Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-123028
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, GA 31401
(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 |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 1, 2005
- ------------------------------------- -------------------------------------
Common Stock, $.01 par value 12,602,154 shares
- --------------------------------------------------------------------------------
1
CITI TRENDS, INC.
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FORM 10-Q
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TABLE OF CONTENTS
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PAGE
NUMBER
________
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Condensed Balance Sheets (unaudited)
April 30, 2005 and January 29, 2005 3
Condensed Statements of Income (unaudited)
Thirteen weeks ended April 30, 2005 and May 1, 2004 4
Condensed Statements of Cash Flows (unaudited)
Thirteen weeks ended April 30, 2005 and May 1, 2004 5
Notes to the Condensed Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
Item 4 Controls and Procedures 13
PART II OTHER INFORMATION 14
Item 1 Legal Proceedings 14
Item 2 Unregistered Sales of Equity Securities and Use of Initial Public Offering Proceeds 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submissions of Matter to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits 14
SIGNATURES 16
2
Item 1. Financial Statements.
Citi Trends, Inc.
Condensed Balance Sheets
April 30, 2005 and January 29, 2005
(unaudited)
April 30, January 29,
2005 2005
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents....................................................................... $ 10,892,459 $ 11,801,442
Inventory....................................................................................... 41,269,527 36,172,832
Prepaid and other current assets................................................................ 4,321,732 2,600,933
Deferred tax asset.............................................................................. 1,108,297 1,139,000
--------------- --------------
Total current assets........................................................................... 57,592,016 51,714,207
Property and equipment, net....................................................................... 18,993,336 17,573,767
Goodwill.......................................................................................... 1,371,404 1,371,404
Other assets...................................................................................... 170,557 130,182
--------------- --------------
Total assets................................................................................... $ 78,127,313 $ 70,789,560
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving lines of credit...................................................... $ -- $ --
Accounts payable................................................................................ 29,124,514 28,132,301
Accrued expenses................................................................................ 5,421,749 3,199,772
Accrued compensation............................................................................ 2,860,459 2,537,643
Current portion of long-term debt............................................................... 81,058 78,953
Current portion of capital lease obligations.................................................... 704,592 718,425
Income taxes payable............................................................................ 1,860,647 2,455,247
Layaway deposits................................................................................ 874,448 252,791
--------------- --------------
Total current liabilities...................................................................... 40,927,466 37,375,132
Long-term debt, less current portion.............................................................. 1,505,753 1,526,110
Capital lease obligations, less current portion................................................... 633,172 688,473
Preferred shares subject to mandatory redemption.................................................. 3,565,860 3,984,763
Deferred tax liability............................................................................ 1,131,397 818,000
Other long-term liabilities....................................................................... 3,284,767 2,632,114
--------------- --------------
Total liabilities.............................................................................. 51,048,413 47,024,592
--------------- --------------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 20,000,000; 9,460,750 shares issued; 9,295,000
shares outstanding............................................................................. 3,639 3,639
Paid-in-capital................................................................................. 4,146,074 4,120,894
Retained earnings............................................................................... 23,093,737 19,828,628
Treasury stock, at cost; 165,750 shares......................................................... (164,550) (164,550)
Subscription receivable......................................................................... -- (23,643)
--------------- --------------
Total stockholders' equity..................................................................... 27,078,900 23,764,968
--------------- --------------
Commitments and contingencies (notes 6 and 7)
Total liabilities and stockholders' equity..................................................... $ 78,127,313 $ 70,789,560
============== ==============
See accompanying notes to the condensed financial statements.
3
Citi Trends, Inc.
Condensed Statements of Income
Thirteen Weeks Ended April 30, 2005 and May 1, 2004
(unaudited)
April 30, May 1,
2005 2004
---------------- ----------------
Net sales........................................................................................ $ 63,616,469 $ 48,068,746
Cost of sales.................................................................................... 38,483,030 29,034,125
---------------- ----------------
Gross profit................................................................................. 25,133,439 19,034,620
Selling, general and administrative expenses..................................................... 19,757,812 15,220,695
---------------- ----------------
Income from operations........................................................................ 5,375,627 3,813,925
Interest expense, including redeemable preferred stock dividend.................................. 110,519 173,369
---------------- ----------------
Income before provision for income taxes...................................................... 5,265,108 3,640,556
Provision for income taxes....................................................................... 2,000,000 1,401,614
---------------- ----------------
Net income.................................................................................... $ 3,265,108 $ 2,238,942
================ ================
Basic income per common share.................................................................... $ .35 $ .24
================= ================
Diluted income per common share.................................................................. $ .30 $ .21
================= ================
Average number of shares outstanding
Basic.......................................................................................... 9,295,000 9,305,400
================ ================
Diluted........................................................................................ 10,986,959 10,907,508
================ ================
See accompanying notes to the condensed financial statements.
4
Citi Trends, Inc.
Condensed Statements of Cash Flows
Thirteen Weeks Ended April 30, 2005 and May 1, 2004
(unaudited)
April 30, May 1,
2005 2004
--------------- ----------------
Operating activities:
Net income..................................................................................... $ 3,265,108 $ 2,238,942
Adjustment to reconcile net income to net cash provided by operating activities:
Dividends on preferred shares subject to mandatory redemption................................ 81,113 81,113
Depreciation and amortization................................................................ 1,394,469 1,076,535
Deferred income taxes........................................................................ 344,100 --
Loss on disposal of fixed assets
Noncash compensation expense................................................................. 25,180 11,157
Changes in assets and liabilities:
Inventory.................................................................................. (5,096,695) (7,330,653)
Prepaid and other current assets........................................................... (1,720,799) 118,703
Other assets............................................................................... (50,156) (5,974)
Accounts payable........................................................................... 992,213 5,493,741
Accrued expenses and other long-term liabilities........................................... 2,374,567 1,327,576
Accrued compensation....................................................................... 322,816 289,361
Income tax payable......................................................................... (594,600) 1,101,966
Layaway deposits........................................................................... 621,657 322,212
------------ --------------
Net cash provided by operating activities................................................. 1,958,973 4,724,678
------------ --------------
Investing activities:
Purchase of property and equipment............................................................. (2,664,073) (2,908,951)
------------ --------------
Financing activities:
Repayments on long-term debt and capital lease obligations..................................... (227,574) (162,339)
Proceeds from payment of shareholder note receivable........................................... 23,691 11,000
Proceeds from sale of stock.................................................................... -- 6,000
------------ -------------
Net cash used in financing activities..................................................... (203,883) (145,339)
------------ --------------
Net increase (decrease) in cash and cash equivalents...................................... (908,983) 1,670,389
Cash and cash equivalents:
Beginning of period........................................................................... 11,801,442 9,954,232
----------- -------------
End of period................................................................................. $ 10,892,459 $ 11,624,621
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest................................................................... $ 453,915 $ 85,933
Cash paid for income taxes............................................................... $ 2,250,500 $ 299,650
Purchases of property and equipment financed by entering into capital leases ................. $ 140,188 $ 526,692
See accompanying notes to the condensed financial statements.
5
Citi Trends, Inc
- ----------------
Notes to the Condensed Financial Statements (unaudited)
- -------------------------------------------------------
1. Basis of Presentation
---------------------
The condensed balance sheet as of April 30, 2005, the interim condensed
statements of income for each of the thirteen week periods ended April 30, 2005
and May 1, 2004, and the interim condensed statements of cash flows for the
thirteen week periods ended April 30, 2005 and May 1, 2004 have been prepared by
Citi Trends, Inc. (the "Company"), without audit. The condensed balance sheet at
January 29, 2005 has been derived from the audited financials statements at that
date, but does not include all required year end disclosures. In the opinion of
management, such statements include all adjustments (which include only normal
recurring adjustments) considered necessary to present fairly the Company's
financial position as of April 30, 2005 and January 29, 2005, results of
operations and cash flows at April 30, 2005 and May 1, 2004 and for all periods
presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been omitted from these interim financial statements.
The Company suggests that you read its condensed financial statements in
conjunction with the financial statements and notes thereto included in its Rule
424(b) prospectus filed May 18, 2005.
The results of operations for the thirteen weeks ended April 30, 2005 are not
necessarily indicative of the operating results that may be expected for the
year ending January 28, 2006.
2. Stock-Based Compensation
------------------------
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, 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 is recorded on the date of grant only if the current fair value of the
underlying stock exceeds the exercise price. The Company recognizes the fair
value of stock rights granted to non-employees in the accompanying condensed
financial statements. 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, establishes accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and the Company has
adopted only the disclosure requirements of SFAS No. 123, as amended. The
following table illustrates the effect on net income for the thirteen weeks
ended April 30, 2005 and May 1, 2004 if the fair-value-based method had been
applied to all outstanding and unvested awards in the periods. Pro forma
information regarding net income and net income per share is required in order
to disclose the Company's net income as if it had accounted for employee stock
options under the fair value method of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation--Transition Disclosure. The fair values of options and shares
issued pursuant to its option plan at each grant date were estimated using the
Black-Scholes option pricing model.
2005 2004
-------------- --------------
Net income, as reported................................................................ $ 3,265,108 $ 2,238,942
Add stock-based employee compensation expense included in reported net income, net
of tax of $9,568 and $4,298, respectively............................................. 15,612 6,859
Deduct total stock-based employee compensation expense determined under
fair-value-based method for all awards, net of tax of $11,790 and $14,423,
respectively.......................................................................... (19,237) (23,020)
------------- -------------
Pro forma net income................................................................ $ 3,261,483 $ 2,222,781
============= =============
As reported basic income per common share.............................................. $ .35 $ .24
============= =============
Pro forma basic income per common share................................................ $ .35 $ .24
============= =============
As reported diluted income per common share............................................ $ .30 $ .21
============= =============
Pro forma diluted income per common share.............................................. $ .30 $ .20
============= =============
6
3. Earnings per Share
------------------
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are 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.
The following table provides a reconciliation of the number of average common
shares outstanding used to calculate 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 ended April 30, 2005 and May 1, 2004:
2005 2004
---- ----
Average number of common shares outstanding............................................ 9,295,000 9,305,400
Incremental shares from assumed exercises of stock options............................. 1,691,959 1,602,108
----------- -----------
Average number of common shares and common stock equivalents outstanding............... 10,986,959 10,907,508
=========== ===========
For the thirteen weeks ended April 30, 2005 and May 1, 2004 there were no
options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because of antidilution.
4. Revolving Lines of Credit
-------------------------
The Company has a revolving line of credit secured by substantially all of the
Company's assets pursuant to which the Company pays customary fees. This secured
line of credit expires in April 2007. At April 30, 2005, the line of credit
provided for aggregate cash borrowings and the issuance of letters of credit up
to the lesser of $25,000,000 or the Company's borrowing base (approximately
$25,000,000 at April 30, 2005), as defined in the credit agreement. Borrowings
under this secured line of credit bear interest at either the prime rate or the
Eurodollar rate plus 2.25%, at the Company's election, based on conditions in
the credit agreement. Additionally, there is a letter of credit fee of 1.25% per
annum on the outstanding balance of letters of credit. At April 30, 2005, there
were no outstanding borrowings on the revolving line of credit, nor were there
any outstanding letters of credit. Under the terms of the credit agreement, the
Company is required to maintain a minimum tangible net worth. The Company was in
compliance with this requirement at April 30, 2005.
In September 2003, the Company entered into an annual unsecured revolving line
of credit with Bank of America that expires on June 30, 2005. At April 30, 2005,
the line of credit provided 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 April 30, 2005, there were no outstanding
borrowings on the unsecured revolving line of credit.
5. Equity Transactions with Majority Shareholder
---------------------------------------------
In August 2003, the Company's board of directors adopted a plan (the
"Anti-Dilution Plan") whereby stock options were to be issued to the Company's
majority stockholder, as well as certain defined members of management, in
amounts necessary to prevent the dilution of their ownership percentage as a
result of the issuance of stock options to other employees of the Company.
Options granted under this Anti-Dilution Plan were to be issued at the estimated
fair market value of the Company's common stock on the date of grant and vest
immediately. On April 28, 2005 the Company terminated the Anti-Dilution Plan.
During the thirteen week periods ended April 30, 2005 and May 1, 2004, the
Company issued no stock options under this Anti-Dilution Plan.
6. Contingencies
-------------
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business, including claims by customers,
employees or former employees. The Company was recently the subject of two
putative collective action lawsuits commenced by former employees under the Fair
Labor Standards Act. The plaintiffs sought unpaid compensation and benefits,
liquidated damages, attorneys fees, costs and injunctive relief. The suits were
dismissed with prejudice pending enforcement proceedings in District Court of
the United States for the Middle District of Alabama, Northern Division of
favorable settlement agreements. The Company has reviewed the allegations in
both of these cases and it believes that its business practices are, and were
during the relevant periods, in compliance with the law. The settlement costs
did not and will not have a material impact on the Company's results of
operations or financial condition.
7. Related Party Transactions - Management Consulting Agreement
------------------------------------------------------------
The Company was a party to an Amended and Restated Management Consulting
Agreement, or the consulting agreement, effective as of February 1, 2004 with
Hampshire Management Company LLC, or the consultant, which is an affiliate of
the Company's majority shareholder, pursuant to which the consultant provided
the Company with certain consulting services related to, but not limited to,
financial affairs, relationships with lenders, stockholders and other
third-party associates or affiliates, and the expansion of the Company's
business. In connection with the Company's initial public offering (see note 9
(a)), the parties terminated the consulting agreement and the Company is
obligated to pay the consultant a termination fee of $1.2 million no later than
December 31, 2005.
7
Included in operating expenses are management fees of $60,000 for the thirteen
weeks ended April 30, 2005 and May 1, 2004.
8. Long-Term Incentive Plan
------------------------
On March 8, 2005 the Company adopted the 2005 Long-Term Incentive Plan which
became effective upon the consummation of the initial public offering. Under the
Incentive Plan, the Company may grant up to 1.3 million shares of common stock
that may be issued for the grant of stock options and other equity incentive
awards.
9. Subsequent Events
-----------------
(a) Initial Public Offering
On May 18, 2005, the Company completed the initial public offering, or IPO, of
its common stock as a result of which the Company sold 2,700,000 shares of
common stock at $14.00 per share. In addition, the Company received notice on
May 27, 2005, that the underwriters had exercised the over-allotment option
granted in connection with the IPO, pursuant to which the Company issued and
sold an additional 577,500 shares on June 1, 2005. Upon completing the offering
and the over-allotment option, the Company received net proceeds of
approximately $40.8 million and incurred approximately $5.1 million in expenses
in connection with the IPO. In addition, 1,150,000 shares of common stock were
sold in the IPO by certain selling stockholders of the Company, for which the
Company received no proceeds. As a result, upon the closing of the offering,
there were 12,602,154 shares of common stock outstanding. The Company's common
stock is listed on NASDAQ under the symbol "CTRN". A summary of the terms of the
IPO can be found in the Company's Registration Statement on Form S-1 (File No.
333-123028), or the Registration Statement, which was declared effective by the
SEC on May 17, 2005. Copies of the prospectus relating to the offering may be
obtained from CIBC World Markets Corp., 417 Fifth Avenue, New York, New York
10016, by fax at (212) 667-6303 or by e-mail at useprospectus@us.cibc.com.
(b) Stock Split
In connection with the IPO, on May 11, 2005, the Board of Directors approved a
26-for-1 stock split of the Company's common stock. All share and per share
amounts related to common stock and stock options included in the accompanying
condensed financial statements and notes have been restated to reflect the stock
split.
(c) Use of IPO Proceeds
Following the closing of the IPO, each of the Company's 3,605 shares of
mandatory redeemable preferred stock were redeemed and extinguished for $3.6
million, and the Company repaid in full the mortgage on its Fahm Street
Headquarters and Distribution Center in the amount of $1.5 million. The Company
intends to acquire, lease or design and construct a new distribution center in
the next 18 months using the proceeds from the IPO and cash flow from
operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Thirteen Weeks (First Quarter) Ended April 30, 2005
The Thirteen Weeks (First Quarter) Ended May 1, 2004
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
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; 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 Company's 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.
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 Company's merchandise offerings are
designed to appeal to the preferences of fashion conscious consumers,
particularly African-Americans. Stores were originally located in only the
Southeast, but have recently expanded into the Mid-Atlantic region and Texas. As
of April 30, 2005 there are 214 stores in operation in both urban and rural
markets in twelve 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, all
stores opened in fiscal 2003 and fiscal 2004 were not considered comparable
stores in fiscal 2004. 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 footprints in established shopping centers rather than sites
built specifically for its stores, and, therefore, store square footage (and
therefore 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 has increased, since new stores and relocated stores are
generally larger than existing stores. Average sales per store have increased
from approximately $0.8 million in fiscal 2000 to approximately $1.1 million in
fiscal 2004. Beyond sales, the Company measures gross margin percentage and
store operating expenses, with a particular focus on labor as a percentage of
sales. These results translate into store level contribution, which are used to
evaluate overall performance of each individual store. Finally, corporate
expenses are monitored in absolute amounts.
The Company's cash requirements are primarily for working capital, construction
of new stores, remodeling of existing stores and improvements to its information
systems. Historically, these cash requirements have been met from cash flow from
operations, short-term trade credit and borrowings under the revolving lines of
credit, long-term debt and capital leases.
Accounting Periods
The following contains references to years 2005 and 2004, which represent fiscal
years ending or ended on January 28, 2006 and January 29, 2005, respectively,
each of which have a 52-week accounting period. This discussion and analysis
should be read with the condensed financial statements and the notes thereto.
9
Results of Operations
The following discussion of the Company's financial performance is based on the
condensed 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.
13 Weeks Ended April 30, 2005 and May 1, 2004
Net Sales. Net sales increased $15.5 million, or 32.3%, to $63.6 million for the
thirteen weeks ended April 30, 2005 from $48.1 million in the thirteen weeks
ended May 1, 2004. The increase in net sales was primarily due to 37 new stores
opened since May 1, 2004 and a comparable store sales increase of 6.9% for the
thirteen weeks ended April 30, 2005 compared to the thirteen weeks ended May 1,
2004. The 37 stores opened since May 1, 2004 accounted for $11.3 million of the
total increase in sales, the 17 stores opened between February 1, 2004 and May
1, 2004 accounted for $1.2 million and the 158 comparable stores contributed
$2.9 million of the increase in sales. The increase in comparable store sales
resulted, in part, from an increase in the number of customer transactions,
items sold and average price per item. Three stores were relocated since May 1,
2004, of which, two of the relocations occurred in the thirteen weeks ended
April 30, 2005. The relocated stores contributed 0.5% of the 6.9% comparable
sales growth.
Gross Profit. Gross profit increased $6.1 million, or 32.0%, to $25.1 million in
the thirteen weeks ended April 30, 2005 from $19.0 million in the thirteen weeks
ended May 1, 2004. The increase resulted primarily from the operation of 37 new
stores opened since May 1, 2004 and the full period impact of 17 stores opened
in the thirteen weeks ended May 1, 2004. As a percentage of net sales, gross
profit decreased from 39.6% in the thirteen weeks ended May 1, 2004 to 39.5% in
the thirteen weeks ended April 30, 2005. This decrease, as a percentage of net
sales, was primarily due to higher inbound and outbound freight costs primarily
due to fuel surcharges in the thirteen weeks ended May 1, 2004 compared to the
thirteen weeks ended April 30, 2005.
Selling, General and Administrative Expense. Selling, general and administrative
expenses increased $4.5 million, or 29.8%, to $19.8 million in the thirteen
weeks ended April 30, 2005 from $15.2 million in the thirteen weeks ended May 1,
2004. The increase in these expenses was due primarily to additional store
level, distribution and corporate costs arising from the opening of 37 new
stores since May 1, 2004. Selling, general and administrative expense as a
percent of sales decreased to 31.1% in April 30, 2005 from 31.7% in the thirteen
weeks ended May 1, 2004. This decrease was primarily due to a prior year charge
in the thirteen weeks ended May 1, 2004 of approximately $300,000 for additional
vacation pay accrual pursuant to a change in the Company's vacation policy.
Interest Expense, Net. Interest expense decreased by 35.8% from approximately
$173,000 in the thirteen weeks ended May 1, 2004 to approximately $111,000 in
the thirteen weeks ended April 30, 2005. The decrease in net interest expense in
the thirteen weeks ended April 30, 2005 compared to the thirteen weeks ended May
1, 2004 is due primarily to interest income earned on outstanding cash balances.
Provision for Income Taxes. The provision for income taxes increased to $2.0
million in the thirteen weeks ended April 30, 2005 from $1.4 million in the
thirteen weeks ended May 1, 2004. The effective income tax rates for fiscal 2005
and fiscal 2004 are 38.0%, and 38.5%, respectively.
Net Income. Net income increased 45.8% to $3.3 million in the thirteen weeks
ended April 30, 2005 from $2.2 million in the thirteen weeks ended May 1, 2004.
The increase in net income is due to the factors discussed previously.
Liquidity and Capital Resources
Current financial condition. At April 30, 2005, the Company had a net cash
position of $10.9 million, compared with a net cash position of $11.8 million at
January 29, 2005. The most significant factors in the change in the Company's
net debt/cash position during the first 13 weeks of 2005 were positive net
income from operations adjusted for depreciation and other non-cash charges,
offset by the purchase of additional inventory and capital expenditures to open
new stores, and the earlier occurrence of Easter in fiscal 2005 compared to
fiscal 2004 resulted in a shift in the timing of merchandise receipts and
payments between the years.
Inventory represented approximately 53% of the Company's total assets as of
April 30, 2005. Management's ability to manage its inventory can have a
significant impact on the Company's 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 or Christmas-related
merchandise.
Cash flows provided by (used in) operating activities. Net cash provided by
operating activities was $2.0 million in the thirteen weeks ended April 30, 2005
compared to $4.7 million in the thirteen weeks ended May 1, 2004. The main
sources of cash provided during
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the thirteen weeks ended April 30, 2005 was net income adjusted for depreciation
and other non-cash charges of $5.1 million, increases in accrued expenses of
$2.4 million, deposits taken on layaway transactions of approximately $622,000
and increases in accrued compensation of approximately $323,000. Uses of cash
consisted of the net increase in inventory of $4.1 million, a $1.7 million
increase in prepaid assets related to receivables for tenant improvements and
deferred charges related to the Company's IPO on May 17, 2005 and a decrease in
income tax liability of approximately $595,000 from payments made for the prior
year's tax liability.
Cash flows used in investing activities. Cash used in investing activities was
$2.7 million in the thirteen weeks ended April 30, 2005 and $2.9 million in the
thirteen weeks ended May 1, 2004. Investing activities consisted of $2.8 million
used for the purchase of property and equipment for the build out of 14 new
stores. Of the $2.8 million in capital expenditures, $2.7 million related to
equipment purchased directly by the Company while approximately $140,000 was
facilitated through capital leases. Approximately $911,000 of the Company's
capital expenditures on new stores in the thirteen weeks ended April 30, 2005
will be reimbursed to the Company by the landlords of the leased properties.
These tenant improvement dollars will be amortized over the life of the
individual store's lease as a reduction to occupancy expense. Capital
expenditures during fiscal 2005 are projected to be approximately $10.0 million.
The Company anticipates funding its fiscal 2005 and longer term capital
requirements with cash flows from operations, and the proceeds from the IPO, if
necessary.
Cash flows used in financing activities. Cash used in financing activities was
approximately $204,000 in the thirteen weeks ended April 30, 2005 and $145,000
in the thirteen weeks ended May 1, 2004. Financing activities in the thirteen
weeks ended April 30, 2005 included scheduled repayments of approximately
$228,000 on capital leases and receipt of approximately $24,000 in payment of a
shareholder note.
IPO Proceeds and Cash Requirements
On May 18, 2005, the Company completed the IPO of its common stock, as a result
of which the Company sold 2,700,000 shares of common stock at $14.00 per share.
In addition, the Company received notice on May 27, 2005, that the underwriters
had exercised the over-allotment option, pursuant to which the Company issued
and sold an additional 577,500 shares on June 1, 2005. Upon completing the
offering and the over-allotment option granted in connection with the IPO, the
Company received net proceeds of approximately $40.8 million and incurred
approximately $5.1 million in expenses in connection with the IPO. In addition,
1,150,000 shares of common stock were sold in the IPO by certain selling
stockholders of the Company, for which the Company received no proceeds. As a
result, upon the closing of the offering, there were 12,602,154 shares of common
stock outstanding.
Following the closing of the IPO on May 23, 2005, each of the Company's 3,605
shares of mandatory redeemable preferred stock were redeemed and extinguished
for $3.6 million, and the Company repaid in full the mortgage on its Fahm Street
Headquarters and Distribution Center in the amount of $1.5 million.
The Company currently intends to acquire, lease or design and construct a new
distribution center in the next 18 months using the proceeds from the IPO and
cash flow from operations. The Company has hired a third party to conduct a site
and feasibility study regarding the necessary size and location of the new
distribution center. The Company expects to receive the results of the study in
the near future. After receipt of the report, the Company will determine whether
to construct, acquire or lease a new distribution center and will select a
suitable location.
The Company's cash requirements are primarily for working capital, construction
of new stores, remodeling of existing stores and improvements to its information
systems. Historically, the Company has met these cash requirements from cash
flow from operations, short-term trade credit and borrowings under the revolving
lines of credit, long-term debt and capital leases. Due to the IPO on May 18,
2005, the Company expects to be able to meet its cash requirements using cash
flow from operations and the cash proceeds from the IPO.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 its 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 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 10 days after the date of sales and the estimate for returns is
based on actual observed return activity 10 days after the period ends. Revenue
from layaway sales is recognized when the customer has paid for and received the
merchandise. However, revenue from the $2.00 service charge for participating in
the program and from the $5.00 re-stocking fee, if charged as part of the
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layaway program, is recognized at the time of payment. 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 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 a shrinkage reserve 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 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 has not entered 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. 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 15 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 intangible 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 intangible 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 Company's
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 applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees , and related interpretations including 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 is recorded on the date of
grant only if the current fair value of the underlying stock exceeds the
exercise price. The Company recognizes the fair value of stock rights granted to
non-employees in the accompanying condensed financial statements. 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 , establishes accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by existing accounting standards, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123, as
amended. Pro forma information regarding net income and net income per share is
required in order to disclose the Company's net income as if it had accounted
for employee stock options under the fair value method of SFAS No. 123,
Accounting for Stock-Based Compensation , as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-- Transition Disclosure . This information is
contained in Note 2 of the condensed financial statements. The fair values of
options and shares issued pursuant to the Company's option plan at each grant
date were estimated using the Black-Scholes option pricing model.
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 which such changes are enacted.
The above listing is not intended to be a comprehensive list of all the
Company's accounting policies. In many cases the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk of the Company's financial instruments as of April 1, 2005 has
not significantly changed since January 29, 2005. The Company's risk profile as
of January 29, 2005 is disclosed in Quantitative and Qualitative Disclosures
About Market Risk in the Company's Registration Statement on Form S-1 filed May
17, 2005.
Item 4. Controls and Procedures.
The Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
April 30, 2005 pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There were no changes in internal controls over
financial reporting during the fiscal quarter ended April 30, 2005 identified in
connection with the Chief Executive Officer's and Chief Financial Officer's
evaluation that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
At the end of fiscal 2006, Section 404 of the Sarbanes-Oxley Act will require
the Company's management to provide an assessment of the effectiveness of the
Company's internal control over financial reporting, and the Company's
independent registered public accountants will be required to audit management's
assessment. The Company is in the process of performing the system and process
documentation, evaluation and testing required for management to make this
assessment and for its independent registered public accountants to provide
their attestation report. The Company has not completed this process or its
assessment, and this process will require significant amounts of management time
and resources. In the course of evaluation and testing, management may identify
deficiencies that will need to be addressed and remediated.
13
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. The Company was recently the subject of two
putative collective action lawsuits commenced by former employees under the Fair
Labor Standards Act. The plaintiffs sought unpaid compensation and benefits,
liquidated damages, attorneys fees, costs and injunctive relief. The suits were
dismissed with prejudice pending enforcement proceedings in District Court of
the United States for the Middle District of Alabama, Northern Division of
favorable settlement agreements. The Company has reviewed the allegations in
both of these cases and it believes that its business practices are, and were
during the relevant periods, in compliance with the law. The settlement costs
did not and will not have a material impact on the Company's results of
operations or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Initial Public
Offering Proceeds.
(a) The Company did not sell any unregistered equity securities during
the thirteen week period ending April 30, 2005.
(b) Use of Initial Public Offering Proceeds.
On May 18, 2005, the Company completed the IPO of its common
stock as a result of which the Company sold 2,700,000 shares of
common stock at $14.00 per share. In addition, the Company
received notice on May 27, 2005, that the underwriters had
exercised the over-allotment option granted in connection with
the IPO, pursuant to which the Company issued and sold an
additional 577,500 shares on June 1, 2005. Upon completing the
offering and the over-allotment option, the Company received net
proceeds of $40.8 million and incurred approximately $5.1 million
in expenses in connection with the IPO. In addition, 1,150,000
shares of common stock were sold in the IPO by certain selling
stockholders of the Company, for which the Company received no
proceeds. As a result, upon the closing of the offering, there
were 12,602,154 shares of common stock outstanding. The Company
used the proceeds to repay outstanding debt and intends to use
the remaining proceeds, together with cash flow from operations,
to fund new store openings and for working capital and other
general corporate purposes. Following the closing of the IPO,
each of the Company's 3,605 shares of mandatory redeemable
preferred stock were redeemed and extinguished for $3.6 million,
and the Company repaid in full the mortgage on its Fahm Street
Headquarters and Distribution Center in the amount of $1.5
million. The Company intends to acquire, lease or design and
construct a new distribution center in the next 18 months using
the proceeds from the IPO and cash flow from operations. The
Company has hired a third party to conduct a site and feasibility
study regarding the necessary size and location of the new
distribution center. The Company expects to receive the results
of the study in the near future. After receipt of the report, the
Company will determine whether to construct, acquire or lease a
new distribution center and will select a suitable location. The
Company's common stock is listed on NASDAQ under the symbol
"CTRN". A summary of the terms of the IPO can be found in the
Company's Registration Statement on Form S-1 (File No.
333-123028), which was declared effective by the SEC on May 17,
2005. Copies of the prospectus relating to this offering may be
obtained from CIBC World Markets Corp., 417 Fifth Avenue, New
York, New York 10016, by fax at (212) 667-6303 or by e-mail at
useprospectus@us.cibc.com.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matter to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. 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,
14
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.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly authorized, and the
undersigned also has signed this Quarterly Report in his capacity as the
Registrant's Secretary and Chief Financial Officer (Principal Financial
Officer).
CITI TRENDS, INC.
Date: June 10, 2005
By: /s/ Thomas W. Stoltz
--------------------
Name: Thomas W. Stoltz
Title: Secretary and Chief Financial Officer
16