 5, 2018 and January 28, 2017February 3, 2018 are as follows (in thousands):

Dividends

On February 7, 2017, the Company’s Board of Directors declared a dividend of $0.06 per common share, which was paid on March 14, 2017 to stockholders of record as of February 28, 2017.  On May 16, 2017,13, 2018, the Company’s Board of Directors declared a dividend of $0.08 per common share, which was paid on June 13, 2017March 20, 2018 to stockholders of record as of March 6, 2018.  On May 30, 2016.  On August 15, 2017,22, 2018, the Company’s Board of Directors declared a dividend of $0.08 per common share payable September 12, 2017on June 19, 2018 to stockholders of record as of August 29, 2017.June 5, 2018.  Any determination to declare and pay cash dividends for future quarters will be made by the Board of Directors.

12.11.  Recent Accounting Pronouncements

Recently Adopted

In July 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”).  ASU 2015-11 requires entities to measure inventory at the lower of cost or net realizable value, simplifying the current requirement that inventories be measured at the lower of cost or market. The ASU will not apply to inventories that are measured using the last-in, first-out method or retail inventory method. The guidance is effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company adopted ASU 2015-11 in the first quarter of fiscal 2017.  As the majority of the Company's inventory is accounted for under the retail inventory method, the adoption of this guidance did not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance changes how companies account for certain aspects of share-based payments to employees. Under previous accounting guidance, tax benefits and certain tax deficiencies arising from the vesting of share-based payments were recorded in additional paid-in-capital. The new guidance requires such benefits or deficiencies to be recognized as components of income tax expense in the statement of operations with the impact of such tax benefits or deficiencies to be combined with the “Deferred taxes” line in operating activities in the statement of cash flows.  The ASU also allows election of an accounting policy whereby forfeitures of share-based payment awards are recognized as they occur, or alternatively, are accounted for on a prospective basis utilizing an estimate of expected forfeitures.  Entities are required to apply the new guidance prospectively.  The new standard is effective for fiscal years beginning after December 15, 2016.  The Company adopted ASU 2016-09 in the first quarter of fiscal 2017, and, as a result, combined the impact of excess tax benefits from share-based payments with deferred taxes in the Consolidated Statement of Cash Flows and elected to recognize the impact of forfeitures as they occur.  These impacts on the Company’s consolidated balance sheet, results of operations and cash flows were immaterial.

Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The guidance requires an entity to recognize revenue on contracts with customers relating to the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve this, an entity is required to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize

Company recorded an estimated refund liability of $0.4 million, included in the line item “Accrued expenses”, and the carrying value of a return asset of $0.2 million, presented separately from inventory, included in the line item “Prepaid and other current assets” on the Condensed Consolidated Balance Sheets.  The cumulative effect of the changes made to the May 5, 2018 Condensed Consolidated Balance Sheet from the modified retrospective adoption of ASU 2014-09 on retained earnings was immaterial.

Disaggregation of Revenue

The Company’s retail operations represent a single operating segment based on the way the Company manages its business.  Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation.  The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.

In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line.  The percentage of net sales related to each classification of its merchandise assortment for the first quarter of fiscal 2018 and 2017 was approximately:

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, capital allocation expectations 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,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language. 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; the results of pending or threatened litigation; 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 January 28, 2017February 3, 2018 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 fashion preferences of value-conscious consumers, particularly African-Americans. We operated 545553 stores in both urban and rural markets in 31 states as of July 29, 2017.May 5, 2018.

Accounting Periods

The following discussion contains references to fiscal years 20172018 and 2016,2017, which represent fiscal years ending or ended on February 2, 2019 and February 3, 2018, and January 28, 2017, respectively.  Fiscal 20172018 has a 53-week52-week accounting period and fiscal 20162017 had a 52-week53-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.