Table
of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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Annual
Report Pursuant to Section 13 or 15(d) of
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the
Securities Exchange Act of 1934
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For the fiscal year ended January 31, 2009
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Or
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Transition
Report Pursuant to Section 13 or 15(d) of
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the
Securities Exchange Act of 1934
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For the transition period
from to
Commission File Number: 000-51315
CITI
TRENDS, INC.
(Exact name of registrant
as specified in its charter)
Delaware
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(State
or other jurisdiction of
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52-2150697
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incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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104 Coleman Boulevard, Savannah, Georgia
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31408
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(Address
of principal executive offices)
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(Zip
Code)
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Registrants
telephone number, including area code
(912) 236-1561
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange
on which registered
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Common
Stock, $.01 Par Value
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NASDAQ
Stock Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
o
No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
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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
State the aggregate market
value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the registrants most recently completed second fiscal quarter:
$327,760,015 at August 1, 2008.
Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the
latest practicable date: Common Stock, par value $.01 per share, 14,685,737
shares outstanding as of March 30, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates
information from the registrants definitive proxy statement, to be filed with
the Securities and Exchange Commission within 120 days after the close of the
registrants fiscal year covered by this Annual Report on Form 10-K, with
respect to the Annual Meeting of Stockholders to be held on May 27, 2009.
Table of
Contents
PART I
Some statements in, or incorporated
by reference into, this Annual Report on Form 10-K (this Report) of
Citi Trends, Inc. (we, us, or the Company) may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). All statements other than historical facts contained
in this Report, including statements regarding our future financial position,
business policy and plans and objectives and expectations of management for
future operations, are forward-looking statements. The words believe, may, could,
estimate, continue, anticipate, intend, expect, plan, project and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events,
including, among other things: implementation of our growth strategy; our
ability to anticipate and respond to fashion trends; competition in our
markets; consumer spending patterns; actions of our competitors or anchor tenants
in the strip shopping centers where our stores are located; and anticipated
fluctuations in our operating results.
These forward-looking statements are
subject to a number of risks, uncertainties and assumptions, including those
described in Item 1A. Risk Factors and elsewhere in this Report and the other
documents we file with the Securities and Exchange Commission (SEC),
including our reports on Form 8-K and Form 10-Q, and any amendments
thereto. Because forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, you should not
rely upon forward-looking statements as predictions of future events. The
events and circumstances reflected in the forward-looking statements may not be
achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. These forward-looking statements
speak only as of the date of such statements. Except as required by applicable
law, including the securities laws of the United States and the rules and
regulations of the SEC, we do not plan to publicly update or revise any
forward-looking statements contained in this Report, whether as a result of any
new information, future events or otherwise.
Information is provided herein with
respect to our operations related to our fiscal years ended on January 31,
2009 (fiscal 2008), February 2, 2008 (fiscal 2007) and February 3,
2007 (fiscal 2006)
.
ITEM
1.
BUSINESS
Overview and History
We are a rapidly growing, value-priced retailer of
urban fashion apparel and accessories for the entire family. We offer quality,
branded products from nationally recognized brands, as well as private label
products and a limited assortment of home décor items. Our merchandise offerings
are designed to appeal to the preferences of fashion conscious consumers,
particularly African-Americans. We believe that we provide merchandise at
compelling values. Our goal is to provide nationally recognized branded
merchandise at 30% to 70% discounts to department and specialty stores regular
prices. Our stores average approximately 10,200 square feet of selling space
and are typically located in neighborhood shopping centers that are convenient
to low- to moderate-income customers. Originally our stores were located in the
Southeast, and in recent years were expanded into the Mid-Atlantic and Midwest
regions as well as the state of Texas. In fiscal 2008, we opened 39 new stores
and closed one store. As of January 31, 2009, we operated 357 stores
in both urban and rural markets in 22 states.
Our predecessor, Allied Department Stores, was founded
in 1946 and grew into a chain of family apparel stores operating in the
Southeast. In 1999, the Company, then consisting of 85 stores throughout the Southeast,
was acquired by Hampshire Equity Partners II, L.P., a private equity firm.
Following the acquisition by Hampshire Equity Partners II, L.P., management
implemented several strategies to refocus us on the growing urban market and
improve our operating and financial performance. After the successful
implementation of these strategies and the successful growth of our chain from
85 stores to 212 stores, we completed an initial public offering of our common
stock on May 18, 2005.
Our executive offices are located at 104 Coleman
Boulevard, Savannah, Georgia 31408 and our telephone number is (912) 236-1561.
Our Internet address is
http://www.cititrends.com
.
The reference to our web site address in this Report does not constitute the
incorporation by reference of the information contained at the web site in this
Report. We make available, free of charge through publication on our web site,
copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, as soon as
reasonably practicable after we have filed such materials with, or furnished
such materials to, the SEC. In addition, you may read and copy any
materials we file with the SEC at the SECs Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549 or on the SECs web site at
http://www.sec.gov
, and you
may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
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Table
of Contents
Company Strengths and Strategies
Our goal is to be the leading value-priced retailer of
urban fashion apparel and accessories. We believe the following business
strengths differentiate us from our competitors and are important to our
success:
Focus on Urban Fashion Mix.
We focus our merchandise on urban
fashions, which we believe appeal to our core customers. We do not attempt to
dictate trends, but rather devote considerable effort to identifying emerging
trends and ensuring that our apparel assortment is considered timely and
fashionable in the urban market. Our merchandising staff tests new merchandise
before reordering and actively manages the mix of brands and products in the
stores to keep our offering fresh and minimize markdowns.
Superior Value Proposition.
As a value-priced retailer, we seek to
offer top quality, fashionable merchandise at compelling prices. We seek to
provide nationally recognized brands at 30% to 70% discounts to department and
specialty stores regular prices. We also offer products under our proprietary
brands such as Diva Blue, Red Ape, and Lil Miss Hollywood. These
private brands enable us to expand our product selection, offer fashion merchandise
at lower prices and enhance our product offerings.
Merchandise Mix that Appeals to the
Entire Family.
We
merchandise our stores to create a destination environment capable of meeting
the fashion needs of the entire value-conscious family. Each store offers a
wide variety of products for men and women, as well as children. Our stores
feature sportswear, dresses, outerwear, footwear, intimate apparel and
accessories, as well as a limited assortment of home décor items. We believe
that the breadth of our merchandise distinguishes our stores from many
competitors that offer urban apparel primarily for women, and reduces our
exposure to fashion trends and demand cycles in any single category.
Strong and Flexible Sourcing
Relationships.
We
maintain strong sourcing relationships with a large group of suppliers. We have
purchased merchandise from more than 1,200 vendors in the past 12 months.
Purchasing is controlled by a 25-plus member buying team located at our
Savannah, Georgia headquarters and our buying office in New York, New York. We
purchase merchandise through planned programs with vendors at reduced prices
and opportunistically through close-outs, with the majority of our merchandise
purchased for the current season and a limited quantity held for sale in future
seasons. To foster vendor relationships, we pay vendors promptly and do not ask
for typical retail concessions such as promotional and markdown allowances.
Attractive Fashion Presentation and
Store Environment.
We seek to provide a fashion-focused shopping environment that is similar to a
specialty apparel retailer, rather than a typical off-price store. Products
from nationally recognized brands are prominently displayed by brand, rather
than by size, on dedicated, four-way fixtures featuring multiple sizes and
styles. The remaining merchandise is arranged on hanging racks. The stores are
carpeted and well-lit, with most featuring a sound system that plays urban
adult and urban contemporary music throughout the store. Nearly all of our stores
have either been opened or remodeled in the past eight years.
Highly Profitable Store Model.
We operate a proven and efficient store
model that delivers strong cash flow and store level return on investment. We
locate stores in high traffic strip shopping centers that are convenient to
low- and moderate-income neighborhoods. We generally utilize previously
occupied store sites which enables us to obtain attractive rents for our store
sites. Similarly, advertising expenses are low as we do not rely on promotion-driven
sales but rather seek to build our reputation for value through everyday low
prices. At the same time, from an investment perspective, we seek to design
stores that are inviting and easy to shop, while limiting startup and fixturing
costs. As a result, our stores have generated rapid payback of investments,
typically within 12 to 14 months.
Product Merchandising and Pricing
Products.
Our merchandising policy is to offer
high quality, branded products at attractive prices for the entire value-conscious
family. We seek to maintain a diverse assortment of first quality, in-season
merchandise that appeals to the distinctive tastes and preferences of our core
customers. Approximately 47% of our net sales are represented by nationally
recognized brands. We also offer a wide variety of products from less
recognized brands and a lesser amount representing private label products under
our proprietary brands such as Diva Blue, Red Ape, and Lil Miss Hollywood.
Our private brand products enable us to expand product selection, offer
merchandise at lower prices and enhance our product offerings.
Our merchandise includes apparel, accessories and home
décor. Within apparel, we offer fashion sportswear for men, women and children,
including offerings for newborns, infants, toddlers, boys and girls. We also
offer accessories, which includes handbags, jewelry, footwear, belts, intimate
apparel and sleepwear, as well as a limited assortment of home décor.
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Table of Contents
The following table sets forth the merchandise
assortment by classification as a percentage of net sales for fiscal
2008, 2007 and 2006.
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Percentage of
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Net Sales
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2008
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2007
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2006
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Womens
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35
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%
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35
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%
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36
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%
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Childrens
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29
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%
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27
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%
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26
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%
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Mens
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22
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%
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22
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%
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22
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%
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Accessories
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12
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%
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14
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%
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14
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%
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Home décor
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2
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%
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2
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%
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2
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%
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Pricing.
We purchase our merchandise at
attractive prices and mark prices up less than department or specialty stores.
We seek to provide nationally recognized brands at prices 30% to 70% below
regular retail prices available in department stores and specialty stores, and
to provide a product offering that validates both our value and fashion positioning
to our consumers. We also consider the price-to-value relationships of our
non-branded products to be strong. Our basic pricing strategy is everyday low
prices. The discount from the suggested retail price is usually reflected on
the price tag. We review each department in our stores at least monthly for
possible markdowns based on sales rates and fashion seasons to promote faster
turnover of inventory and to accelerate the flow of current merchandise.
Sourcing and Allocation
The merchandising department oversees the sourcing,
planning and allocation of merchandise to our stores, which allows us to
utilize volume purchase discounts and maintain control over our inventory. We
source our merchandise from over 1,200 vendors, consisting of domestic manufacturers
and importers. Our Chief Merchandising Officer supervises a planning and
allocation team consisting of nearly 30 associates, as well as a buying team,
which is comprised of four merchandise managers and approximately 25 buyers and
assistant buyers.
Our buyers have on average more than 20 years of
experience in the retail business and have developed long-standing
relationships with many of our vendors, including those controlling the
distribution of branded apparel. Our buyers, who are based in Savannah and New
York, travel regularly to the major United States apparel markets, visiting
major manufacturers and attending national and regional apparel trade shows,
including urban-focused trade shows.
Our buyers purchase merchandise in styles, sizes and
quantities to meet inventory levels developed by the planning staff. The buying
staff utilizes several purchasing techniques that enable us to offer to
consumers branded and other merchandise at everyday low prices. The majority of
the nationally recognized branded products we sell are purchased in-season and
represent vendors excess inventories resulting from over-production or
retailer order cancellations. We generally purchase later in the merchandising
buying cycle than department and specialty stores. This allows us to take
advantage of imbalances between retailers demands for specific merchandise and
manufacturers supply of that merchandise. We also purchase merchandise from
some vendors in advance of the selling season at reduced prices and purchase
merchandise on an opportunistic basis, which we then store for sale three to
nine months later. Where possible, we seek to purchase items based on style or
color in limited quantities on a test basis with the right to reorder as
needed. Finally, we purchase private brand merchandise that we source to our
specifications.
We allocate merchandise across our store base
according to store-level demand. The merchandising staff utilizes a centralized
management system to monitor merchandise purchasing, planning and allocation in
order to maximize inventory turnover, identify and respond to changing product
demands and determine the timing of mark-downs to our merchandise. The buyers
also regularly review the age and condition of the merchandise and manage both the
reordering and clearance processes. In addition, the merchandising team
communicates with regional, district and store managers to ascertain regional
and store-level conditions and to better ensure that our product mix meets our
consumers demands in terms of quality, fashion, price and availability.
We accept payment from our customers for merchandise
at time of sale. Payments are made to us by cash, check, Visa or Mastercard.
We do not extend credit terms to our customers.
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Table of Contents
Seasonality
The nature of our business is seasonal. Historically,
sales in the first and fourth quarters have been higher than sales achieved in
the second and third quarters of the fiscal year. Expenses, and to a greater
extent operating income, vary by quarter. Results of a period shorter than a
full year may not be indicative of results expected for the entire year.
Furthermore, the seasonal nature of our business may affect comparisons
between periods.
Store Operations
Store Format.
The average selling space of our
existing 357 stores is approximately 10,200 square feet, which allows us the
space and flexibility to departmentalize our stores and provide directed
traffic patterns. We arrange our stores in a racetrack format with womens
sportswear, our most attractive and fashion current merchandise, in the center
of each store and complementary categories adjacent to those items. Mens and
boys apparel is displayed on one side of the store, while dresses, footwear
and accessories are displayed on the other side. Merchandise for infants,
toddlers and girls is displayed along the back of the store. Impulse items,
such as jewelry and sunglasses, are featured near the checkout area. Products
from nationally recognized brands are prominently displayed on four-way racks
at the front of each department. The remaining merchandise is displayed on
hanging racks and occasionally on table displays. Large hanging signs identify
each category location. The unobstructed floor plan allows the customer to see
virtually all of the different product areas from the store entrance and
provides us the flexibility to easily expand and contract departments in
response to consumer demand, seasonality and merchandise availability.
Virtually all of our inventory is displayed on the selling floor. Prices are
clearly marked and often have the comparative retail-selling price noted on the
price tag.
Store Management.
Store operations are managed by our
Senior Vice President of Store Operations, five regional managers and 42
district managers, each of whom typically manages five to twelve stores. The
typical store is staffed with a store manager, two or three assistant managers
and seven to eight part-time sales associates, all of whom rotate work days on
a shift basis. Store managers and assistant store managers participate in a
bonus program based on achieving predetermined levels of sales and inventory
shrinkage. District managers participate in bonus programs based on achieving
targeted levels of sales, profits, inventory shrinkage and payroll costs.
Regional managers participate in a bonus program based on a rollup of the
district managers bonuses. Sales associates are compensated on an hourly basis
with incentives. Moreover, we recognize individual performance through internal
promotions and provide extensive opportunities for advancement, particularly
given our rapid growth.
We place significant emphasis on loss prevention in
order to control inventory shrinkage. Initiatives include electronic tags on
most of our products, training and education of store personnel on loss
prevention issues, digital video camera systems, alarm systems and motion
detectors in the stores. In certain stores, we use an outside service to
visually monitor the stores throughout the day using sophisticated camera
systems. We also capture extensive point-of-sale data and maintain systems that
monitor returns, voids and employee sales, and produce trend and exception
reports to assist in identifying shrinkage issues. We have a centralized loss
prevention team that focuses exclusively on implementation of these initiatives
and specifically on stores that have experienced above average levels of
shrinkage. We also maintain an independent, third party administered, toll-free
line for reporting shrinkage concerns and any other employee concerns.
Employee Training.
Our employees are critical to achieving
our goals, and we strive to hire employees with high energy levels and
motivation. We have well-established store operating policies and procedures
and an extensive 90-day in-store training program for new store managers and
assistant managers. Sales associates also participate in a 30-day customer
service and store procedures training program, which is designed to enable them
to assist customers in a friendly, helpful manner.
Layaway Program.
We offer a layaway program that allows
customers to purchase merchandise by initially paying a 20% deposit and a $2.00
service charge. The customer then makes additional payments every two weeks and
has 60 days within which to complete the purchase. If the purchase is not
completed, the customer receives a merchandise credit for amounts paid less a
re-stocking fee and service charge.
Site Selection.
Cost-effective store locations are an
important part of our profitability model. Accordingly, we look for second
and third use store locations that offer attractive rents, but also meet our
demographic and economic criteria. We have a dedicated real estate
management team responsible for new store site selection. In selecting a
location, we target both urban and rural markets. Demographic criteria used in
site selection include concentrations of our core consumers. In addition, we
require convenient site accessibility, as well as strong co-tenants, such as
food stores, dollar stores, rent-to-own stores and other apparel stores.
Shortly after we sign a new store lease, our store
construction department prepares the store by installing fixtures, signs,
dressing rooms, checkout counters, cash register systems and other items. Once
we take possession of a store site, we can open the store within approximately
three to four weeks.
6
Table of Contents
Advertising and Marketing
Our advertising goal is to build the Citi Trends
brand and promote consumers association of the Citi Trends brand with value,
quality, fashion and everyday low prices. We generally focus our advertising
efforts during the Easter, back-to-school and Christmas seasons. This
advertising consists of radio commercials played on local hip-hop radio
stations and cable television commercials that highlight our brands, value and everyday
low prices. We also do in-store advertising that includes window signs
designated for special purposes, such as seasonal events and clearance periods,
and taped audio advertisements co-mingled with in-store music programs. Signs
change in color, quantity and theme every six to nine weeks. For store grand
openings and significant remodels, we typically seek to create community
awareness and consumer excitement through radio advertising preceding and
during the grand opening and by creating an on-site event with local radio
personalities broadcasting from the new location. We also distribute
promotional items such as gift certificates and shopping sprees in connection
with our grand openings and significant remodels.
Our marketing efforts center on promoting our everyday
low prices and on demonstrating the strong price-to-value relationship of our
products to our consumers. We do not utilize promotional advertising.
Merchandise is priced so that our competition rarely has lower prices. In the
limited situations where the competition offers the same merchandise at a lower
price, we will match the price.
Distribution
All merchandise sold in our stores is shipped directly
from our distribution centers in Savannah, Georgia and Darlington, South
Carolina. We generally ship merchandise from our distribution centers to our
stores daily, utilizing United Parcel Service, Inc. and FedEx Corporation.
In addition to the distribution center in Savannah, we have a small merchandise
storage facility that is attached to our corporate offices. The Savannah facilities have a combined
square footage of approximately 240,000, including 55,000 square feet of
office space. To support our continued growth, we completed an expansion of the
Darlington distribution center in 2008 which increased the size of the facility
from 286,000 square feet to 550,000 square feet. We expect this expansion to
support our growth plans through 2010.
Information Technology and Systems
We have information systems in place to support each
of our business functions. We purchased our enterprise software from Island
Pacific, a primary software provider to the retail industry. The computer
platform is an IBM AS400. The Island Pacific software supports the
following business functions: purchasing, purchase order management, price and
markdown management, distribution, merchandise allocation, general ledger,
accounts payable and sales audit.
Our stores use point-of-sale software from
DataVantage, a division of MICROS Systems, Inc., to run the stores cash
registers. The system uses bar code scanners at checkout to capture item sales.
It also supports end-of-day processing and automatically transmits sales and
transaction data to Savannah soon after the close of business. Additionally,
the software supports store time clock and payroll functions. To facilitate the
marking down and re-ticketing of merchandise, employees in the stores use
hand-held scanners that read the correct item price and prepare new price
tickets for merchandise. DataVantage software also enables us to sort and
review transaction data and generate exception and other database reporting to
assist in loss prevention.
We believe that our information systems, with upgrades
and updates over time, are adequate to support our operations for the
foreseeable future.
Growth Strategy
Our growth strategy is to open stores in new and
existing markets, as well as to increase sales in existing stores. Adding
stores in the markets we currently serve often enables us to benefit from
enhanced name recognition and achieves advertising and operating synergies. In
fiscal 2006, we opened 42 new stores and entered the Indianapolis, Indiana;
Dayton, greater-Cleveland, Akron, Ohio; and St Louis, Missouri markets. In
fiscal 2007, we opened 42 new stores and entered the Tulsa, Oklahoma; Detroit,
Michigan; Chicago, Illinois; and Milwaukee, Wisconsin markets. In fiscal 2008,
we opened 39 new stores and entered the Philadelphia, Pennsylvania and Kansas
City, Kansas markets. We expect to open approximately 45 new stores in fiscal
2009. Approximately 85% of the new stores we intend to open in fiscal 2009 will
be located in states in which we are currently located.
7
Table of Contents
Competition
The markets we serve are highly competitive. The
principal methods of competition in the retail business are fashion,
assortment, pricing and presentation. We believe we have a competitive
advantage in our offering of fashionable brands at everyday low prices. We
compete against a diverse group of retailers, including national off-price
retailers, mass merchants, smaller specialty retailers and dollar stores. The
off-price retail companies with which we compete include TJX Companies, Inc.
(TJX Companies), Burlington Coat Factory Warehouse Corp. (Burlington Coat
Factory) and Ross Stores, Inc. (Ross Stores). In particular, TJX
Companies A.J. Wright stores target moderate income consumers and Ross Stores
has a similar concept targeting lower income consumers, called dds DISCOUNTS.
We believe our strategy of appealing to African-American consumers and offering
urban apparel products allows us to compete successfully with these retailers.
We also believe we offer a more inviting store format than the off-price
retailers, including our use of carpeted floors and more prominently displayed
brands. We also compete with a group of smaller specialty retailers that only
sell womens products, such as Rainbow, Dots, Fashion Cents, Its Fashions! and
Simply Fashions. Our mass merchant competitors include Wal-Mart and Kmart.
These chains do not focus on fashion apparel and, within their apparel
offering, lack the urban focus that we believe differentiates our offering and
appeals to our core customers. Similarly, while some of the dollar store chains
offer apparel, they typically offer a more limited selection focused on basic
apparel needs. As a result, we believe there is significant demand for a value
retailer that addresses the market of low- to moderate-income consumers
generally and, particularly, African-American and other minority consumers who
seek value-priced, urban fashion apparel and accessories. See Item 1A. Risk
Factors in this Report for additional information.
Intellectual Property
We regard our trademarks and service marks as having
significant value and as being important to our marketing efforts. We have
registered the Citi Trends trademark with the U.S. Patent and Trademark
Office on the Principal Register as both a trademark for retail department
store services and as a trademark for clothing. We have also registered the
following trademarks with the U.S. Patent and Trademark Office on the Principal
Register: Citi Club, Citi Express, Citi Knights, Citi Nite, Citi
Steps, Citi Trends Fashion for Less, Citi Women, CT Sport, Diva Blue, Lil
Citi Man, Lil Miss Hollywood, Univer Soul, Urban Sophistication, Red
Ape, and Vintage Harlem. Our policy
is to pursue registration of our marks and to oppose vigorously infringement of
our marks.
Employees
As of January 31, 2009, we had approximately
1,900 full-time and approximately 2,100 part-time employees. Of these
employees, approximately 3,400 are employed in our stores and the remainder are
employed in our distribution centers and corporate office. We are not a party
to any collective bargaining agreements, and none of our employees is
represented by a labor union. We believe our relations with our employees are
good.
8
Table of Contents
ITEM
1A.
RISK FACTORS
You should carefully consider the
following risk factors, together with the other information contained or
incorporated by reference into this Report. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we deem to be currently
immaterial also may impair our business operations. The occurrence of any of
the following risks could have a material adverse effect on our business,
financial condition and results of operations.
Our success depends on our ability to
anticipate, identify and respond rapidly to changes in consumers fashion
tastes, and our failure to adequately evaluate fashion trends could have an
adverse effect on our business, financial condition and results of operations.
The apparel industry in general and our core customer
market in particular are subject to rapidly evolving fashion trends and
shifting consumer demands. Accordingly, our success is heavily dependent on our
ability to anticipate, identify and capitalize on emerging fashion trends,
including products, styles and materials that will appeal to our target
consumers. Our failure to anticipate, identify or react appropriately and
timely to changes in styles, trends, brand preferences or desired image
preferences is likely to lead to lower demand for our merchandise, which could
cause, among other things, sales declines, excess inventories and higher
markdowns.
If we are unsuccessful
in
competing with our retail apparel competitors, our market share could decline
or our growth could be impaired and, as a result, our financial results could
suffer.
The retail apparel market is highly competitive with
few barriers to entry. We compete against a diverse group of retailers,
including national off-price apparel chains such as TJX Companies, Burlington
Coat Factory, and Ross Stores; mass merchants such as Wal-Mart and Kmart;
smaller discount retail chains that only sell womens products, such as
Rainbow, Dots, Fashion Cents, Its Fashions!, and Simply Fashions; and general
merchandise discount stores and dollar stores, which offer a variety of products,
including apparel, for the value-conscious consumer. We also compete against
local off-price and specialty retail stores, regional retail chains,
traditional department stores, web-based retail stores and other direct
retailers.
The level of competition we face from these retailers
varies depending on the product segment, as many of our competitors do not
offer apparel for the entire family. Our greatest competition is generally in
womens apparel. Many of our competitors are larger than us and have
substantially greater resources than us and, as a result, may be able to adapt
better to changing market conditions, exploit new opportunities, exert greater
pricing pressures on suppliers and open new stores more quickly and effectively
than us. Many of these retailers have better name recognition among consumers
than us and purchase significantly more merchandise from vendors. These
retailers may be able to purchase branded merchandise that we cannot purchase
because of their name recognition and relationships with suppliers, or they may
be able to purchase branded merchandise with better pricing concessions than
us. Our local and regional competitors have extensive knowledge of the consumer
base and may be able to garner more loyalty from customers than us. If the
consumer base we serve is satisfied with the selection, quality and price of
our competitors products, consumers may decide not to shop in our stores.
Additionally, if our existing competitors or other retailers decide to focus
more on our core customers, particularly African-American consumers, we may
have greater difficulty in competing effectively, our business and results of
operations could be adversely affected, and the market price of our common
stock could suffer.
The retail industry periodically has experienced
consolidation and other ownership changes. In the future, other United States
or foreign retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations. Any of these developments could
result in our competitors increasing their buying power or market visibility.
These developments may cause us to lose market share and could have an adverse
effect on our sales and results of operations.
We could experience a reduction in
sales and cash flows if we are unable to fulfill our current and future
merchandising needs.
We depend on our
suppliers for the continued availability and satisfactory quality of our
merchandise. Most of our suppliers could discontinue selling to us at any time.
Additionally, if the manufacturers or other owners of brands or trademarks
terminate the license agreements under which some of our suppliers sell our
products, we may be unable to obtain replacement merchandise of comparable
fashion appeal or quality, in the same quantities or at the same prices. In
addition, a number of our suppliers are smaller, less capitalized companies and
are more likely to be impacted by unfavorable general economic and market
conditions than larger and better capitalized companies. These smaller
suppliers may not have sufficient liquidity during economic downturns to
properly fund their businesses, and their ability to supply their products to
us could be negatively impacted. If we lose the services of one or more of our
significant suppliers or one or more of them fail to meet our merchandising
needs, we may be unable to obtain replacement merchandise in a timely manner.
If our existing suppliers cannot meet our increased needs and we cannot locate
alternative supply sources, we may be unable to obtain sufficient quantities of
the most popular items of the nationally recognized brands at attractive
prices, which could negatively impact our sales and results of operations.
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As an apparel retailer, we rely on
numerous third parties in the supply chain to produce and deliver the products
that we sell, and our business may be negatively impacted by their failure to
comply with applicable law.
We rely on numerous third parties to supply the
products that we sell. Violations of law by our importers, manufacturers or
distributors could result in delays in shipments and receipt of goods or damage
our reputation, thus causing our revenues to decline. In addition, merchandise
we sell in our stores is subject to regulatory standards set by various
governmental authorities with respect to quality and safety. Regulations and
standards in this area may change from time to time, and substantial additional
regulations and standards have been proposed. Issues with the quality and
safety of merchandise we sell in our stores, regardless of our fault, or
customer concerns about such issues, could result in damage to our reputation,
lost sales, uninsured product liability claims or losses, merchandise recalls
and increased costs, which could have an adverse effect on our results of
operations. Further, we are susceptible to the receipt of counterfeit brands or
unlicensed goods. We could incur liability with manufacturers or other owners
of the brands or trademarked products if we inadvertently receive and sell
counterfeit brands or unlicensed goods and, therefore, it is important that we
establish relationships with reputable vendors to prevent the possibility that
we inadvertently receive counterfeit brands or unlicensed goods. Although we
have a quality assurance team to check merchandise in an effort to assure that
we purchase only authentic brands and licensed goods and are careful in
selecting our vendors, we may receive products that we are prohibited from
selling or incur liability for selling counterfeit brands or unlicensed goods,
which could adversely impact our results of operations.
If our growth strategy is
unsuccessful,
our financial condition and results of operations could suffer and the market
price of our common stock could decline.
Our ability to continue to increase our net sales and
earnings depends, in large part, on opening new stores and operating the new and
existing stores profitably. We opened 39, 42 and 42 new stores in fiscal 2008,
2007 and 2006, respectively. We expect to open approximately 45 new stores in
fiscal 2009. If we are unable to open all of these stores or operate them
profitably, we may not achieve our forecasted sales and earnings growth
targets. The success of our growth strategy is dependent upon, among other
things, the identification of suitable markets and sites for store locations,
the negotiation of acceptable lease terms, the hiring, training and retention
of competent sales personnel, the effective management of inventory to meet the
needs of new and existing stores on a timely basis, the expansion of our
infrastructure to accommodate growth, and generating sufficient operating cash flows
or securing adequate capital on commercially reasonable terms to fund our
expansion plans. Additionally, growth of our store base will place increased
demands on our operating, managerial and administrative resources and may lead
to management and operating inefficiencies, including merchandising, personnel,
distribution and integration problems. These demands and inefficiencies may
cause deterioration in the financial performance of our individual stores and,
therefore, our entire business.
A significant disruption to our
distribution process or southeastern retail locations could have an adverse
effect on our business, financial condition and results of operations.
Our ability to distribute our merchandise to our store
locations in a timely manner is essential to the efficient and profitable
operation of our business. We have distribution centers located in Savannah,
Georgia and Darlington, South Carolina. Any natural disaster or other
disruption to the operation of either of these facilities due to fire,
accidents, weather conditions or any other cause could damage a significant
portion of our inventory and impair our ability to stock our stores adequately.
In addition, the southeastern United States, where our
distribution centers and many of our stores are located, is vulnerable to
significant damage or destruction from hurricanes and tropical storms. Although
we maintain insurance on our stores and other facilities, the economic effects
of a natural disaster that affects our distribution centers and/or a
significant number of our stores could increase our operating expenses, impair
our cash flows and reduce our revenues.
Our sales, inventory levels and
earnings fluctuate on a seasonal basis, which makes our business more
susceptible to adverse events that occur during the first and fourth quarters.
Our sales and earnings are significantly higher during
the first and fourth quarters each year due to the importance of the spring
selling season, which includes Easter, and the fall selling season, which
includes Christmas. Factors negatively affecting us during the first and fourth
quarters, including adverse weather and unfavorable economic conditions, will
have a greater adverse effect on our financial condition than if our business
was less seasonal.
In order to prepare for the spring and fall selling
seasons, we must order and keep in stock significantly more merchandise than
during other parts of the year. This seasonality makes our business more
susceptible to the risk that our inventory will not satisfy actual consumer
demand. In addition, any unanticipated demand imbalances during these peak
shopping seasons could require us to sell excess inventory at a substantial
markdown or fail to satisfy our consumers. In either event, our sales and gross
margins may be lower than historical levels, which could have an adverse effect
on our business, financial condition and results of operations.
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We experience fluctuations and
variability in our comparable store sales and quarterly results of operations
and, as a result, the market price of our common stock may fluctuate
substantially.
Our comparable store sales and quarterly results have
fluctuated significantly in the past based on a number of economic, seasonal
and competitive factors, and we expect them to continue to fluctuate in the
future. Since the beginning of fiscal 2005, our quarter-to-quarter comparable
store sales have ranged from a decrease of 4.2% to an increase of 25.0%. The
most significant fluctuations were due to the unusually high sales following
Hurricanes Katrina, Rita and Wilma. In addition, we may be unable to maintain
historical levels of comparable store sales as we execute our growth strategy
and expand our business. This variability could cause our comparable store
sales and quarterly results to fall below the expectations of securities
analysts or investors, which could result in a decline in the market price of
our common stock.
Our sales could decline as a result
of general economic and other factors outside of our control, such as changes
in consumer spending patterns and declines in employment levels.
Downturns, or the expectation of a downturn, in
general economic conditions, including the effects of unemployment levels,
interest rates, levels of consumer debt, inflation in food and energy prices,
taxation, consumer confidence and other macroeconomic factors, could adversely
affect consumer spending patterns, our sales and our results of operations. The
deterioration in global economic conditions that began in 2008 may continue to
adversely affect our business and could have an adverse impact on our major
suppliers and landlords. Consumer confidence may also be affected by domestic
and international political unrest, acts of war or terrorism, natural disasters
or other significant events outside of our control, any of which could lead to
a decrease in spending by consumers. Because apparel generally is a
discretionary purchase, declines in consumer spending patterns may have a more
negative effect on apparel retailers than some other retailers. Therefore, we
may not be able to maintain our historical rate of growth in revenues and earnings,
or remain as profitable, if there is a continued decline in consumer spending
patterns. In addition, since the majority of our stores are located in the
southeastern United States, our operations are more susceptible to regional
factors than the operations of our more geographically diversified competitors.
Therefore, any adverse economic conditions that have a disproportionate effect
on the southeastern United States could have a greater negative effect on our
sales and results of operations than on retailers with a more geographically
diversified store base.
If we fail to protect our trademarks,
there could be a negative effect on our brand image and limitations on our
ability to penetrate new markets.
We believe that our Citi Trends trademark is
integral to our store design and our success in building consumer loyalty to
our brand. We have registered this trademark with the U.S. Patent and Trademark
Office. We have also registered, or applied for registration of, additional
trademarks with the U.S. Patent and Trademark Office that we believe are
important to our business. We cannot assure you that these registrations will
prevent imitation of our name, merchandising concept, store design or private
label merchandise or the infringement of our other intellectual property rights
by others. Imitation of our name, concept, store design or merchandise in a
manner that projects lesser quality or carries a negative connotation of our
brand image could have an adverse effect on our business, financial condition
and results of operations.
In addition, we cannot assure you that others will not
try to block the manufacture or sale of our private label merchandise by
claiming that our merchandise violates their trademarks or other proprietary
rights since other entities may have rights to trademarks that contain the word
Citi or may have rights in similar or competing marks for apparel and/or
accessories. Although we cannot currently estimate the likelihood of success of
any such lawsuit or ultimate resolution of such a conflict, such a controversy
could have an adverse effect on our business, financial condition and results
of operations.
If we fail to implement and maintain
effective internal controls in our business, there could be an adverse effect
on our business, financial condition, results of operations and stock price.
Section 404 of the Sarbanes Oxley Act of 2002
requires annual management assessments of the effectiveness of our internal
controls over financial reporting and an audit of such controls by our
independent registered public accounting firm. If we fail to maintain the
adequacy of our internal controls, we may be unable to conclude on an ongoing
basis that we have effective internal controls over financial reporting.
Moreover, effective internal controls, particularly those related to revenue
recognition and accounting for inventory/cost of sales, are necessary for us to
produce reliable financial reports and are important in our effort to prevent
financial fraud. If we cannot produce reliable financial reports or prevent
fraud, our business, financial condition and results of operations could be
harmed, investors could lose confidence in our reported financial information,
the market price of our stock could decline significantly and we may be unable
to obtain additional financing to operate and expand our business.
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Adverse trade restrictions may disrupt
our supply of merchandise. We also face various risks because much of our
merchandise is imported from abroad.
We purchase the products we sell directly from over
1,200 vendors, and a substantial portion of this merchandise is manufactured
outside of the United States and imported by our vendors from countries such as
China and other areas of the Far East. The countries in which our merchandise
currently is manufactured or may be manufactured in the future could become
subject to new trade restrictions imposed by the United States or other foreign
governments. Trade restrictions, including increased customs restrictions and
tariffs or quotas, against apparel items, as well as United States or foreign
labor strikes, work stoppages or boycotts, could increase the cost or
reduce the supply of apparel available to us and have an adverse effect on our
business. In addition, our merchandise supply could be impacted if our vendors
imports become subject to existing or future duties and quotas, or if our vendors
face increased competition from other companies for production facilities,
import quota capacity and shipping capacity.
We also face a variety of other risks generally
associated with relying on vendors that do business in foreign markets and
import merchandise from abroad, such as:
·
political instability, natural disasters, or the
threat of terrorism, in particular in countries where our vendors source
merchandise;
·
increases in merchandise costs due to raw material
price inflation or changes in purchasing power caused by fluctuations in
currency exchange rates;
·
enhanced security measures at United States and
foreign ports, which could delay delivery of imports;
·
imposition of new or supplemental duties, taxes, and
other charges on imports;
·
delayed receipt or non-delivery of goods due to the
failure of foreign-source suppliers to comply with import regulations;
·
delayed receipt or non-delivery of goods due to
organized labor strikes or congestion at United States ports; and
·
local business practice and political issues, including
issues relating to compliance with domestic or international labor standards.
The United States may impose new initiatives that
adversely affect the trading status of countries where apparel is manufactured.
These initiatives may include retaliatory duties or other trade sanctions that,
if enacted, would increase the cost of products imported from countries where
our vendors acquire merchandise.
We may continue to experience market conditions
that could adversely affect the valuation and liquidity of our investment
portfolio.
As of January 31, 2009, we had $43.8 million (at
par value) of investments in municipal auction rate securities (ARS) issued
by student loan funding organizations. These securities are high-grade (at
least AA-rated with one or more rating agencies) and approximately 79% are
either guaranteed by the Department of Education under the Federal Family
Education Loan Program (37%) or backed by insurance companies, AMBAC Assurance
Corporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidity
for investors in ARS was provided via an auction process that reset the
interest rate every 35 days, allowing investors to either roll over their
investments or sell them at par value. Beginning in February 2008, there
was insufficient demand for these types of investments during the auctions and,
as a result, these securities became illiquid. Although the auctions for the
securities have failed, certain issuers did redeem, at par value, $8.2 million
of ARS held by us, and one of our investment banks purchased, at par value,
$4.0 million of ARS held by us. In
addition, we have not experienced any defaults and continue to earn and receive
interest on all of the investments that we still own. However, interest rates had declined by the
end of fiscal 2008 to levels that were much lower than earlier in the
year. As a result, interest income may
be significantly lower in 2009 than in 2008.
In November 2008, we accepted an offer (the Right)
from UBS AG (UBS) allowing us to sell at par value our remaining ARS to UBS
at anytime during a two-year period from June 30, 2010 through July 2,
2012. In accepting the Right, we granted
UBS the authority to sell or auction the ARS at par value at any time up until
the expiration date of the Right and released UBS from any claims relating to
the marketing and sale of ARS. We will
continue to earn interest on the ARS until they are liquidated. The obligations of UBS under the Right are
not secured by its assets and do not require UBS to obtain any financing to
purchase the ARS. UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its
obligations under the Right. If UBS does
not have sufficient funding to buy back the ARS and no alternative buyers are
located either through the auction process, issuer redemptions or other means,
then we may not be able to access cash by selling these securities without
incurring a loss of principal.
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Failure
to attract, train, assimilate and retain skilled personnel could have an
adverse effect on our growth strategy and our financial condition.
Like most retailers, we experience significant
employee turnover rates, particularly among store sales associates and
managers, and our continued growth will require us to hire and train even more
new personnel. We therefore must continually attract, hire and train new
personnel to meet our staffing needs. We constantly compete for qualified
personnel with companies in our industry and in other industries. A significant
increase in the turnover rate among our store sales associates and managers
would increase our recruiting and training costs and could decrease our
operating efficiency and productivity.
If we are unable to retain our employees or attract,
train, assimilate or retain other skilled personnel in the future, we may not
be able to service our customers as effectively, thus reducing our ability to
continue our growth and to operate our existing stores as profitably as we have
in the past.
Increases in the minimum wage could
have an adverse effect on our business, financial condition and results of
operations.
The Fair Minimum Wage Act of 2007 became law on May 25,
2007. As a result, the federal minimum wage increased to $5.85 per hour in July 2007,
then to $6.55 per hour in July 2008, and will increase again to $7.25 per
hour in July 2009. Additionally, from time to time, legislative
proposals are made to increase the minimum wage in certain individual states.
Wage rates for many of our employees are slightly above the minimum wage. As
federal and/or state minimum wage rates increase, we may need to increase not
only our employees wage rates that are under the new minimum, but also the
wages paid to our other hourly employees. Any increase in the cost of our labor
could have an adverse effect on our operating costs, financial condition and
results of operations.
Any failure of our management
information systems or the inability of third parties to continue to upgrade
and maintain our systems could have an adverse effect on our business,
financial condition and results of operations.
We depend on the accuracy, reliability and proper
functioning of our management information systems, including the systems used
to track our sales and facilitate inventory management. We also rely on our
management information systems for merchandise planning, replenishment and markdowns,
as well as other key business functions. These functions enhance our ability to
optimize sales while limiting markdowns and reducing inventory risk through
properly marking down slow-selling styles, reordering existing styles and
effectively distributing new inventory to our stores. We do not currently have
redundant systems for all functions performed by our management information
systems. Any interruption in these systems could impair our ability to manage
our inventory effectively, which could have an adverse effect on our business.
To support our growth, we will need to expand our management information
systems, and our failure to link and maintain these systems adequately could
have an adverse effect on our business.
We depend on third-party suppliers to maintain and
periodically upgrade our management information systems, including the software
programs supporting our inventory management functions. If any of these
suppliers is unable to continue to maintain and upgrade these software programs
and/or if we are unable to convert to alternate systems in an efficient and
timely manner, it could result in an adverse effect on our business.
Our ability to attract consumers to
our stores depends on the success of the strip shopping centers and downtown
business districts where our stores are located.
We locate our stores in strip shopping centers, street
front locations and downtown business districts where we believe our consumers
and potential consumers shop. The success of an individual store can depend on
favorable placement within a given strip shopping center or business district.
We cannot control the development of alternative shopping destinations near our
existing stores or the availability or cost of real estate within existing or
new shopping destinations. If our store locations fail to attract sufficient
consumer traffic or we are unable to locate replacement locations on terms
acceptable to us, our business could suffer. If one or more of the anchor
tenants located in the strip shopping centers or business districts where our
stores are located close or leave, or if there is significant deterioration of
the surrounding areas in which our stores are located, our business may be
adversely affected.
Our stock price is subject to
volatility.
Our stock price is volatile. From our initial public
offering in May 2005 through January 31, 2009, the trading price of
our common stock has ranged from $7.01 to $57.85 per share. As a result of this
volatility, investors may not be able to sell their common stock at or above
their respective purchase prices. The market price for our common stock may be
influenced by many factors, including:
·
actual or anticipated fluctuations in our operating
results;
·
changes in securities analysts recommendations or
estimates of our financial performance;
13
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·
changes in market valuations or operating performance
of our competitors or companies similar to ours;
·
announcements by us, our competitors or other
retailers;
·
additions and departures of key personnel;
·
changes in accounting principles;
·
the passage of legislation or other developments
affecting us or our industry;
·
the trading volume of our common stock in the public
market;
·
changes in economic or financial market conditions;
·
natural disasters, terrorist acts, acts of war or
periods of civil unrest; and
·
the realization of some or all of the risks described
in this section entitled Risk Factors.
In addition, the stock markets have experienced
significant price and trading volume fluctuations from time to time, and the
market prices of the equity securities of retailers have been extremely volatile
and have recently experienced sharp price and trading volume changes. These
broad market fluctuations may adversely affect the market price of our common
stock.
Securities analysts may not continue
to cover our common stock or they may issue negative reports, and this may have
an adverse impact on the price of our common stock.
The trading market for our common stock relies, in
part, on the research reports that financial analysts publish about our company
or our industry. Public statements by these securities analysts may
affect our stock price. If any of the analysts who cover us downgrades
the rating of our common stock, our common stock price would likely
decline. If any of these analysts ceases coverage of our common stock, we
could lose visibility in the market, which in turn could cause our common stock
price to decline. Further, if no analysts continue to cover our common
stock, the lack of research coverage may depress the market price of our common
stock.
We do not currently intend to pay
dividends on our common stock.
We have never declared or paid any cash dividends on
our common stock and do not currently intend to do so for the foreseeable
future. In addition, under the terms of
our revolving credit facility, the payment of cash dividends is prohibited.
Provisions in our certificate of
incorporation and by-laws and Delaware law may delay or prevent our acquisition
by a third party.
Our second amended and restated certificate of
incorporation and our amended and restated by-laws contain several provisions
that may make it more difficult for a third party to acquire control of us
without the approval of our board of directors. These provisions include, among
other things, a classified board of directors, advance notice for raising business
or making nominations at stockholder meetings and blank check preferred
stock. Blank check preferred stock enables our board of directors, without
stockholder approval, to designate and issue additional series of preferred
stock with such dividend, liquidation, conversion, voting or other rights,
including convertible securities with no limitations on conversion, as our
board of directors may determine, including rights to dividends and proceeds in
a liquidation that are senior to the common stock.
We are also subject to several provisions of the
Delaware General Corporation Law that could delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our stockholders receiving a premium over the market price
for their common stock or may otherwise be in the best interests of our
stockholders.
ITEM
1B.
UNRESOLVED STAFF
COMMENTS
None.
14
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ITEM
2.
PROPERTIES
Store Locations
As of January 31, 2009, we operated 357 stores
located in 22 states. Our stores average approximately 10,200 square feet of
selling space and are typically located in neighborhood strip shopping centers
and downtown business districts that are convenient to low- to moderate-income
customers. Originally, our stores were located in the Southeast, but in recent
years we expanded into the Mid-Atlantic and Midwest regions and the state of
Texas.
We have no franchising relationships, and all of the
stores are company operated. All existing 357 stores, totaling
approximately 4.45 million total square feet and 3.65 million selling
square feet, are leased under operating leases. Additionally, as of March 6,
2009, we have signed leases for 11 new stores to be opened during fiscal 2009
aggregating approximately 122,000 total selling square feet. The typical store
lease is for five years with an option to extend the lease term for an additional
five-year period. Nearly all store leases provide us the right to cancel
following an initial three-year period in the event the store does not meet
pre-determined sales levels. The table below sets forth the number of stores in
each of the 22 states in which we operated as of January 31, 2009:
Alabama25
Arkansas7
Florida30
Georgia52
Illinois4
Indiana7
Kansas1
Kentucky3
Louisiana29
Maryland5
Michigan11
Mississippi22
Missouri4
North Carolina34
Ohio13
Oklahoma2
Pennsylvania2
South Carolina39
Tennessee13
Texas37
Virginia16
Wisconsin1
Support Center Facilities
We own an approximately 170,000 square-foot facility
in Savannah, Georgia, which serves as one of our two distribution centers. We
own another facility in Savannah totaling approximately 70,000 square feet,
which serves as our headquarters and, to a lesser extent, as a merchandise
storage facility. We own an approximately 550,000 square-foot facility in
Darlington, South Carolina, which serves as a distribution center. We expect
that our existing distribution centers will support our growth plans through
2010. In addition, we currently lease an 1,800 square-foot office in New York
City which is used for buyer operations and meetings with vendors.
15
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ITEM 3.
LEGAL PROCEEDINGS
We are from time to time involved in various legal
proceedings incidental to the conduct of our business, including claims by
customers, employees or former employees. While litigation is subject to
uncertainties and the outcome of any litigated matter is not predictable, we
are not aware of any legal proceedings pending or threatened against us that we
expect to have a material adverse effect on our financial condition, results of
operations or liquidity.
ITEM
4.
SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security
holders through the solicitation of proxies or otherwise during the fourth
quarter of fiscal 2008.
PART II
ITEM 5.
MARKET FOR THE
REGISTRANTS
COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Stock Market
under the symbol CTRN. The following table shows the high and low per share
prices of our common stock for the periods indicated.
|
|
High
|
|
Low
|
|
2007
|
|
|
|
|
|
First Quarter
|
|
48.00
|
|
38.20
|
|
Second Quarter
|
|
42.88
|
|
32.44
|
|
Third Quarter
|
|
38.35
|
|
16.22
|
|
Fourth Quarter
|
|
17.97
|
|
10.76
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
First Quarter
|
|
22.73
|
|
12.42
|
|
Second Quarter
|
|
28.12
|
|
17.72
|
|
Third Quarter
|
|
25.88
|
|
11.33
|
|
Fourth Quarter
|
|
17.46
|
|
7.01
|
|
On March 30, 2009,
the last reported sale price of our common stock on The NASDAQ Stock Market was
$22.03 per share. On March 30, 2009, there were 121 holders of record and
approximately 2,000 beneficial holders of our common stock.
We have never declared or paid any cash dividends on
our common stock and do not intend to pay any cash dividends on our common
stock in the foreseeable future. In addition, under the terms of our revolving
credit facility, the payment of cash dividends is prohibited.
Recent Sales of Unregistered
Securities.
None.
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers.
None.
Equity Compensation Plan Information.
See Item 12.
16
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Stock Performance Graph
Set forth below is a line graph comparing the last
forty-four months percentage change in the cumulative total stockholder return
on shares of our common stock against (i) the cumulative total return of
companies listed on The NASDAQ Stock Market and (ii) the cumulative total
return of the NASDAQ Retail Trade. The period compared commences May 18,
2005, the date on which our common stock began trading on The NASDAQ Stock
Market, and ends January 31, 2009. This graph assumes that $100 was
invested on May 18, 2005 in our common stock and in each of the market
index and the industry index, and that all cash distributions were reinvested.
Our common stock price performance shown on the graph is not indicative of
future price performance.
COMPARISON OF 44 MONTH CUMULATIVE TOTAL RETURN*
Among Citi Trends, Inc., The NASDAQ Composite Index
And The NASDAQ Retail Trade Index
*$100
invested on 5/18/05 in stock or 4/30/05 in index, including reinvestment of
dividends. Fiscal year ending January 31.
Total Return Analysis
|
|
5/18/05
|
|
1/06
|
|
1/07
|
|
1/08
|
|
1/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citi Trends, Inc.
|
|
100.00
|
|
292.99
|
|
251.02
|
|
87.07
|
|
60.70
|
|
NASDAQ Composite
|
|
100.00
|
|
121.23
|
|
132.21
|
|
127.35
|
|
77.32
|
|
NASDAQ Retail Trade
|
|
100.00
|
|
134.88
|
|
131.94
|
|
143.14
|
|
82.15
|
|
17
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
Selected
Financial and Operating Data
The following table provides selected financial and
operating data for each of the fiscal years in the five-year period ended January 31,
2009, including: (a) statement of income data for each such period, (b) additional
operating data for each such period and (c) balance sheet data as of the
end of each such period. The statement of income data for the fiscal years
ended January 31, 2009, February 2, 2008 and February 3, 2007
and the balance sheet data as of January 31, 2009 and February 2,
2008 are derived from our audited financial statements included in Item 8 that
have been audited by KPMG LLP, an independent registered public accounting
firm. The statement of income data for the fiscal years ended January 28,
2006 and January 29, 2005 and the balance sheet data as of February 3,
2007, January 28, 2006 and January 29, 2005 are derived from our
audited financial statements that are not included in this Report. The selected
financial and operating data set forth below should be read in conjunction
with, and are qualified in their entirety by reference to, the
section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 and our financial
statements and related notes set forth in the financial pages of this
Report. Historical results are not necessarily indicative of results to be
expected for any future period.
|
|
Fiscal Year Ended (1)
|
|
|
|
January 31,
|
|
February 2,
|
|
February 3,
|
|
January 28,
|
|
January 29,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
488,202
|
|
$
|
437,515
|
|
$
|
381,918
|
|
$
|
289,804
|
|
$
|
203,442
|
|
Cost of sales
|
|
301,867
|
|
278,783
|
|
235,744
|
|
178,953
|
|
127,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
186,335
|
|
158,732
|
|
146,174
|
|
110,851
|
|
76,134
|
|
Selling, general and administrative expenses
|
|
147,009
|
|
127,470
|
|
107,535
|
|
83,559
|
|
58,722
|
|
Depreciation and amortization
|
|
16,261
|
|
12,583
|
|
8,326
|
|
6,087
|
|
4,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
23,065
|
|
18,679
|
|
30,313
|
|
21,205
|
|
12,540
|
|
Interest income (expense), net (2)
|
|
2,188
|
|
1,914
|
|
1,655
|
|
546
|
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
25,253
|
|
20,593
|
|
31,968
|
|
21,751
|
|
11,808
|
|
Income tax expense
|
|
7,870
|
|
6,379
|
|
10,617
|
|
7,551
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,383
|
|
$
|
14,214
|
|
$
|
21,351
|
|
$
|
14,200
|
|
$
|
7,257
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
$
|
1.02
|
|
$
|
1.57
|
|
$
|
1.21
|
|
$
|
0.78
|
|
Diluted
|
|
$
|
1.22
|
|
$
|
1.00
|
|
$
|
1.51
|
|
$
|
1.08
|
|
$
|
0.67
|
|
Weighted average shares used to compute net income per share (3):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,131,077
|
|
13,946,342
|
|
13,574,718
|
|
11,746,866
|
|
9,302,800
|
|
Diluted
|
|
14,268,788
|
|
14,223,229
|
|
14,138,063
|
|
13,148,602
|
|
10,879,388
|
|
Additional Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores:
|
|
|
|
|
|
|
|
|
|
|
|
Opened during period
|
|
39
|
|
42
|
|
42
|
|
36
|
|
40
|
|
Closed during period
|
|
1
|
|
0
|
|
0
|
|
1
|
|
1
|
|
Open at end of period
|
|
357
|
|
319
|
|
277
|
|
235
|
|
200
|
|
Selling square footage at end of period
|
|
3,654,378
|
|
3,168,866
|
|
2,628,539
|
|
2,123,684
|
|
1,715,943
|
|
Comparable store sales increase (4)
|
|
0.0
|
%
|
1.0
|
%(5)
|
8.2
|
%(5)
|
16.7
|
%(6)
|
3.0
|
%
|
Average sales per store (7)
|
|
$
|
1,444
|
|
$
|
1,468
|
|
$
|
1,492
|
|
$
|
1,332
|
|
$
|
1,127
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,516
|
|
$
|
6,203
|
|
$
|
7,707
|
|
$
|
3,995
|
|
$
|
6,812
|
|
Short-term investments
|
|
|
|
56,165
|
|
65,956
|
|
54,458
|
|
|
|
Long-term investments
|
|
43,825
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
240,789
|
|
210,177
|
|
192,107
|
|
142,205
|
|
65,800
|
|
Total liabilities
|
|
82,582
|
|
72,030
|
|
73,898
|
|
58,456
|
|
42,036
|
|
Total stockholders equity
|
|
158,207
|
|
138,147
|
|
118,209
|
|
83,749
|
|
23,764
|
|
18
Table of Contents
(1)
Our fiscal year ends on the Saturday closest to January 31
of each year. The years ended January 31, 2009, February 2, 2008, February 3,
2007, January 28, 2006 and January 29, 2005 are referred to as fiscal
2008, 2007, 2006, 2005 and 2004, respectively. Fiscal 2006 is comprised of 53
weeks. Fiscal years 2008, 2007, 2005 and 2004 are each comprised of 52 weeks.
(2)
Series A Preferred Stock, which was redeemed
using a portion of the net proceeds from the IPO, was reclassified as debt as
of the second quarter of fiscal 2003, in accordance with the Financial
Accounting Standards Boards (FASB) Statement of Financial Accounting
Standards (SFAS) No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
.
The amount of dividends treated as interest expense was $0 in fiscal 2008, 2007
and 2006, $100,000 in fiscal 2005 and $324,000 in fiscal 2004.
(3)
Reflects 26 for 1 stock split completed in May 2005.
(4)
Stores included in the comparable store sales
calculation for any period are those stores that were opened prior to the
beginning of the preceding fiscal year and were still open at the end of such
period. Relocated stores and expanded stores are included in the comparable
store sales results.
(5)
The Company is reporting comparable store sales on a
comparable store and comparable weeks basis; for fiscal 2007, the 52 weeks
ended February 2, 2008 are compared to the 52 weeks ended February 3,
2007; for fiscal 2006, the 53 weeks ended February 3, 2007 are compared to
the 53 weeks ended February 4, 2006.
(6)
This data includes the positive impact of
post-hurricane sales as a result of Hurricanes Katrina, Rita and Wilma during
the months of September 2005 through January 2006.
(7)
Average sales per store is defined as net sales divided
by the average of stores open at the end of the prior period and stores open at
the end of the current period.
19
Table of Contents
ITEM 7.
MANAGEMENTS DISCUSSION
AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the section entitled Selected Financial and Operating
Data and our audited financial statements and the respective related notes
included elsewhere in this Annual Report on Form 10-K. This discussion
may contain forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth under the
section entitled Risk Factors and elsewhere in this Report, our actual
results may differ materially from those anticipated in these
forward-looking statements.
Overview
We are a rapidly growing, value-priced retailer of
urban fashion apparel and accessories for the entire family. Our merchandise
offerings are designed to appeal to the preferences of fashion conscious
consumers, particularly African-Americans. Originally our stores were located in
the Southeast, and in recent years we expanded into the Mid-Atlantic and
Midwest regions and the state of Texas. We operate 357 stores in both urban and
rural markets in 22 states.
We are pursuing an aggressive store growth strategy
and believe that the addition of new stores will be the primary source of
future growth. In fiscal 2008 we opened 39 new stores, entering the
Philadelphia, Pennsylvania and Kansas City, Kansas markets for the first time.
We expect to open approximately 45 new stores in fiscal 2009. Approximately 85%
of the new stores we intend to open in fiscal 2009 will be located in states
that we currently serve.
We measure performance using key operating statistics.
One of the main performance measures we use is comparable store sales growth.
We define a comparable store as a store that has been opened for an entire
fiscal year. Therefore, a store will not be considered a comparable store until
its 13th month of operation at the earliest or until its 24th month at the
latest. As an example, stores opened in fiscal 2007 and fiscal 2008 were not
considered comparable stores in fiscal 2008. Relocated and expanded stores are
included in the comparable store sales results. We also use other operating
statistics, most notably average sales per store, to measure our performance.
As we typically occupy existing space in established shopping centers rather
than sites built specifically for our stores, store square footage (and
therefore sales per square foot) varies by store. We focus on overall store
sales volume as the critical driver of profitability. The average sales per
store has increased over the years, as we have increased comparable store sales
and opened new stores that are generally larger than our historical store base.
Average sales per store have increased from $0.8 million in fiscal 2000 to
$1.4 million in fiscal 2008. In addition to sales, we measure gross profit as a
percentage of sales and store operating expenses, with a particular focus on
labor, as a percentage of sales. These results translate into store level
contribution, which we use to evaluate overall performance of each individual
store. Finally, we monitor corporate expenses against budgeted amounts.
Basis of the Presentation
Net sales consist of store sales and layaway fees, net
of returns by customers. Cost of sales consists of the cost of products we sell
and associated freight costs. Selling, general and administrative expenses are
comprised of store costs, including payroll and store occupancy costs,
corporate and distribution center costs and advertising costs. We operate on a
52- or 53-week fiscal year, which ends on the Saturday closest to January 31.
Each of our fiscal quarters consists of four 13-week periods, with an extra
week added to the fourth quarter every five to six years. The years ended January 31,
2009, February 2, 2008, February 3, 2007, January 28, 2006 and January 29,
2005 are referred to as fiscal 2008, 2007, 2006, 2005 and 2004, respectively.
Fiscal year 2006 is comprised of 53 weeks. Fiscal years 2008, 2007, 2005
and 2004 are each comprised of 52 weeks.
Results of Operations
The following discussion of our financial performance
is based on the financial statements set forth in the financial pages of
this Report. The nature of our business is seasonal. Historically, sales in the
first and fourth quarters have been higher than sales achieved in the second
and third quarters of the fiscal year. Expenses and, to a greater extent,
operating income, vary by quarter. Results of a period shorter than a full year
may not be indicative of results expected for the entire year.
Furthermore, the seasonal nature of our business may affect comparisons
between periods.
20
Table of Contents
Net Sales and
Additional Operating Data
The following table sets forth, for the periods
indicated, selected statement of income data expressed both in dollars and as a
percentage of net sales:
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
February 2,
|
|
February 3,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
488,202
|
|
100.0
|
%
|
$
|
437,515
|
|
100.0
|
%
|
$
|
381,918
|
|
100.0
|
%
|
Cost of sales
|
|
301,867
|
|
61.8
|
%
|
278,783
|
|
63.7
|
%
|
235,744
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
186,335
|
|
38.2
|
%
|
158,732
|
|
36.3
|
%
|
146,174
|
|
38.3
|
%
|
Selling, general and administrative expenses
|
|
147,009
|
|
30.1
|
%
|
127,470
|
|
29.1
|
%
|
107,535
|
|
28.2
|
%
|
Depreciation and amortization
|
|
16,261
|
|
3.4
|
%
|
12,583
|
|
2.9
|
%
|
8,326
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
23,065
|
|
4.7
|
%
|
18,679
|
|
4.3
|
%
|
30,313
|
|
7.9
|
%
|
Interest income
|
|
2,495
|
|
0.5
|
%
|
2,383
|
|
0.5
|
%
|
2,014
|
|
0.5
|
%
|
Interest expense
|
|
(307
|
)
|
(0.0
|
)%
|
(469
|
)
|
(0.1
|
)%
|
(359
|
)
|
(0.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
25,253
|
|
5.2
|
%
|
20,593
|
|
4.9
|
%
|
31,968
|
|
8.4
|
%
|
Income tax expense
|
|
7,870
|
|
1.6
|
%
|
6,379
|
|
1.5
|
%
|
10,617
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,383
|
|
3.6
|
%
|
$
|
14,214
|
|
3.4
|
%
|
$
|
21,351
|
|
5.6
|
%
|
The following table provides information, for the
periods indicated, about the number of total stores open at the beginning of
the period, stores opened and closed during each period, total stores open at
the end of each period and comparable store sales for the periods:
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
February 2,
|
|
February 3,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Total stores open, beginning of period
|
|
319
|
|
277
|
|
235
|
|
New stores
|
|
39
|
|
42
|
|
42
|
|
Closed stores
|
|
1
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
Total stores open, end of period
|
|
357
|
|
319
|
|
277
|
|
|
|
|
|
|
|
|
|
Comparable store sales increase (1)
|
|
0.0
|
%
|
1.0
|
%(2)
|
8.2
|
%(2)
|
(1)
Stores included in the comparable store sales
calculation for any period are those stores that were opened prior to the
beginning of the preceding fiscal year and were still open at the end of such
period. Relocated stores and expanded stores are included in the comparable
store sales results.
(2)
The Company is reporting comparable store sales on a
comparable store and comparable weeks basis; for fiscal 2007, the 52 weeks
ended February 2, 2008 are compared to the 52 weeks ended February 3,
2007; for fiscal 2006, the 53 weeks ended February 3, 2007 are compared to
the 53 weeks ended February 4, 2006.
21
Table of Contents
Fiscal 2008
Compared to Fiscal 2007
Net Sales.
Net sales increased $50.7 million,
or 11.6%, to $488.2 million in fiscal 2008 from $437.5 million in
fiscal 2007. The increase in net sales was due to 39 new store openings in
fiscal 2008 and 42 new store openings in fiscal 2007 for which there was not a
full year of sales in 2007, partially offset by the closing of one store in
2008. Comparable store sales were up less than 0.1% in fiscal 2008. The
39 stores opened in fiscal 2008 accounted for $30.2 million of the
increase in sales, the 42 stores opened in fiscal 2007 accounted for
$20.7 million of the increase, and the 276 comparable stores contributed
$0.3 million in additional sales, while the closed store had the effect of
reducing sales by $0.5 million. Comparable stores include locations that
have been relocated or expanded. There were 9 stores relocated or expanded in
fiscal 2008 and 12 stores relocated or expanded in fiscal 2007. Sales in these
comparable relocated and expanded stores increased 6.2% in fiscal 2008, while
sales in all other comparable stores decreased 0.6%.
The negligible increase in comparable store sales
included a 1.1% increase in the average customer purchase, offset by a similar
decrease in the number of customer transactions. Comparable store sales changes
by major merchandise class were as follows: Childrens +8%; Home +5%; Mens
-2%; Womens -3%; Accessories -8%.
Gross Profit.
Gross profit increased
$27.6 million, or 17.4%, to $186.3 million in fiscal 2008 from
$158.7 million in fiscal 2007. The increase in gross profit is a result of
the increase in sales, together with an improvement in the gross margin from
36.3% in fiscal 2007 to 38.2% in fiscal 2008. This increase in gross margin
resulted primarily from merchandise markdowns being approximately 140 basis
points lower as a percentage of sales due to improved management of inventory
levels. In addition, gross margin benefited from inventory shrinkage being
approximately 40 basis points lower due to the steps taken in the past year to
better control inventory shrinkage, including, a reduction in the span of
control given to our district managers in order to increase the level of supervision,
a greater focus on problem stores by the store operations and loss prevention
departments, the addition of sophisticated surveillance systems in high
shrinkage stores, and lower inventory levels.
Selling, General and Administrative
Expenses.
Selling,
general and administrative expenses increased $19.5 million, or 15.3%, to
$147.0 million in fiscal 2008 from $127.5 million in fiscal 2007. The
increase in these expenses was due primarily to additional store level,
distribution and corporate costs arising from the opening of 39 new stores in
fiscal 2008. Selling, general and administrative expenses as a percentage of
net sales increased to 30.1% in fiscal 2008 from 29.1% in fiscal 2007, due
primarily to the deleveraging effect that occurs on expenses as a percentage of
sales when comparable store sales increase at a rate that is lower than the
rate of inflation on expenses. In particular, payroll-related costs
increased 80 basis points due to this deleveraging effect, together with higher
incentive compensation expense resulting from better results in relation to
goals, and an increase in store supervision costs in connection with a
reduction in the span of control given to our district managers. These
increases in the expense percentage were partially offset by the benefit in
this years comparison of approximately $600,000 of expenses last year related
to a 2007 secondary stock offering and stock registration of which the Company
received no proceeds.
Depreciation and Amortization.
Depreciation and amortization expense
increased $3.7 million, or 29.2%, to $16.3 million in fiscal 2008 from $12.6
million in fiscal 2007, as the result of capital expenditures incurred for new
and relocated/expanded stores and the expansion of the Darlington distribution
center.
Interest Income.
Interest income increased to $2.5
million in fiscal 2008 from $2.4 million in fiscal 2007 due primarily to higher
interest rates earned on our investments in auction rate securities once the
auctions of such securities began to fail in February 2008 and due to an
increase in market rates for a short period of time during the banking crisis
in the third quarter. By the end of fiscal 2008, market interest rates had
declined from levels earlier in the year, which will likely cause interest
income in fiscal 2009 to be significantly lower than in fiscal 2008.
Interest Expense
. Interest expense decreased to $307,000
in fiscal 2008 from $469,000 in fiscal 2007 due to the normal decline in the
interest portion of payments on our capital lease obligations as the principal
portion of such obligations is reduced.
Income Tax Expense.
Income tax expense increased $1.5
million, or 23.4%, to $7.9 million in fiscal 2008 from $6.4 million in
fiscal 2007 due primarily to higher pretax earnings in 2008. The effective
income tax rates for fiscal 2008 and fiscal 2007 were virtually unchanged at
31.2% and 31.0%, respectively. If interest income earned on tax-free
investments declines as expected in 2009, it will cause the effective income
tax rate to increase due to the reduction in tax-free income.
Net Income.
Net income increased 22.3% to
$17.4 million in fiscal 2008 from $14.2 million in fiscal 2007 due to
the factors discussed above.
Fiscal 2007
Compared to Fiscal 2006
Net Sales.
Net sales increased $55.6 million,
or 14.6%, to $437.5 million in fiscal 2007 from $381.9 million in
fiscal 2006. The increase in net sales was due to 42 new store openings in
fiscal 2007, 42 new store openings in fiscal 2006 for which there was not a
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full year of sales in 2006, and a comparable store sales increase of
1.0% (note that 1.0% is based on a 52-week fiscal 2007 compared to the
comparable 52 weeks in the prior year), partially offset by the 53-week fiscal
2006 having an extra week. The 42 stores opened in fiscal 2007 accounted
for $40.3 million of the total increase in sales, the 42 stores opened in
fiscal 2006 accounted for $21.4 million of the increase, and the 235
comparable stores contributed $3.5 million of the increase in sales on a
comparable 52-week versus 52-week basis, but had a $6.1 million decrease on a
fiscal year basis due to the extra week in fiscal 2006. Sales in the extra week
in fiscal 2006 were $9.6 million. The increase in comparable store sales
on a comparable weeks basis included a slight increase in the number of items
per sale transaction, partially offset by slight declines in the number of
transactions and the average item price. Comparable store sales changes
by major merchandise class were as follows:
Childrens +4%; Home +1%; Womens 0%; Mens -1%; Accessories -2%. Comparable stores include locations that have
been relocated or expanded. There were
12 stores relocated or expanded in fiscal 2007 and 7 stores relocated or
expanded in fiscal 2006. Sales in these
comparable relocated and expanded stores increased 18.1% in fiscal 2007, while
sales in all other comparable stores decreased 0.6%.
Gross
Profit.
Gross profit
increased $12.5 million, or 8.6%, to $158.7 million in fiscal 2007
from $146.2 million in fiscal 2006. 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 36.3% in fiscal
2007 from 38.3% in fiscal 2006 due to a 210 basis points increase in
merchandise markdowns as a percentage of sales.
The increase in markdowns occurred in the third and fourth quarters due
to negative comparable store sales during the months of September and October in
the third quarter and during the critical month of December in the fourth
quarter. With comparable store sales
being negative during those months, higher clearance markdowns were
necessary. Inventory shrinkage was 20
basis points higher year-over-year; however, the increase in shrinkage 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
$20.0 million, or 18.5%, to $127.5 million in fiscal 2007 from
$107.5 million in fiscal 2006. The increase in these expenses was due
primarily to additional store level, distribution and corporate costs arising
from the opening of 42 new stores in fiscal 2007 and approximately $600,000 of
expenses related to a 2007 secondary stock offering and stock registration of
which the Company received no proceeds. Selling, general and
administrative expenses as a percentage of net sales increased to 29.1% in
fiscal 2007 from 28.2% in fiscal 2006, due primarily to the deleveraging effect
that occurs on expenses as a percentage of sales when comparable store sales
increase at a rate that is lower than the rate of inflation on expenses.
In particular, occupancy expenses as a percent of sales were up 60 basis points
and payroll was 40 basis points higher.
Depreciation
and Amortization.
Depreciation
and amortization expense increased $4.3 million, or 51.1%, to $12.6 million in
fiscal 2007 from $8.3 million in fiscal 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 $2.4 million in fiscal 2007 from $2.0 million in fiscal
2006 due to higher interest rates and a slightly higher average investment
balance throughout the year.
Interest
Expense
. Interest
expense increased to $469,000 in fiscal 2007 from $359,000 in fiscal 2006 due
to the addition of a $4.8 million capital equipment lease in fiscal 2006.
Income Tax
Expense.
Income tax
expense decreased $4.2 million, or 39.9%, to $6.4 million in fiscal 2007 from
$10.6 million in fiscal 2006. The effective income tax rates for fiscal
2007 and fiscal 2006 were 31.0% and 33.2%, respectively. The tax rate decreased
in fiscal 2007 primarily as a result of continued increases in income tax
credits and tax-exempt interest income, while pretax income was decreasing.
Net
Income.
Net income
decreased 33.4% to $14.2 million in fiscal 2007 from $21.4 million in
fiscal 2006 due to the factors discussed above.
Liquidity
and Capital Resources
Our cash requirements are
primarily for working capital, expansion of our distribution infrastructure,
construction of new stores, remodeling of our existing stores and the
improvement of our information systems. Historically, we have met these cash
requirements from cash flow from operations, short-term trade credit,
borrowings under our revolving lines of credit, long-term debt and capital leases,
and cash proceeds from our initial public offering. We expect to be able
to meet future cash requirements with cash flow from operations, short-term
trade credit, existing cash balances and, if necessary, borrowings under our
revolving credit facility (described below). In fiscal 2008, there was no need
to borrow under the credit facility, including during the seasonal build of
inventory in advance of the Christmas season. Due to our strong cash and cash
equivalents position at January 31, 2009 ($33.5 million), we believe that
we will likely not have to borrow under the credit facility during fiscal 2009.
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Discussion
of Cash Flows
Fiscal 2008 Compared to Fiscal 2007
As of January 31, 2009,
we had total cash and cash equivalents of $33.5 million compared with
total cash and cash equivalents of $6.2 million as of February 2,
2008. The most significant factors in the increase in our net liquidity
position during fiscal 2008 were positive cash flow from operations and net
sales/redemptions of investment securities, partially offset by capital
expenditures.
Inventory represented 35.8%
of our total assets as of January 31, 2009. Managements ability to manage
our inventory can have a significant impact on our cash flows from operations
during a given interim period or fiscal year. In addition, inventory purchases
can be seasonal in nature, such as the purchase of warm-weather or
Christmas-related merchandise.
Cash Flows
Provided by Operating Activities
. Net cash provided by operating activities was $39.6 million in
fiscal 2008 compared to $16.6 million in fiscal 2007. The main source of cash
provided during fiscal 2008 was net income, adjusted for noncash expenses such
as depreciation and amortization, deferred income taxes, loss on disposal of
property and equipment, and stock-based compensation expense, totaling
$35.4 million. In addition, cash
provided by operating activities benefited from accounts payable increasing
$8.7 million, despite inventory increasing only $3.8 million, due to improved
inventory turnover which caused a greater percentage of inventory purchases to
be included in accounts payable at the end of fiscal 2008. The only significant
use of cash, other than inventory, was a $4.1 million increase in prepaid and
other current assets due to (1) an increase in receivables from landlords
for tenant improvement reimbursements, as the result of an effort by us to take
on more of the construction work for new store leasehold improvements, in order
to better control the projects, in return for reimbursements from the
landlords, and (2) normal increases in credit card receivables, prepaid
rent and prepaid insurance due to the Companys growth.
Cash Flows
Used in Investing Activities.
Cash used in investing activities was $11.4 million in fiscal
2008 compared to $20.3 million in fiscal 2007. Cash used for the purchase
of property and equipment was $7.1 million lower during fiscal 2008 than in
fiscal 2007 due primarily to the larger portion of the capital expenditures
related to the expansion of the Darlington, South Carolina distribution center
occurring in fiscal 2007. In addition,
fiscal 2007 capital expenditures included the purchase of our corporate
headquarters/inventory storage facility in Savannah, Georgia that had
previously been leased. Sales/redemptions of municipal auction rate securities,
net of purchases, provided cash of $11.7 million and $9.8 million in 2008 and
2007, respectively.
Cash Flows
(Used in)/Provided by Financing Activities.
Cash used in financing activities was $0.9
million in fiscal 2008 and cash provided by financing activities was
$2.2 million in fiscal 2007. Cash used in financing activities consisted
of payments on capital lease obligations totaling $1.6 million and $1.8 million
in 2008 and 2007, respectively. In
addition, cash totaling $1.0 million was used in fiscal 2008 to settle a stock
option exercise. Cash provided by financing
activities consisted primarily of the tax benefit from stock option exercises
of $1.2 million in 2008 and $3.5 million in 2007.
Until required for other
purposes, we maintain cash and cash equivalents in deposit or money market
accounts.
Fiscal 2007 Compared to Fiscal 2006
As of February 2, 2008,
we had total cash and cash equivalents of $6.2 million compared with total
cash and cash equivalents of $7.7 million as of February 3, 2007. The
most significant factors in the change in our net liquidity position during
fiscal 2007 were positive cash flow from operations and net sales of investment
securities, offset by capital expenditures.
Inventory represented 39.2%
of our total assets as of February 2, 2008. Managements ability to manage
our inventory can have a significant impact on our cash flows from operations
during a given interim period or fiscal year. In addition, inventory purchases
can be seasonal in nature, such as the purchase of warm-weather or
Christmas-related merchandise.
Cash Flows
Provided by Operating Activities
. Net cash provided by operating activities was $16.6 million in
fiscal 2007 compared to $19.1 million in fiscal 2006. The main sources of cash
provided during fiscal 2007 were net income, adjusted for noncash expenses such
as depreciation and amortization, deferred income taxes, loss on disposal of
property and equipment, and noncash stock-based compensation expense, totaling
$27.0 million, and an increase in accrued expenses and other long-term
liabilities of $3.8 million. Uses of cash consisted of a $9.1 million
increase in inventory, a $3.3 million decrease in accounts payable and a $1.1
million increase in prepaid assets. The
change in income taxes payable was substantially offset by excess tax benefits
from stock option exercises. Accounts payable did not increase as would
typically be the case when inventory increases, because inventory turns slowed
down, particularly over the last five months of fiscal 2007 when comparable
store sales were negative. The decline in inventory turns forced us to take
significantly more merchandise markdowns, as discussed in the Fiscal 2007
Compared to Fiscal 2006 - Gross Profit section above, and caused us to slow
down purchases in the last half of the year. This reduction in purchases
contributed to the decrease in accounts payable at year end. Additionally, we
took advantage of more opportunistic purchases of next-season-buy
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merchandise in 2007. Such purchases are paid for well in advance
of shipping the merchandise to our stores, causing a reduction in inventory
turns and in accounts payable as a percentage of inventory.
Cash Flows
Used in Investing Activities.
Cash used in investing activities was $20.3 million in fiscal
2007 compared to $26.9 million in fiscal 2006. Cash used for the purchase
of property and equipment increased during fiscal 2007 compared to fiscal 2006
due primarily to capital expenditures in the amount of $30.1 million in
fiscal 2007 for the build out of 42 new stores and twelve store
relocations/expansions, purchase of our corporate headquarters/inventory
storage facility in Savannah, Georgia that had previously been leased,
construction work related to the expansion of the Darlington, South Carolina
distribution center, and other general corporate purposes, compared to
$20.5 million ($15.7 million, excluding equipment financed by capital
leases) in fiscal 2006 for the build out of 42 new stores and seven
relocations/expansions, purchase of markdown scanners, build out of our
distribution center in Darlington, and other general corporate purposes. Net
sales of municipal auction rate securities provided cash of $9.8 million in
2007, while net purchases of such securities used cash of $11.5 million in
2006.
Cash Flows
Provided by Financing Activities.
Cash provided by financing activities was $2.2 million in fiscal
2007 and $11.5 million in fiscal 2006. Financing activities consisted
primarily of the tax benefit from stock option exercises of $3.5 million in
2007 and $12.2 million in 2006, partially offset by repayments on long-term
debt and capital lease obligations totaling $1.8 million and $0.8 million in
2007 and 2006, respectively.
Liquidity
Sources, Requirements and Contractual Cash Requirements and Commitments
Our principal sources of
liquidity consist of: (i) cash and cash equivalents (which equaled
$33.5 million as of January 31, 2009); (ii) short-term trade
credit; (iii) cash generated from operations on an ongoing basis as we
sell our merchandise inventory; and (iv) a $20 million revolving credit
facility. Trade credit represents a significant source of financing for
inventory purchases and arises from customary payment terms and trade practices
with our vendors. Historically, our principal liquidity requirements have
been for working capital and capital expenditure needs.
As of January 31, 2009,
we had $43.8 million (at par value) of investments in municipal auction rate
securities (ARS) issued by student loan funding organizations. These
securities are high-grade (at least AA-rated with one or more rating agencies)
and approximately 79% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (31%) or MBIA Insurance Corporation
(11%). Historically, liquidity for investors in ARS was provided via an auction
process that reset the interest rate every 35 days, allowing investors to
either roll over their investments or sell them at par value. Beginning in February 2008,
there was insufficient demand for these types of investments during the
auctions and, as a result, these securities became illiquid. Although the
auctions for the securities have failed, certain issuers did redeem, at par
value, $8.2 million of ARS held by us, and one of our investment banks
purchased, at par value, $4.0 million of ARS held by us. In addition, we have not experienced any
defaults and continue to earn and receive interest on all of the investments
that we still own.
In November 2008, we
accepted an offer (the Right) from UBS AG (UBS) allowing us to sell at par
value our remaining ARS to UBS at anytime during a two-year period from June 30,
2010 through July 2, 2012. In
accepting the Right, we granted UBS the authority to sell or auction the ARS at
par value at any time up until the expiration date of the Right and released
UBS from any claims relating to the marketing and sale of ARS. We will continue to earn interest on the ARS
until they are liquidated. The
obligations of UBS under the Right are not secured by its assets and do not
require UBS to obtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will
have sufficient financial resources to satisfy its obligations under the
Right. If UBS does not have sufficient
funding to buy back the ARS and no alternative buyers are located either
through the auction process, issuer redemptions or other means, then we may not
be able to access cash by selling these securities without incurring a loss of
principal.
We believe that our existing
sources of liquidity will be sufficient to fund our operations and anticipated
capital expenditures for at least the next 12 months.
We anticipate that capital
expenditures will be approximately $18 million to $20 million in
fiscal 2009. These expenditures will relate principally to the capital costs
associated with approximately 45 stores that we plan to open in fiscal 2009. We
plan to finance these capital expenditures with cash flow from operations and
existing cash balances and, if necessary, borrowings under our $20 million
revolving credit facility.
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The following table
discloses aggregate information about our contractual obligations as of January 31,
2009 and the periods in which payments are due:
|
|
Payments Due by Period
|
|
|
|
|
|
Less than
|
|
1-3
|
|
3-5
|
|
More than
|
|
|
|
Total
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
|
|
(in thousands)
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
$
|
1,475
|
|
$
|
1,475
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Operating leases (1)
|
|
79,103
|
|
22,801
|
|
36,115
|
|
16,367
|
|
3,820
|
|
Purchase obligations
|
|
72,122
|
|
72,122
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
152,700
|
|
$
|
96,398
|
|
$
|
36,115
|
|
$
|
16,367
|
|
$
|
3,820
|
|
(1)
Represents fixed minimum rents in stores and does not include
incremental rents which are computed as a percentage of net sales. For example,
in fiscal 2008 incremental percentage rent was approximately $1.6 million,
which represented 7.0% of total rent expense.
Indebtedness.
In March 2008, we obtained a $35
million unsecured revolving credit facility with Bank of America, replacing a
$3 million facility that had been scheduled to expire on June 30,
2008. This new facility has a term of
364 days, has an unused commitment fee equal to 0.15%, and has one restrictive
financial covenant (consolidated leverage ratio). Our earnings before interest, taxes,
depreciation and rent expense have been well in excess of the level required by
the consolidated leverage ratio. Loans
under the facility bear interest at either (a) a rate equal to the higher
of (i) the Federal Funds Rate plus 0.50% and (ii) Bank of Americas
prime rate, plus an applicable margin; or (b) a rate equal to LIBOR plus
an applicable margin. The applicable margin is dependent on our consolidated
leverage ratio and ranges from 1.00% to 1.50% for LIBOR-based loans, and from
0.00% to 0.50% for prime rate-based loans. We have had no borrowings under this
facility.
On
March 25, 2009, we amended the credit facility with Bank of America to
extend the expiration date to March 24, 2010 and to lower the commitment
to $20 million, reflecting our year end cash position and the fact that we have
had no borrowings under the facility. In
addition, changes were made to the pricing of the facility, including an
increase in the unused commitment fee to 0.25% and an amendment of the interest
rates.
Loans under the
facility now bear interest at either (a) a rate equal to the highest of (i) the
Federal Funds Rate plus 0.50%, (ii) LIBOR plus 1.0% and (iii) Bank of
Americas prime rate, plus an applicable margin; or (b) a rate equal to
LIBOR plus an applicable margin. The applicable margin is dependent on our
consolidated leverage ratio and ranges from 0.75% to 1.25% for loans bearing
interest at the rate described under (a) above and from 1.75% to 2.25% for
loans bearing interest at the rate described under (b) above.
We previously had a $25
million revolving line of credit with Wachovia Capital Finance secured by
substantially all of our assets and pursuant to which we paid customary fees.
This secured line of credit expired on April 2, 2007 and was not renewed.
Capital
Leases.
We have
capital lease obligations that financed the purchase of technology equipment.
As of January 31, 2009, our capital lease obligations, including interest,
were $1.5 million. These obligations have a maturity date of December 2009
and an interest rate of 11.3%. All of these obligations are secured by the
technology equipment. The lease agreements contain cross default
provisions which result in a default if the Company is out of compliance with
any other borrowing agreements.
Operating
Leases.
We lease our
stores under operating leases, which generally have an initial term of five
years with renewal options. The typical store lease requires a combination of
both fixed monthly rents and contingent rents computed as a percentage of net
sales after a certain sales threshold has been met. For fiscal 2008, rent
expense was $23.1 million compared to $19.3 million in fiscal 2007
(including approximately $1.6 million and $1.9 million of percentage rent,
respectively, in fiscal 2008 and 2007).
Purchase
Obligations.
As of January 31,
2009, we had purchase obligations of $72.1 million, all of which were for less
than one year. These purchase obligations primarily consist of outstanding merchandise
orders.
Off-Balance
Sheet Arrangements
Other than the store
operating leases described above, we do not have any off-balance sheet
arrangements.
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Outstanding
Stock Options
As of January 31, 2009,
we had outstanding vested options to purchase 154,170 shares of common stock at
a weighted average exercise price of $15.94 per share and outstanding unvested
options to purchase 54,680 shares of common stock at a weighted average price
of $29.09 per share. The per share value of each share of common stock
underlying the vested and unvested options, based on the difference between the
exercise price per option and the estimated fair market value of the shares at
the dates of the grant of the options (also referred to as intrinsic value),
ranges from $0 to $1.25 per share. Based on the closing price of our common
stock of $9.53 per share on January 30, 2009, the intrinsic value of the
options outstanding on January 31, 2009 was $392,000, all of which related
to vested options.
Critical
Accounting Policies and Estimates
The preparation of our
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. We
believe 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 ours. We recognize retail sales net of sales taxes at the
time the customer takes possession of and pays for merchandise, less an
allowance for returns. We allow for returns up to ten days after the date
of sale and we reduce revenues for each fiscal year for returns in the
ten days after the year ends. As of January 31, 2009, the reserve for
returns was $258,000. Revenue from layaway sales is recognized when the
customer has paid for and received the merchandise. If the merchandise is not
fully paid for within sixty days, the customer is given a store credit for
merchandise payments made, less a re-stocking fee and a layaway service
charge. 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. We do not offer
company-sponsored customer credit accounts or gift cards. There were no
material changes in the estimates or assumptions related to revenue recognition
during fiscal 2008.
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. We estimate 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. Inventory shrinkage as a percentage of sales has ranged from 1.5% to
1.9% during fiscal years 2006 through 2008. We believe 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. We do not generally enter into such arrangements with our
vendors. There were no material changes in the estimates or assumptions related
to the valuation of inventory during fiscal 2008.
Property and Equipment, net
We have a significant
investment in property and equipment. Property and equipment are stated at cost
less accumulated depreciation and amortization. Equipment under capital leases
is stated at the present value of the required 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, seven years for major purchased software systems, and
fifteen to twenty years for buildings and building improvements) of the related
assets or the relevant lease term, as defined in SFAS No. 13,
Accounting for Leases
. Any reduction in these estimated
useful lives would result in a higher annual depreciation expense for the
related assets. There were no material changes in the estimates or assumptions
related to the valuation and classification of property and equipment during
fiscal 2008.
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Impairment of Long-Lived Assets
We continually evaluate
whether events and changes in circumstances warrant revised estimates of the
useful lives or recognition of an impairment loss for long-lived assets. 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 long-lived assets, thereby possibly requiring an impairment
charge. 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 our
estimates for net sales, gross profit and store expenses are not realized,
future assessments of recoverability could result in impairment charges. There
were no impairment charges during fiscal years 2006 through 2008. There were no
material changes in the estimates or assumptions related to impairment of
long-lived assets during fiscal 2008.
Fair Value Measurements
Effective February 3,
2008, we adopted the methods of fair value as described in SFAS No. 157,
Fair Value Measurements,
to value our
financial assets and liabilities. SFAS No. 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants in the principal or most
advantageous market at the measurement date. This statement also establishes a
fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels, which are described below:
Level 1: Unadjusted quoted prices in active markets
that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that
are based on inputs not quoted on active markets, but corroborated by market
data.
Level
3: Unobservable inputs are used when
little or no market data is available. Level 3 inputs are given the lowest
priority in the fair value hierarchy.
As of January 31, 2009,
we had $43.8 million (at par value) of investments in municipal auction rate
securities (ARS) issued by student loan funding organizations. The ARS are
classified as trading securities in noncurrent assets and are reflected at
estimated fair value. These securities are high-grade (at least AA-rated with
one or more rating agencies) and approximately 79% are either guaranteed by the
Department of Education under the Federal Family Education Loan Program (37%)
or backed by insurance companies, AMBAC Assurance Corporation (31%) or MBIA
Insurance Corporation (11%). Historically, liquidity for investors in ARS was
provided via an auction process that reset the interest rate every 35 days,
allowing investors to either roll over their investments or sell them at par
value. Beginning in February 2008, there was insufficient demand for these
types of investments during the auctions and, as a result, these securities
became illiquid. Although the auctions for the securities have failed, certain
issuers did redeem, at par value, $8.2 million of ARS held by us, and one of
our investment banks purchased, at par value, $4.0 million of ARS held by
us. In addition, we have not experienced
any defaults and continue to earn and receive interest on all of the
investments that we still own.
There was insufficient
observable market information available as of January 31, 2009 to
determine the fair value of ARS held by us. Accordingly, we estimated Level 3
fair values for these securities based on assumptions that market participants
would use in their estimates of fair value. These assumptions included, among
other things, discounted cash flow projections, the timing of expected future
successful auctions or redemptions, collateralization of the underlying
securities and the creditworthiness of the issuers and insurance
companies. Based on this Level 3
valuation, we valued the ARS investments at $38.9 million as of January 31,
2009, representing a $4.9 million decline from par value. Prior to fiscal 2008,
the ARS were valued at par value due to the frequent resets that historically
occurred through the auction process.
In November 2008, we
accepted an offer (the Right) from UBS AG (UBS) allowing us to sell at par
value our remaining ARS to UBS at anytime during a two-year period from June 30,
2010 through July 2, 2012. In
accepting the Right, we granted UBS the authority to sell or auction the ARS at
par value at any time up until the expiration date of the Right and released
UBS from any claims relating to the marketing and sale of ARS. We will continue to earn interest on the ARS
until they are liquidated. The
obligations of UBS under the Right are not secured by its assets and do not
require UBS to obtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will
have sufficient financial resources to satisfy its obligations under the
Right. If UBS does not have sufficient
funding to buy back the ARS and no alternative buyers are located either
through the auction process, issuer redemptions or other means, then we may not
be able to access cash by selling these securities without incurring a loss of
principal.
28
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The Right represents a put option and is recognized
as an instrument separate from the ARS.
We elected to account for this Right at fair value under SFAS No. 159
,
The Fair Value Option for
Financial Assets and Financial Liabilities.
We valued the Right using a discounted cash
flow approach that includes estimates of interest rates and the credit risk
associated with UBS. This valuation is
based on unobservable inputs, therefore, represents a Level 3 fair value. We recorded a $4.9 million gain associated
with the Right, together with the $4.9 million ARS impairment charge discussed
above. We expect that subsequent changes
in the value of the Right will largely offset the subsequent fair value
movements of the ARS, subject to the continued expected performance by UBS of
its obligations under the Right.
Stock-Based Compensation
SFAS No. 123 (revised
2004),
Share-Based Payment
(SFAS
No. 123R), requires the measurement and recognition of compensation
expense for all stock-based awards made to employees based on the estimated
fair value of the award. The determination of the fair value of our stock
options on the date of grant using an option-price model is affected by our
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 are estimated at each grant date
using the Black-Scholes Merton option pricing model, while grants of nonvested
restricted stock are valued based on the closing stock price on the grant
date. If factors change and we employ 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. There were no material changes in the estimates
or assumptions used to determine stock-based compensation during fiscal 2008.
Operating Leases
We lease all of our store
properties and account 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 rent expenses on a straight-line
basis over the terms of the leases, we use the date of initial possession to
begin amortization, which is generally when we enter the space and begin 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, we record minimum
rent expenses on a straight-line basis over the terms of the leases. For tenant
improvement allowances we record a deferred rent liability on the balance sheet
and amortize 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 net sales that are in excess of a
predetermined level. These amounts are excluded from minimum rent and are
included in the determination of total rent expense when it is probable that
the expense has been incurred and the amount is reasonably estimable. There
were no material changes in the estimates or assumptions related to operating
leases during fiscal 2008.
Accounting for Income Taxes
We account 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. We adjust
our income tax provision in the period it is determined that actual results
will differ from our estimates. Tax law and rate changes are reflected in the
income tax provision in the year in which such changes are enacted. There were
no material changes in the estimates or assumptions related to income taxes
during fiscal 2008.
The above listing is not
intended to be a comprehensive list of all our accounting policies. In many
cases the accounting treatment of a particular transaction is specifically
dictated by U.S. 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.
Recent
Accounting Pronouncements
In May 2008, the FASB
issued SFAS No. 162,
The Hierarchy of Generally
Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United
States. SFAS No. 162 was effective November 15,
2008 and did not have a significant impact on our financial statements.
29
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Effective February 3,
2008, we adopted SFAS No. 157 which 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. In February 2008,
the FASB issued FASB Staff Position No. 157-2,
Effective
Date of Statement No. 157,
which provided a one year deferral
of the effective date of SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, we adopted the
provisions of SFAS No. 157 with respect to our financial assets and
financial liabilities only in fiscal 2008. The adoption of this statement did
not have a material impact on our financial statements. Effective February 1, 2009, we adopted
SFAS No. 157 for non-financial assets and non-financial liabilities, and
it did not have a material impact on our financial statements. In October 2008, the FASB issued Staff
Position No. FAS 157-3,
Determining the Fair Value
of a Financial Asset When the Market for That Asset is Not Active
(FSP
FAS 157-3), which clarified the application of SFAS No. 157 in cases
where a market is not active. We have considered the guidance provided by FSP
FAS 157-3 in our determination of fair values as of January 31, 2009, and
the impact was not material.
Effective February 3,
2008, we adopted SFAS No. 159, which
permits entities to choose to measure specified financial assets and financial
liabilities at fair value. Election of the fair value option is
irrevocable and is applied on a contract-by-contract basis. The adoption of
SFAS No. 159 did not have a material impact on our financial statements
since we did not elect to apply the fair value option for any of our eligible
financial instruments or other items on the effective date of adoption.
In December 2007, the
SEC issued Staff Accounting Bulletin 110,
Share-Based Payment
(SAB 110). SAB 110 allows for
continued use of the simplified method for estimating the expected term of plain
vanilla share option grants under specified conditions. The expected term used to value a share
option grant under the simplified method is the mid-point between the vesting
date and the contractual term of the share option. SAB 110 eliminates the December 31, 2007
sunset provision previously specified in SAB 107. SAB 110 is effective for share option grants
made on or after January 1, 2008.
We have utilized the simplified method for estimating the expected term
of our stock option grants under SAB 107 and SAB 110 and will continue to
utilize this simplified method until we have sufficient historical exercise
data to provide a reasonable basis to estimate the expected term.
30
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
We are exposed to financial
market risks related to changes in interest rates connected with our revolving
credit facility, which bears interest at variable rates. We cannot predict
market fluctuations in interest rates. As a result, future results may differ
materially from estimated results due to adverse changes in interest rates or
debt availability. A hypothetical 100 basis point increase in prevailing market
interest rates would not have materially impacted our financial position,
results of operations or cash flows for fiscal 2008, because we did not borrow
during the year. We do not engage in financial transactions for trading
or speculative purposes and have not entered into any interest rate hedging
contracts.
We source all of our product
from apparel markets in the United States in U.S. Dollars and, therefore, are
not directly subject to fluctuations in foreign currency exchange rates.
However, fluctuations in currency exchange rates could affect our purchasing
power with vendors that import merchandise to sell to us. We have not entered
into forward contracts to hedge against fluctuations in foreign currency
prices.
As of January 31, 2009,
we had $43.8 million (at par value) of investments in municipal auction rate
securities (ARS) issued by student loan funding organizations. These
securities are high-grade (at least AA-rated with one or more rating agencies)
and approximately 79% are either guaranteed by the Department of Education
under the Federal Family Education Loan Program (37%) or backed by insurance
companies, AMBAC Assurance Corporation (31%) or MBIA Insurance Corporation
(11%). Historically, liquidity for investors in ARS was provided via an auction
process that reset the interest rate every 35 days, allowing investors to
either roll over their investments or sell them at par value. Beginning in February 2008,
there was insufficient demand for these types of investments during the
auctions and, as a result, these securities became illiquid. Although the
auctions for the securities have failed, certain issuers did redeem, at par
value, $8.2 million of ARS held by us, and one of our investment banks
purchased, at par value, $4.0 million of ARS held by us. In addition, we have not experienced any
defaults and continue to earn and receive interest on all of the investments
that we still own. However, interest rates
had declined by the end of fiscal 2008 to levels that were much lower than
earlier in the year. As a result,
interest income may be significantly lower in 2009 than in 2008.
In November 2008, we
accepted an offer (the Right) from UBS AG (UBS) allowing us to sell at par
value our remaining ARS to UBS at anytime during a two-year period from June 30,
2010 through July 2, 2012. In
accepting the Right, we granted UBS the authority to sell or auction the ARS at
par value at any time up until the expiration date of the Right and released
UBS from any claims relating to the marketing and sale of ARS. We will continue to earn interest on the ARS
until they are liquidated. The
obligations of UBS under the Right are not secured by its assets and do not require
UBS to obtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will
have sufficient financial resources to satisfy its obligations under the
Right. If UBS does not have sufficient
funding to buy back the ARS and no alternative buyers are located either
through the auction process, issuer redemptions or other means, then we may not
be able to access cash by selling these securities without incurring a loss of
principal.
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The financial statements
required by this item and the report of the independent accountant thereon
required by Item 14(a)(2) appear beginning on page F-2 of this
Report. See accompanying Index to the financial statements on page F-1.
The supplementary financial data required by Item 302 of Regulation S-K appears
in note 11 to the financial statements.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
We carried out an evaluation
under the supervision and with the participation of management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the
end of the period covered by this Report pursuant to Rules 13a-15 and
15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer each concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information has been
accumulated and communicated to our management, including the officers who
certify our financial reports, as appropriate, to allow timely decisions
regarding the required disclosures.
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Changes in Internal Control
Over Financial Reporting
There were no changes in our
internal control over financial reporting that occurred during the fiscal
quarter ended January 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Managements Report on
Internal Control Over Financial Reporting
For the Report of Management
on Internal Control over Financial Reporting and the report of our independent
registered public accounting firm on Internal Control over Financial Reporting,
see Item 8, Financial Statements and Supplementary Data.
ITEM 9B.
OTHER INFORMATION
None.
32
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PART III
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by
this Item with respect to our executive officers and directors, compliance by
our directors, executive officers and certain beneficial owners of our common
stock with Section 16(a) of the Exchange Act, the committees of our
Board of Directors, our Audit Committee Financial Expert and our Code of Ethics
is incorporated herein by reference to information under the captions entitled Board
of Directors and Committees of the Board of Directors, Executive Officers,
and Section 16(a) Beneficial Ownership Reporting Compliance
in our definitive proxy statement (to be filed hereafter) in connection with
our 2009 Annual Meeting of Stockholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this Report).
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by
this Item is incorporated herein by reference to information under the captions
entitled Executive Compensation, Board of Directors and Committees of the
Board of Directors and Compensation Committee Report in our definitive proxy
statement (to be filed hereafter) in connection with our 2009 Annual Meeting of
Stockholders and possibly elsewhere in the proxy statement (or will be filed by
amendment to this Report).
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The information required by
this Item with respect to ownership of our common stock is incorporated herein
by reference to the information under the caption entitled Security Ownership
of Certain Beneficial Owners and Management in our definitive proxy statement
(to be filed hereafter) in connection with our 2009 Annual Meeting of
Stockholders and possibly elsewhere in the proxy statement (or will be filed by
amendment to this Report).
Equity
Compensation Plan Information
. The following table represents those securities authorized for
issuance as of January 31, 2009 under our existing equity compensation
plans.
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
Number of securities
|
|
Weighted average
|
|
future issuance under
|
|
|
|
to be issued upon
|
|
exercise price of
|
|
equity compensation
|
|
|
|
exercise of outstanding
|
|
outstanding options,
|
|
plans (excluding
|
|
|
|
options, warrants and
|
|
warrants and rights (2)
|
|
securities reflected in
|
|
Plan category
|
|
rights (1) (a)
|
|
(b)
|
|
column (a)) (3) (c)
|
|
Equity compensation plans approved by security
holders
|
|
446,160
|
|
$
|
19.38
|
|
855,248
|
|
Equity compensation plans not approved by security
holders
|
|
|
|
|
|
|
|
Total
|
|
446,160
|
|
$
|
19.38
|
|
855,248
|
|
(1)
Includes 59,100 outstanding options issued
under the 1999 Allied Fashion Stock Option Plan. This plan was replaced
in May 2005 by the 2005 Citi Trends Inc. Long-Term Incentive Plan (the Incentive
Plan), which provides for the issuance of up to 1,300,000 shares of common
stock upon the exercise of stock options or as awards of nonvested restricted
stock and other performance awards. Also, includes 149,750 outstanding options
and 237,310 nonvested restricted stock grants issued under the Incentive Plan.
(2)
The weighted average exercise price is for
options only and does not include nonvested restricted stock.
(3)
Consists of shares available for awards of
options, nonvested restricted stock and other performance awards under the
Incentive Plan.
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by
this Item is incorporated herein by reference to the information under the
captions entitled Certain Relationships and Related Party Transactions and Board
of Directors and Committees of the Board of Directors in our definitive
33
Table
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proxy statement (to be filed
hereafter) in connection with our 2009 Annual Meeting of Stockholders and
possibly elsewhere in the proxy statement (or will be filed by amendment to
this Report).
ITEM 14.
PRINCIPAL ACCOUNTING FEES
AND SERVICES
The information required by
this Item is incorporated herein by reference to the information under the
caption entitled Ratification of Independent Registered Public Accounting Firm
in our definitive proxy statement (to be filed hereafter) in connection with
our 2009 Annual Meeting of Stockholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this Report).
34
Table
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PART IV
ITEM 15.
EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
(a)(1)
Financial Statements
See accompanying Financial
Statements beginning on page F-1.
(a)(2)
Financial Statement Schedules
All schedules for which
provision is made in the applicable accounting regulations of the SEC are not
required under the related instructions, are inapplicable or the information is
included in the Financial Statements, and therefore, have been omitted.
(a)(3)
Exhibits
Exhibit Index
Exhibit No.
|
|
Description
|
3.1
|
|
Second Amended and
Restated Certificate of Incorporation, as amended by the Certificate of
Amendment dated June 22, 2006 (incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 29, 2006)
|
|
|
|
3.2
|
|
Amended and Restated
By-laws (incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8 (File No. 333-125611) filed with
the SEC on June 8, 2005)
|
|
|
|
4.1
|
|
Specimen certificate for
shares of common stock, $.01 par value (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
April 29, 2005)
|
|
|
|
*10.1
|
|
Amended and Restated
Employment Agreement by and between R. Edward Anderson and Citi
Trends, Inc., dated as of December 30, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on December 30, 2005)
|
|
|
|
*10.2
|
|
Amended and Restated
Employment Agreement by and between George Bellino and Citi
Trends, Inc., dated as of December 30, 2005 (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed with the SEC on December 30, 2005)
|
|
|
|
10.3
|
|
The Loan and Security
Agreement, dated as of April 2, 1999, by and between Congress Financial
Corporation (Southwest) and Allied Fashion, Inc. (incorporated by
reference to Exhibit 10.4 to the Companys Registration Statement on
Form S-1 (File No. 333-123028) filed with the SEC on
February 28, 2005)
|
|
|
|
10.4
|
|
First Amendment to Loan
and Security Agreement, dated as of June 28, 2000, by and between
Congress Financial Corporation (Southwest) and Allied Fashion, Inc.
(incorporated by reference to Exhibit 10.5 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
February 28, 2005)
|
|
|
|
10.5
|
|
Second Amendment to Loan
and Security Agreement, dated as of November 30, 2000, by and between
Congress Financial Corporation (Southwest) and Allied Fashion, Inc.
(Incorporated by reference to Exhibit 10.6 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
February 28, 2005)
|
|
|
|
10.6
|
|
Third Amendment to Loan
and Security Agreement, dated as of January 2003, by and between
Congress Financial Corporation (Southwest) and Citi Trends, Inc.
(incorporated by reference to Exhibit 10.7 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
February 28, 2005)
|
|
|
|
10.7
|
|
Fourth Amendment to Loan
and Security Agreement, dated as of February 9, 2005, by and between
Congress Financial Corporation (Southwest) and Citi Trends, Inc.
(incorporated by reference to Exhibit 10.8 to the Companys Registration
Statement on Form S-1 (File No. 333-123028) filed with the SEC on
February 28, 2005)
|
|
|
|
10.8
|
|
Fifth Amendment to the
Loan and Security Agreement, dated as of May 18, 2006, by and between
Wachovia Capital Finance (formerly Congress Financial Corporation) and Citi
Trends, Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
July 29, 2006)
|
|
|
|
10.9
|
|
Lease Agreement, dated as
of September 30, 2004, by and between Meyer Warehouse, LLC, as landlord,
and Citi Trends, Inc., as tenant (incorporated by reference to
Exhibit 10.9 to the Companys Registration Statement on Form S-1
(File No. 333-123028) filed with the SEC on February 28, 2005)
|
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Table of Contents
10.10
|
|
$3.0 Million Loan
Agreement between Citi Trends, Inc. and Bank of America dated
June 16, 2006 (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
July 29, 2006)
|
|
|
|
10.11
|
|
Amendment No. 1 dated
August 28, 2006 to $3.0 Million Loan Agreement between Citi
Trends, Inc. and Bank of America dated June 16, 2006 (incorporated
by reference to Exhibit 10.12 to the Companys Annual Report on
Form 10-K for the year ended February 3, 2007)
|
|
|
|
*10.12
|
|
Allied Fashion, Inc.
Amended and Restated 1999 Stock Option Plan (as previously amended and
restated effective as of June 17, 2004) (incorporated by reference to
Exhibit 2.2 to the Companys Registration Statement on Form S-8
(File No. 333-125611) filed with the SEC on June 8, 2005)
|
|
|
|
*10.13
|
|
Amendment to the 1999
Allied Fashion Inc. Stock Option Plan (as previously amended and restated
effective as of June 17, 2004) (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended October 28, 2006)
|
|
|
|
*10.14
|
|
Citi Trends, Inc.
2005 Amended and Restated Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended August 2, 2008)
|
|
|
|
*10.15
|
|
Form of Restricted
Stock Award Agreement for Employees (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 2, 2008)
|
|
|
|
*10.16
|
|
Form of Restricted
Stock Award Agreement for Directors (incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on Form 10-K for the
year ended February 3, 2007)
|
|
|
|
*10.17
|
|
Form of Stock Option
Agreement for Employees (incorporated by reference to Exhibit 10.20 to
the Companys Annual Report on Form 10-K for the year ended
February 3, 2007)
|
|
|
|
*10.18
|
|
Form of Stock Option
Agreement for Directors (incorporated by reference to Exhibit 10.21 to
the Companys Annual Report on Form 10-K for the year ended
February 3, 2007)
|
|
|
|
*10.19
|
|
Offer Letter to Ivy Council
dated December 6, 2006 (incorporated by reference to Exhibit 10.24
to the Companys Annual Report on Form 10-K for the year ended
February 2, 2008)
|
|
|
|
*10.20
|
|
Offer Letter to Bruce D.
Smith dated April 2, 2007 (incorporated by reference to Exhibit 10.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended
May 5, 2007)
|
|
|
|
*10.21
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Bruce D.
Smith dated April 2, 2007 (incorporated by reference to Exhibit 10.2
to the Companys Quarterly Report on Form 10-Q for
the quarter ended May 5, 2007)
|
|
|
|
10.22
|
|
Credit Agreement dated
March 26, 2008 among Citi Trends, Inc., as Borrower, the
Subsidiaries of the Borrower identified therein, as the Guarantors, and Bank
of America, N.A., as Lender (incorporated by reference to Exhibit 10.25
to the Companys Annual Report on Form 10-K for the year ended
February 2, 2008)
|
|
|
|
*10.23
|
|
Employment Agreement
between the Company and Elizabeth Feher dated April 2, 2008 (incorporated
by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended May 3, 2008)
|
|
|
|
*10.24
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and Elizabeth
Feher dated April 2, 2008 (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended May 3, 2008)
|
|
|
|
10.25
|
|
UBS Offer Letter dated
October 8, 2008, together with Acceptance Form of Citi
Trends, Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
November 1, 2008)
|
|
|
|
*10.26
|
|
Employment Agreement
between the Company and R. David Alexander, Jr. dated December 5,
2008
|
|
|
|
*10.27
|
|
Employment Non-Compete,
Non-Solicit and Confidentiality Agreement between the Company and R. David
Alexander, Jr. dated December 5, 2008
|
|
|
|
10.28
|
|
First Amendment to Credit
Agreement, dated as of March 25, 2009, by and between Citi
Trends, Inc. and Bank of America, N.A.
|
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23.1
|
|
Consent of KPMG LLP
|
|
|
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31.1
|
|
Certification of R. David
Alexander, Jr., President and Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Bruce D.
Smith, Chief Financial Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of R. David
Alexander, Jr., President and Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Bruce D.
Smith, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
*
Indicates management contract or compensatory
plan or arrangement.
37
Table
of Contents
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
CITI TRENDS, INC.
|
|
|
(Registrant)
|
|
|
|
Date
|
April 15, 2009
|
By
|
/s/
R. David Alexander, Jr.
|
|
/s/ Bruce D. Smith
|
|
|
|
R. David
Alexander, Jr.
|
|
Bruce D. Smith
|
|
|
|
President and Chief
Executive Officer (Principal Executive Officer)
|
|
Senior Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer)
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ R. David
Alexander, Jr.
|
|
President and Chief
Executive Officer
|
|
April 15,
2009
|
R. David
Alexander, Jr.
|
|
(Principal Executive
Officer) and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Bruce D. Smith
|
|
Senior Vice President and
|
|
April 15,
2009
|
Bruce D. Smith
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ R. Edward Anderson
|
|
Executive Chairman of the
Board of Directors
|
|
April 15,
2009
|
R. Edward Anderson
|
|
|
|
|
|
|
|
|
|
/s/ Brian P. Carney
|
|
Director
|
|
April 15,
2009
|
Brian P. Carney
|
|
|
|
|
|
|
|
|
|
/s/ Lawrence E. Hyatt
|
|
Director
|
|
April 15,
2009
|
Lawrence E. Hyatt
|
|
|
|
|
|
|
|
|
|
/s/ John S. Lupo
|
|
Director
|
|
April 15,
2009
|
John S. Lupo
|
|
|
|
|
|
|
|
|
|
/s/ Patricia M. Luzier
|
|
Director
|
|
April 15,
2009
|
Patricia M. Luzier
|
|
|
|
|
38
Table
of Contents
Citi Trends, Inc.
Index to Financial Statements
FINANCIAL STATEMENTS AS OF
AND FOR THE YEARS ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3, 2007
Managements Annual Report on Internal Control Over
Financial Reporting
|
F-2
|
|
|
Report of Independent Registered Public Accounting
Firm
|
F-3
|
|
|
Balance
Sheets as of January 31, 2009 and February 2, 2008
|
F-4
|
|
|
Statements of Income for the Years Ended
January 31, 2009, February 2, 2008 and February 3, 2007
|
F-5
|
|
|
Statements of Cash Flows for the Years Ended
January 31, 2009, February 2, 2008 and February 3, 2007
|
F-6
|
|
|
Statements of Stockholders Equity for the Years Ended
January 31, 2009, February 2, 2008 and February 3, 2007
|
F-7
|
|
|
Notes to Financial Statements for the Years Ended
January 31, 2009, February 2, 2008 and February 3, 2007
|
F-8
|
F-1
Table
of Contents
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Under the supervision and with the participation of
management, including our chief executive officer and chief financial officer,
we assessed the effectiveness of our internal control over financial reporting
as of January 31, 2009, based on the criteria described in
Internal ControlIntegrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, our management concluded that our internal
control over financial reporting was effective based on those criteria as of January 31,
2009.
Our independent registered
public accounting firm, KPMG LLP, audited the effectiveness of our internal
control over financial reporting as of January 31, 2009, as stated in
their attestation report which is included herein.
F-2
Table of
Contents
Report of Independent
Registered Public Accounting Firm
The Board of Directors
and Stockholders
Citi Trends, Inc.:
We have audited the accompanying balance sheets of
Citi Trends, Inc. (the Company) as of January 31, 2009 and February 2,
2008, and the related statements of income, stockholders equity, and cash
flows for fiscal years ended January 31, 2009, February 2, 2008, and February 3,
2007. We also have audited the Companys internal control over financial
reporting as of January 31, 2009, based on criteria established in
Internal Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Companys internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position of Citi
Trends, Inc., as of January 31, 2009 and February 2, 2008, and
the results of its operations and its cash flows for each of the fiscal years
ended January 31, 2009, February 2, 2008, and February 3, 2007,
in conformity with U.S. generally accepted accounting principles. Also in our
opinion, Citi Trends, Inc., maintained, in all material respects,
effective internal control over financial reporting as of January 31,
2009, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As discussed in note 2 to the financial
statements, effective February 3, 2008, the Company adopted the methods of
fair value as described in SFAS No. 157,
Fair
Value Measurements,
and
as discussed in note 7 to the financial
statements, effective February 4, 2007, the Company adopted the
provisions of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
interpretation of FAS 109
.
/s/
KPMG LLP
April 14,
2009
Jacksonville,
Florida
Certified
Public Accountants
F-3
Table of Contents
Citi Trends, Inc.
Balance Sheets
January 31, 2009 and February 2, 2008
(in thousands, except per share and share amounts)
|
|
January 31,
|
|
February 2,
|
|
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,516
|
|
$
|
6,203
|
|
Investment securities
|
|
|
|
56,165
|
|
Inventory
|
|
86,259
|
|
82,420
|
|
Prepaid and other current assets
|
|
10,625
|
|
5,888
|
|
Deferred tax asset
|
|
3,447
|
|
2,838
|
|
Total current assets
|
|
133,847
|
|
153,514
|
|
Property and equipment, net
|
|
58,861
|
|
52,207
|
|
Investment securities
|
|
43,825
|
|
|
|
Goodwill
|
|
1,371
|
|
1,371
|
|
Deferred tax asset
|
|
2,480
|
|
2,756
|
|
Other assets
|
|
405
|
|
329
|
|
Total assets
|
|
$
|
240,789
|
|
$
|
210,177
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
52,295
|
|
$
|
43,566
|
|
Accrued expenses
|
|
11,478
|
|
11,864
|
|
Accrued compensation
|
|
7,514
|
|
5,225
|
|
Current portion of capital lease
obligations
|
|
1,403
|
|
1,580
|
|
Income tax payable
|
|
682
|
|
1,155
|
|
Layaway deposits
|
|
564
|
|
635
|
|
Total current liabilities
|
|
73,936
|
|
64,025
|
|
Capital lease obligations, less current
portion
|
|
|
|
1,403
|
|
Other long-term liabilities
|
|
8,646
|
|
6,602
|
|
Total liabilities
|
|
82,582
|
|
72,030
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
32,000,000 shares; 14,698,852 shares issued as of January 31, 2009 and
14,265,471 shares issued as of February 2, 2008; 14,533,102 shares
outstanding as of January 31, 2009 and 14,099,721 shares outstanding as
of February 2, 2008
|
|
145
|
|
142
|
|
Paid in capital
|
|
70,950
|
|
68,276
|
|
Retained earnings
|
|
87,277
|
|
69,894
|
|
Treasury stock, at cost; 165,750 shares as
of January 31, 2009 and February 2, 2008
|
|
(165
|
)
|
(165
|
)
|
Total stockholders equity
|
|
158,207
|
|
138,147
|
|
|
|
|
|
|
|
Commitments and contingencies (note 9)
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
240,789
|
|
$
|
210,177
|
|
See accompanying notes to
financial statements
F-4
Table
of Contents
Citi Trends, Inc.
Statements of Income
Years Ended January 31, 2009, February 2, 2008 and February 3,
2007
(in thousands, except per share amounts)
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
Fiscal 2006
|
|
Net sales
|
|
$
|
488,202
|
|
$
|
437,515
|
|
$
|
381,918
|
|
Cost of sales
|
|
301,867
|
|
278,783
|
|
235,744
|
|
Gross profit
|
|
186,335
|
|
158,732
|
|
146,174
|
|
Selling, general and administrative
expenses
|
|
147,009
|
|
127,470
|
|
107,535
|
|
Depreciation and amortization
|
|
16,261
|
|
12,583
|
|
8,326
|
|
Income from operations
|
|
23,065
|
|
18,679
|
|
30,313
|
|
Interest income
|
|
2,495
|
|
2,383
|
|
2,014
|
|
Interest expense
|
|
(307
|
)
|
(469
|
)
|
(359
|
)
|
Income before income tax expense
|
|
25,253
|
|
20,593
|
|
31,968
|
|
Income tax expense
|
|
7,870
|
|
6,379
|
|
10,617
|
|
Net income
|
|
$
|
17,383
|
|
$
|
14,214
|
|
$
|
21,351
|
|
Basic net income per common share
|
|
$
|
1.23
|
|
$
|
1.02
|
|
$
|
1.57
|
|
Diluted net income per common share
|
|
$
|
1.22
|
|
$
|
1.00
|
|
$
|
1.51
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
14,131
|
|
13,946
|
|
13,575
|
|
Diluted
|
|
14,269
|
|
14,223
|
|
14,138
|
|
See accompanying notes to
financial statements
F-5
Table
of Contents
Citi Trends, Inc.
Statements of Cash Flows
Years Ended January 31, 2009, February 2, 2008 and February 3,
2007
(in thousands)
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
Fiscal 2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,383
|
|
$
|
14,214
|
|
$
|
21,351
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
16,261
|
|
12,583
|
|
8,326
|
|
Deferred income taxes
|
|
(333
|
)
|
(1,401
|
)
|
(2,248
|
)
|
Loss on disposal of property and equipment
|
|
110
|
|
59
|
|
90
|
|
Noncash stock-based compensation expense
|
|
2,024
|
|
1,496
|
|
842
|
|
Excess tax benefits from stock-based
payment arrangements
|
|
(1,218
|
)
|
(3,516
|
)
|
(12,249
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Inventory
|
|
(3,839
|
)
|
(9,060
|
)
|
(19,339
|
)
|
Prepaid and other current assets
|
|
(4,072
|
)
|
(1,078
|
)
|
(1,710
|
)
|
Other assets
|
|
(76
|
)
|
(51
|
)
|
(85
|
)
|
Accounts payable
|
|
8,729
|
|
(3,328
|
)
|
6,189
|
|
Accrued expenses and other long-term
liabilities
|
|
1,658
|
|
3,813
|
|
4,442
|
|
Accrued compensation
|
|
2,289
|
|
(969
|
)
|
1,214
|
|
Income tax payable
|
|
745
|
|
3,820
|
|
12,031
|
|
Layaway deposits
|
|
(71
|
)
|
59
|
|
258
|
|
Net cash provided by operating activities
|
|
39,590
|
|
16,641
|
|
19,112
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
Purchases of investment securities
|
|
(4,000
|
)
|
(33,989
|
)
|
(49,476
|
)
|
Sales/redemptions of investment securities
|
|
15,675
|
|
43,780
|
|
37,978
|
|
Insurance proceeds received
|
|
|
|
|
|
269
|
|
Purchases of property and equipment
|
|
(23,025
|
)
|
(30,095
|
)
|
(15,652
|
)
|
Net cash used in investing activities
|
|
(11,350
|
)
|
(20,304
|
)
|
(26,881
|
)
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based
payment arrangements
|
|
1,218
|
|
3,516
|
|
12,249
|
|
Repayments on long-term debt and capital
lease obligations
|
|
(1,580
|
)
|
(1,768
|
)
|
(786
|
)
|
Cash used to settle equity instruments
granted under stock-based payment arrangements
|
|
(1,040
|
)
|
|
|
(896
|
)
|
Proceeds from the exercise of stock options
|
|
475
|
|
411
|
|
914
|
|
Net cash (used in) provided by financing
activities
|
|
(927
|
)
|
2,159
|
|
11,481
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
27,313
|
|
(1,504
|
)
|
3,712
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
6,203
|
|
7,707
|
|
3,995
|
|
End of period
|
|
$
|
33,516
|
|
$
|
6,203
|
|
$
|
7,707
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
285
|
|
$
|
446
|
|
$
|
321
|
|
Cash paid for income taxes
|
|
$
|
7,458
|
|
$
|
3,961
|
|
$
|
834
|
|
Supplemental disclosures of noncash
financing and investing activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment
financed through capital leases
|
|
$
|
|
|
$
|
|
|
$
|
4,809
|
|
Paid in capital for the exercise of stock
options satisfied by the surrender of shares
|
|
$
|
43
|
|
$
|
45
|
|
$
|
23
|
|
Cumulative effect of adoption of FIN 48
|
|
$
|
|
|
$
|
301
|
|
$
|
|
|
See accompanying notes to
financial statements
F-6
Table of Contents
Citi
Trends, Inc.
Statements of Stockholders Equity
Years
Ended January 31, 2009, February 2, 2008 and February 3, 2007
(in
thousands, except share amounts)
|
|
Common Stock
|
|
Paid in
|
|
Retained
|
|
Treasury Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Total
|
|
BalancesJanuary 28, 2006
|
|
13,179,765
|
|
$
|
132
|
|
$
|
49,754
|
|
$
|
34,028
|
|
165,750
|
|
$
|
(165
|
)
|
$
|
83,749
|
|
Exercise of stock options
|
|
792,672
|
|
8
|
|
929
|
|
|
|
|
|
|
|
937
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
12,249
|
|
|
|
|
|
|
|
12,249
|
|
Stock-based compensation expense
|
|
|
|
|
|
842
|
|
|
|
|
|
|
|
842
|
|
Net share settlement of options
|
|
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
(919
|
)
|
Net income
|
|
|
|
|
|
|
|
21,351
|
|
|
|
|
|
21,351
|
|
BalancesFebruary 3, 2007
|
|
13,972,437
|
|
140
|
|
62,855
|
|
55,379
|
|
165,750
|
|
(165
|
)
|
118,209
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
301
|
|
|
|
|
|
301
|
|
Exercise of stock options
|
|
228,563
|
|
2
|
|
454
|
|
|
|
|
|
|
|
456
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
3,516
|
|
|
|
|
|
|
|
3,516
|
|
Issuance of nonvested shares to employees and
directors under incentive plan
|
|
69,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of nonvested shares by employees
and directors
|
|
(5,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
1,496
|
|
|
|
|
|
|
|
1,496
|
|
Net share settlement of options
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
Net income
|
|
|
|
|
|
|
|
14,214
|
|
|
|
|
|
14,214
|
|
BalancesFebruary 2, 2008
|
|
14,265,471
|
|
142
|
|
68,276
|
|
69,894
|
|
165,750
|
|
(165
|
)
|
138,147
|
|
Exercise of stock options
|
|
246,823
|
|
3
|
|
515
|
|
|
|
|
|
|
|
518
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
1,218
|
|
|
|
|
|
|
|
1,218
|
|
Issuance of nonvested shares to employees and
directors under incentive plan
|
|
212,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of nonvested shares by employees
and directors
|
|
(20,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
2,024
|
|
|
|
|
|
|
|
2,024
|
|
Net share settlement of options
|
|
|
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
(1,003
|
)
|
Net share settlement of nonvested shares
|
|
(5,264
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
(80
|
)
|
Net income
|
|
|
|
|
|
|
|
17,383
|
|
|
|
|
|
17,383
|
|
BalancesJanuary 31, 2009
|
|
14,698,852
|
|
$
|
145
|
|
$
|
70,950
|
|
$
|
87,277
|
|
165,750
|
|
$
|
(165
|
)
|
$
|
158,207
|
|
See accompanying notes to
financial statements
F-7
Table of Contents
Citi Trends, Inc.
Notes to Financial Statements
January 31, 2009, February 2, 2008 and February 3, 2007
(1)
Organization and Business
Citi Trends, Inc. (the Company)
is a rapidly growing, value-priced retailer of urban fashion apparel and
accessories for the entire family. As of January 31, 2009, the Company
operated 357 stores in 22 states.
(2)
Summary of Significant Accounting Policies
(a)
Fiscal Year
The Companys fiscal year
ends on the Saturday closest to January 31 of each year. The years ended January 31,
2009, February 2, 2008 and February 3, 2007 are referred to as fiscal
2008, fiscal 2007 and fiscal 2006, respectively, in the accompanying financial
statements. Fiscal year 2006 is comprised of 53 weeks. Fiscal years 2008
and 2007 are each comprised of 52 weeks.
(b)
Cash and Cash Equivalents
For purposes of the balance
sheets and 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.
(c)
Investment Securities
The Companys investment
securities are carried at fair value and consist of investments in municipal
auction rate securities (ARS) issued by student loan funding organizations.
During the fourth quarter of fiscal 2008, the Company reclassified the ARS from
available-for-sale to trading securities.
Unrealized gains and losses, net of deferred income taxes (benefits), on
investments the Company designates as available-for-sale are excluded from
earnings and are credited or charged directly to other comprehensive income, a
separate component of stockholders equity. If any unrealized losses are deemed
other than temporary, such unrealized losses are recognized as realized losses.
Investments that the Company designates as trading securities are reported at
fair value, with unrealized gains or losses resulting from changes in fair value
recognized in earnings. See Note 4 for
further detailed discussion.
(d)
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.
(e)
Property and Equipment, net
Property and equipment, net
are stated at cost less accumulated depreciation and amortization. Equipment
under capital leases is stated at the present value of the required minimum
lease payments per the applicable lease agreement. 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,
seven years for major purchased software systems, and fifteen to twenty years
for buildings and building improvements) of the related assets or the relevant
lease term, as defined in Statement of Financial Accounting Standards (SFAS) No. 13,
Accounting for Leases
.
(f)
Goodwill
Goodwill represents the excess
of the purchase price over the fair value of assets acquired. Pursuant to
SFAS No. 142, goodwill acquired in a purchase business combination and
determined to have an indefinite useful life is not amortized, but instead
tested for impairment at least annually. The Company performed this analysis at
the end of fiscal 2008 and fiscal 2007 and no impairment was indicated for
either year.
(g)
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets,
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
F-8
Table of Contents
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.
(h)
Stock-Based Compensation
The Company recognizes
compensation expense associated with all stock options and nonvested restricted
stock based on the grant-date fair value estimated in accordance with SFAS No. 123
(revised 2004),
Share-Based Payment
(SFAS No. 123R), as interpreted by SEC Staff Accounting Bulletin No. 107. The fair values of options issued pursuant to
the stock based compensation plans are estimated at each grant date using the
Black-Scholes Merton option pricing model, while grants of nonvested restricted
stock are valued based on the stock price on the grant date. See Note 8
for additional information on the Companys stock-based compensation plans.
(i)
Revenue Recognition
Revenue from retail sales
net of sales taxes is recognized at the time the customer takes possession of
and pays for merchandise, less an allowance for returns. The Company allows for
returns up to ten days after the date of sales and the Company reduces revenues
for each fiscal year for returns in the ten days after the year ends. Revenue
from layaway sales is recognized when the customer has paid for and received
the merchandise. If the merchandise is not fully paid for within sixty days,
the customer is given a store credit for merchandise payments made, less a
re-stocking fee and a layaway service charge. 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. The Company does
not offer company-sponsored customer credit accounts or gift cards.
(j)
Cost of Sales
Cost of sales includes the
cost of inventory sold during the period and transportation costs, including
inbound freight and freight from the distribution centers to the stores, net of
discounts and allowances. Distribution center costs, store occupancy expenses
and advertising expenses are not considered components of cost of sales and are
included as part of selling, general and administrative expenses.
(k)
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 stock
options and nonvested restricted stock.
The
following table provides a reconciliation of the number of average common
shares outstanding used to calculate basic earnings per share to the number of
common shares and common stock equivalents outstanding used in calculating diluted
earnings per share for fiscal 2008, 2007 and 2006:
|
|
2008
|
|
2007
|
|
2006
|
|
Average number of common shares outstanding
|
|
14,131,077
|
|
13,946,342
|
|
13,574,718
|
|
Incremental shares from assumed exercises
of stock options
|
|
137,711
|
|
276,887
|
|
563,345
|
|
Average number of common shares and common
stock equivalents outstanding
|
|
14,268,788
|
|
14,223,229
|
|
14,138,063
|
|
In accordance with SFAS No. 128,
Earnings per Share
, the Company
calculates the dilutive effect of stock-based compensation arrangements using
the treasury stock method. This method assumes that the proceeds the
Company receives from the exercise of stock options are used to repurchase
common shares in the market. The adoption of SFAS No. 123R requires
the Company to include as assumed proceeds the amount of compensation cost
attributed to future services and not yet recognized, and the amount of tax
benefits, if any, that would be credited to additional paid-in capital assuming
exercise of outstanding options and vesting of nonvested restricted
stock. For fiscal 2008, 2007 and 2006, respectively, there were 95,000,
61,000 and 23,000 options outstanding to purchase shares of common stock
excluded from the calculation of diluted earnings per share because of
antidilution. There were no shares of
nonvested restricted stock included in the calculation of diluted earnings per
share for fiscal 2008, 2007 and 2006, because of antidilution.
F-9
Table of Contents
(l)
Advertising
The Company expenses
advertising as incurred. Advertising expense for fiscal 2008, 2007 and 2006 was
approximately $2.5 million, $2.5 million and $1.9 million, respectively.
(m)
Operating Leases
The Company leases all of
its store properties and accounts for the leases as operating leases in
accordance with SFAS No. 13
.
Many lease agreements contain tenant improvement allowances, rent holidays,
rent escalation clauses and/or contingent rent provisions. For purposes of
recognizing incentives and minimum rent expense 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 rent expense on a straight-line basis over the terms of the
leases. For tenant improvement allowances a deferred rent liability is recorded
on the balance sheet and amortized 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 net sales that are in excess of a
predetermined level. These amounts are excluded from minimum rent and are
included in the determination of total rent expense when it is probable that
the expense has been incurred and the amount is reasonably estimable.
In March 2005, the
Financial Accounting Standards Board (FASB) issued FASB interpretation (FIN)
47,
Accounting for Conditional Asset
Retirement Obligations,
which is an interpretation of SFAS No. 143,
Accounting for Asset Retirement Obligations.
This interpretation clarifies terminology within SFAS No. 143 and requires
an entity to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liabilitys fair value can be
reasonably estimated. The Company had a liability of $482,000 and $420,000 as
of January 31, 2009 and February 2, 2008, respectively, which is
included in other long-term liabilities on the accompanying balance sheets and
represents estimated expenses that would be incurred upon the termination of
the Companys operating leases
.
(n)
Store Opening and Closing Costs
New and relocated store
opening period costs are charged directly to expense when incurred. When the
Company decides to close or relocate a store, the Company records an expense
for the present value of expected future rent payments, net of sublease income,
if any, in the period that a store closes or relocates. All store opening and
closing costs are included in selling, general and administrative expenses on
the statements of income.
(o)
Income Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(p)
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 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 made in the valuation of inventory,
investment securities, stock-based compensation, property and equipment, and
income taxes. Management periodically evaluates estimates used in the
preparation of the financial statements for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made prospectively
based on such periodic evaluations.
F-10
Table of Contents
(q)
Business Reporting Segments
The Company is a
value-priced retailer of urban fashion apparel and accessories for the entire
family. The Companys executive officers review performance and the allocation
of resources on a store by store basis. Because the Company operates one
business activity and the level of review by the Companys executive officers
is on a store by store basis, the Company has determined that its operations
are within one reportable segment. Accordingly, financial information on
industry segments is not applicable. All sales and assets are located within
the United States.
(r)
Other Comprehensive Income
As discussed in Note 4,
other comprehensive income included a temporary unrealized loss on investment
securities during interim periods of 2008.
The unrealized loss, totaling $1,544,000 (net of tax) as of the end of
the third quarter of 2008, was reclassified to net income in the fourth
quarter. The Company did not have any components of other comprehensive income
for fiscal 2007 and 2006. There was no
accumulated comprehensive income as of January 31, 2009, February 2,
2008 or February 3, 2007.
(s)
Recent Accounting Pronouncements
In May 2008, the FASB
issued SFAS No. 162,
The Hierarchy of Generally
Accepted Accounting Principles.
SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS No. 162
was effective November 15, 2008 and did not have a significant impact on
the Companys financial statements.
Effective February 3,
2008, the Company adopted SFAS No. 157,
Fair
Value Measurements.
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. In February 2008, the FASB issued FASB Staff Position No. 157-2,
Effective Date of Statement No. 157,
which
provided a one year deferral of the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company adopted the provisions of SFAS No. 157
with respect to its financial assets and financial liabilities only in fiscal
2008. The adoption of this statement did not have a material impact on the
Companys financial statements.
Effective February 1, 2009, the Company adopted SFAS No. 157
for non-financial assets and non-financial liabilities, and it did not have a
material impact on the Companys financial statements. In October 2008, the FASB issued Staff
Position No. FAS 157-3,
Determining the Fair Value
of a Financial Asset When the Market for That Asset is Not Active
(FSP
FAS 157-3), which clarified the application of SFAS No. 157 in cases
where a market is not active. The Company has considered the guidance provided
by FSP FAS 157-3 in its determination of fair values as of January 31,
2009, and the impact was not material.
Effective February 3,
2008, the Company adopted SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
. SFAS No. 159 permits entities to choose
to measure specified financial assets and financial liabilities at fair
value. Election of the fair value option is irrevocable and is applied on
a contract-by-contract basis. The adoption of SFAS No. 159 did not have a
material impact on the Companys financial statements since the Company did not
elect to apply the fair value option for any of its eligible financial
instruments or other items on the effective date of adoption.
In December 2007, the
SEC issued Staff Accounting Bulletin 110,
Share-Based Payment
(SAB 110). SAB 110 allows for
continued use of the simplified method for estimating the expected term of plain
vanilla share option grants under specified conditions. The expected term used to value a share
option grant under the simplified method is the mid-point between the vesting
date and the contractual term of the share option. SAB 110 eliminates the December 31, 2007
sunset provision previously specified in SAB 107. SAB 110 is effective for share option grants
made on or after January 1, 2008.
The Company has utilized the simplified method for estimating the
expected term of its stock option grants under SAB 107 and SAB 110 and will
continue to utilize this simplified method until the Company has sufficient
historical exercise data to provide a reasonable basis to estimate the expected
term.
F-11
Table of Contents
(3)
Property and
Equipment, net
The
components of property and equipment as of January 31, 2009 and February 2,
2008 are as follows (in thousands):
|
|
January 31,
|
|
February 2,
|
|
|
|
2009
|
|
2008
|
|
Land
|
|
$
|
858
|
|
$
|
858
|
|
Buildings
|
|
15,295
|
|
4,708
|
|
Leasehold improvements
|
|
37,681
|
|
31,992
|
|
Furniture, fixtures and equipment
|
|
47,525
|
|
35,293
|
|
Computer equipment
|
|
15,433
|
|
13,519
|
|
Construction in progress
|
|
194
|
|
7,799
|
|
|
|
116,986
|
|
94,169
|
|
Accumulated depreciation and amortization
|
|
(58,125
|
)
|
(41,962
|
)
|
|
|
$
|
58,861
|
|
$
|
52,207
|
|
Technology equipment held
under capital leases and related accumulated depreciation was $8.4 million and
$7.1 million, respectively, as of January 31, 2009 and $8.4 million and
$5.5 million, respectively, as of February 2, 2008.
(4) Fair
Value Measurements
Effective February 3,
2008, the Company adopted the methods of fair value as described in SFAS No. 157
to value its financial assets and liabilities. SFAS No. 157 defines fair
value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the
principal or most advantageous market at the measurement date. This statement
also establishes a fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which
are described below:
Level 1: Unadjusted quoted prices in active markets
that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level
2: Observable prices that are based on
inputs not quoted on active markets, but corroborated by market data.
Level
3: Unobservable inputs are used when
little or no market data is available. Level 3 inputs are given the lowest
priority in the fair value hierarchy.
As of January 31, 2009,
the Company had $43.8 million (at par value) of investments in municipal
auction rate securities (ARS) issued by student loan funding organizations.
The ARS are classified as trading securities in noncurrent assets and are
reflected at estimated fair value. These securities are high-grade (at least
AA-rated with one or more rating agencies) and approximately 79% are either
guaranteed by the Department of Education under the Federal Family Education
Loan Program (37%) or backed by insurance companies, AMBAC Assurance
Corporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidity
for investors in ARS was provided via an auction process that reset the
interest rate every 35 days, allowing investors to either roll over their
investments or sell them at par value. Beginning in February 2008, there
was insufficient demand for these types of investments during the auctions and,
as a result, these securities became illiquid. Although the auctions for the
securities have failed, certain issuers did redeem, at par value, $8.2 million
of ARS held by the Company, and one of the Companys investment banks
purchased, at par value, $4.0 million of ARS held by the Company. In addition, the Company has not experienced
any defaults and continues to earn and receive interest on all of the
investments still owned by the Company.
There was insufficient
observable market information available as of January 31, 2009 to
determine the fair value of the Companys ARS. Accordingly, the Company
estimated Level 3 fair values for these securities based on assumptions that
market participants would use in their estimates of fair value. These
assumptions included, among other things, discounted cash flow projections, the
timing of expected future successful auctions or redemptions, collateralization
of the underlying securities and the creditworthiness of the issuers and
insurance companies. Based on this Level
3 valuation, the ARS investments were valued at $38.9 million as of January 31,
2009, representing a $4.9 million decline from par value. Prior to fiscal 2008,
the ARS were valued at par value due to the frequent resets that historically
occurred through the auction process.
In November 2008, the
Company accepted an offer (the Right) from UBS AG (UBS) allowing the
Company to sell at par value the remaining ARS to UBS at anytime during a
two-year period from June 30, 2010 through July 2, 2012. In accepting the Right, the
F-12
Table of Contents
Company granted UBS the
authority to sell or auction the ARS at par value at any time up until the
expiration date of the Right and released UBS from any claims relating to the
marketing and sale of ARS. The ARS will
continue to earn interest until they are liquidated. The obligations of UBS under the Right are
not secured by its assets and do not require UBS to obtain any financing to
purchase the ARS. UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its
obligations under the Right. If UBS does
not have sufficient funding to buy back the ARS and no alternative buyers are
located either through the auction process, issuer redemptions or other means,
then the Company may not be able to access cash by selling these securities
without incurring a loss of principal.
The Right represents a put option and is recognized
as an instrument separate from the ARS.
The Company elected to account for this Right at fair value under SFAS No. 159
. The
Right was valued using a discounted cash flow approach that includes estimates
of interest rates and the credit risk associated with UBS. This valuation is based on unobservable
inputs, therefore, represents a Level 3 fair value. A $4.9 million gain associated with the Right
was recorded in selling, general and administrative expenses, together with the
$4.9 million ARS impairment charge discussed above. The Company expects that subsequent changes
in the value of the Right will largely offset the subsequent fair value
movements of the ARS, subject to the continued expected performance by UBS of
its obligations under the Right. Prior to the acceptance of the Right, the ARS
were classified as available-for-sale, and the Company recorded a temporary
unrealized loss of $1,544,000 (net of tax) in other comprehensive income as of
the end of the third quarter of 2008.
Upon acceptance of the Right to sell the ARS, the ARS were reclassified
to trading securities and the related unrealized loss was reclassified to net
income in the fourth quarter.
The following table provides
a summary of changes in fair value of the Companys investment securities for
the year ended January 31, 2009 (in thousands):
|
|
Level 2
|
|
Level 3
|
|
Balance as of February 2, 2008
|
|
$
|
56,165
|
|
$
|
|
|
Transfer from Level 2 to Level 3
|
|
(56,665
|
)
|
56,665
|
|
Sales/redemptions of auction rate
securities
|
|
(3,500
|
)
|
(12,175
|
)
|
Purchases of auction rate securities
|
|
4,000
|
|
|
|
Losses included in earnings
|
|
|
|
(4,901
|
)
|
Recognition of put option
|
|
|
|
4,901
|
|
Reclassification of interest receivable to
other current assets
|
|
|
|
(665
|
)
|
Balance as of January 31, 2009
|
|
$
|
|
|
$
|
43,825
|
|
Investment securities
included in the January 31, 2009 balance sheet consist of ARS valued at
$38,924,000 and the put option valued at $4,901,000, both of which are
classified as noncurrent assets due to the expectation that liquidity will not
occur during the next twelve months. As
of February 2, 2008, ARS investments, totaling $56,165,000, were
classified as current assets due to the successful history of ARS auctions up
until that time which had provided liquidity every 35 days.
(5) Revolving
Lines of Credit
In March 2008, the
Company obtained a $35 million unsecured revolving credit facility with Bank of
America, replacing a $3 million facility that had been scheduled to expire on June 30,
2008. This new facility has a term of
364 days, has an unused commitment fee equal to 0.15%, and has one restrictive
financial covenant (consolidated leverage ratio). Loans under the facility bear interest at
either (a) a rate equal to the higher of (i) the Federal Funds Rate
plus 0.50% and (ii) Bank of Americas prime rate, plus an applicable
margin; or (b) a rate equal to LIBOR plus an applicable margin. The
applicable margin is dependent on the Companys consolidated leverage ratio and
ranges from 1.00% to 1.50% for LIBOR-based loans, and from 0.00% to 0.50% for
prime rate-based loans. The Company has had no borrowings under this facility.
On
March 25, 2009, the credit facility with Bank of America was amended to
extend the expiration date to March 24, 2010 and to lower the commitment
to $20 million, reflecting the Companys year end cash position and the fact
that there have been no borrowings under the facility. In addition, changes were made to the pricing
of the facility, including an increase in the unused commitment fee to 0.25%
and an amendment of the interest rates.
Loans under the facility now bear interest
at either (a) a rate equal to the highest of (i) the Federal Funds
Rate plus 0.50%, (ii) LIBOR plus 1.0% and (iii) Bank of Americas
prime rate, plus an applicable margin; or (b) a rate equal to LIBOR plus
an applicable margin. The applicable margin is dependent on the Companys
consolidated leverage ratio and ranges from 0.75% to 1.25% for loans bearing
interest at the rate described under (a) above and from 1.75% to 2.25% for
loans bearing interest at the rate described under (b) above.
The Company previously had a
$25 million revolving line of credit with Wachovia Capital Finance secured by
substantially all of the Companys assets and pursuant to which the Company
paid customary fees. This secured line of credit expired on April 2, 2007
and was not renewed.
F-13
Table of Contents
(6) Capital
Lease Obligations
The Company has capital
lease obligations that financed the purchase of certain technology equipment.
These obligations have a maturity date of December 2009. All of these
obligations are secured by the technology equipment. The lease agreement
contains cross default provisions which result in a default on the lease if the
Company is out of compliance with any other borrowing agreements.
As of January 31, 2009
and February 2, 2008, capital lease obligations consist of the following
(in thousands):
|
|
January 31,
|
|
February 2,
|
|
|
|
2009
|
|
2008
|
|
Capital lease obligations issued to finance
purchase of technology equipment; payable in monthly installments averaging
approximately $124 in 2009, with a maturity date of December 2009;
interest rate of 11.3%; secured by technology equipment
|
|
$
|
1,403
|
|
$
|
2,983
|
|
Less current portion of capital lease
obligations
|
|
1,403
|
|
1,580
|
|
Noncurrent portion of capital lease
obligations
|
|
$
|
|
|
$
|
1,403
|
|
As of January 31, 2009,
annual capital lease obligation maturities are as follows (in thousands):
Fiscal Year
|
|
|
|
2009
|
|
$
|
1,475
|
|
Less portion attributable to future
interest payments (at rate of 11.3%)
|
|
(72
|
)
|
|
|
$
|
1,403
|
|
F-14
Table of Contents
(7) Income
Taxes
Income
tax expense for fiscal 2008, 2007 and 2006 consists of the following (in
thousands):
|
|
2008
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,258
|
|
$
|
6,667
|
|
10,893
|
|
State
|
|
945
|
|
1,113
|
|
1,972
|
|
Total current
|
|
8,203
|
|
7,780
|
|
12,865
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(190
|
)
|
(1,080
|
)
|
(1,733
|
)
|
State
|
|
(143
|
)
|
(321
|
)
|
(515
|
)
|
Total deferred
|
|
(333
|
)
|
(1,401
|
)
|
(2,248
|
)
|
Total income tax expense
|
|
$
|
7,870
|
|
$
|
6,379
|
|
$
|
10,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense computed using the federal statutory rate is reconciled to the
reported income tax expense as follows for fiscal 2008, 2007 and 2006 (in
thousands):
|
|
2008
|
|
2007
|
|
2006
|
|
Statutory rate applied to income before
income taxes
|
|
$
|
8,839
|
|
$
|
7,208
|
|
$
|
10,869
|
|
State income taxes, net of federal benefit
|
|
985
|
|
870
|
|
1,371
|
|
State tax credits
|
|
(439
|
)
|
(395
|
)
|
(410
|
)
|
Secondary offering expense
|
|
|
|
211
|
|
|
|
Tax exempt interest
|
|
(811
|
)
|
(834
|
)
|
(677
|
)
|
General business credits
|
|
(786
|
)
|
(697
|
)
|
(403
|
)
|
Other
|
|
82
|
|
16
|
|
(133
|
)
|
Income tax expense
|
|
$
|
7,870
|
|
$
|
6,379
|
|
$
|
10,617
|
|
The components of deferred
tax assets and deferred tax liabilities as of January 31, 2009 and February 2,
2008 are as follows (in thousands):
|
|
2008
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
Deferred rent amortization
|
|
$
|
1,526
|
|
$
|
1,335
|
|
Inventory capitalization
|
|
1,807
|
|
1,574
|
|
Book and tax depreciation differences
|
|
1,412
|
|
1,801
|
|
Vacation liability
|
|
459
|
|
358
|
|
State tax credits
|
|
591
|
|
482
|
|
Stock options
|
|
980
|
|
917
|
|
Other
|
|
100
|
|
80
|
|
Total deferred tax assets
|
|
6,875
|
|
6,547
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Prepaid expenses
|
|
(622
|
)
|
(665
|
)
|
Goodwill
|
|
(326
|
)
|
(288
|
)
|
Total deferred tax liabilities
|
|
(948
|
)
|
(953
|
)
|
Net deferred tax asset
|
|
$
|
5,927
|
|
$
|
5,594
|
|
F-15
Table of Contents
The Company adopted FASB
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109
(FIN
48) on February 4, 2007. FIN 48
clarifies the accounting and disclosure for uncertain tax positions. 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 performed a review and assessment of all tax positions and during
fiscal year 2007 recorded a net benefit to retained earnings and a decrease to
current liabilities of $301,000 in accordance with FIN 48. The Company files income tax returns in U.S.
federal and state jurisdictions where it does business and is subject to
examinations by the IRS and other taxing authorities. As of January 31,
2009, there were 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 charges as either
income tax expense or another expense classification. Should such expense
be incurred in the future, the Company will classify such interest as a
component of interest expense and penalties as a component of income tax
expense.
In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible and income tax credits may be
utilized, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences. Income tax credits
generated but not yet utilized by the Company may be carried forward for
periods ranging from 10 to 15 years. As such, a valuation allowance for
deferred tax assets was not considered necessary as of January 31, 2009 or
February 2, 2008. The Company has $846,000 of tax credit carryforwards for
one state, available for use through 2022, and tax credit carryforwards of
$63,000 for another state, available for use through 2018. The Company files
income tax returns with the U.S. federal government and various state
jurisdictions. With a few exceptions, the Company is no longer subject to U.S.
federal and state income tax examinations by tax authorities for years prior to
fiscal 2005.
(8) Stockholders
Equity
Secondary
Offerings
On January 31, 2006,
the Company completed a secondary offering of shares of the Companys common
stock by certain of its stockholders that was priced at $42.25 per share.
The offering consisted of 1,926,250 shares of the Companys common stock.
All of the shares were sold by stockholders of the Company and, as a result,
the Company did not receive any of the proceeds from the offering. In
connection with the offering, certain of the Companys stockholders exercised
options which were then sold in the offering for which the Company received
approximately $473,000. The Company incurred expenses in fiscal 2005 in
connection with the secondary offering of approximately $525,000.
On June 18, 2007, the
Company completed another secondary offering of shares of the Companys common
stock by certain of its stockholders that was priced at $37.92 per share. The offering consisted of 2,455,250 shares of
the Companys common stock. All of the shares were sold by stockholders
of the Company and, as a result, the Company did not receive any of the
proceeds from the offering. In connection with the offering, certain of
the Companys stockholders exercised options which were then sold in the
offering for which the Company received approximately $50,000. The
Company incurred expenses in fiscal 2007 in connection with the secondary
offering of approximately $600,000.
Stock-Based
Compensation
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 Allied Fashion 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. In August 2006,
the 1999 Plan was amended to permit the exercise price of stock options to be
satisfied through net share settlements.
The Incentive Plan provides
for the grant of incentive and nonqualified options, nonvested restricted stock
and other forms of stock-based compensation to key employees and
directors. The Board of Directors determines the exercise prices of the
option grants which are generally equal to the closing market price of the
Companys stock on the date of grant. Option grants generally vest in
equal
F-16
Table of Contents
installments over four years
from the date of grant for employees and over one to three years for directors
and 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 Incentive Plan was
amended to permit the exercise price of stock options to be satisfied through
net share settlements, and in May 2008, the Incentive Plan was amended to
permit the lapsing of restrictions on restricted stock at any time in the event
of a change in control of the Company.
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. 123R.
The Company selected the Modified Prospective transition approach for
adoption of SFAS No. 123R. Under the Modified Prospective approach, prior
periods are not restated. Compensation expense for the unvested portions of
grants awarded prior to January 29, 2006 are recognized over the grants
remaining service periods using the compensation cost calculated previously for
pro-forma disclosure under APB Opinion No. 25 . 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.
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 noted in
the following table. 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 Bulletins 107 and 110 (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 for
the vesting period in effect at the time of grant.
No options were granted in
fiscal 2008 or 2007. The fair value of
options granted during fiscal 2006 was estimated using the following weighted
average assumptions:
|
|
2006
|
|
Expected dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
50.00
|
%
|
Risk-free interest rate
|
|
4.71
|
%
|
Weighted-average expected life, in years
|
|
6.2 years
|
|
A summary of the status of
stock options under the Companys stock option plans and changes during fiscal
2008 is presented in the table below:
|
|
2008
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
Price
|
|
Term (Years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of February 3, 2008
|
|
560,141
|
|
$
|
9.48
|
|
5.0
|
|
$
|
5,190,425
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(246,823
|
)
|
2.10
|
|
2.5
|
|
|
|
Net shares settled
|
|
(77,643
|
)
|
0.38
|
|
2.8
|
|
|
|
Forfeited
|
|
(26,825
|
)
|
26.63
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 31, 2009
|
|
208,850
|
|
$
|
19.38
|
|
5.8
|
|
$
|
391,632
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of
January 31, 2009
|
|
192,747
|
|
$
|
18.51
|
|
5.7
|
|
$
|
391,632
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of January 31, 2009
|
|
154,170
|
|
$
|
15.94
|
|
5.4
|
|
$
|
391,632
|
|
F-17
Table of Contents
As of January 31, 2009,
the range of exercise prices was $0.38 to $44.03. As of February 2,
2008, the range of exercise prices and weighted-average remaining contractual
life of outstanding options was $0.38 to $44.03 and 5.0 years,
respectively. As of February 3, 2007, the range of exercise prices
and weighted-average remaining contractual life of outstanding options was
$0.38 to $44.03 and 5.7 years, respectively.
There were no options
granted in fiscal 2008 or 2007. The weighted average grant-date fair value of
options granted during fiscal 2006 was $22.03 per share, or approximately
$2,074,000. Cash received from options exercised totaled $475,000,
$411,000 and $914,000 in fiscal 2008, 2007 and 2006, respectively. The
intrinsic value of options exercised was approximately $4,578,000, $8,136,000
and $32,823,000 in fiscal 2008, 2007 and 2006, respectively.
Prior to the adoption of
SFAS No. 123R, the Company presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the statements of cash
flows. SFAS No. 123R requires that cash flows resulting from tax
deductions in excess of the cumulative compensation cost recognized for options
exercised (excess tax benefits) be classified as financing cash flows. Excess
tax benefits realized from the exercise of stock options was approximately $1.2
million, $3.5 million and $12.2 million in fiscal 2008, 2007 and 2006,
respectively.
The Company recognized
$811,000, $931,000 and $842,000 in compensation expense for option grants
during fiscal 2008, 2007 and 2006, respectively. As of January 31, 2009,
the total compensation cost related to stock option awards that will be
incurred in future periods amounts to $612,000. The weighted-average
period over which this amount is expected to be recognized is 15.7
months. The Companys stock option plans allow the Company to issue new
shares from shares authorized for issuance or repurchase shares on the open
market to complete employee stock option exercises. The Company does not
currently plan to repurchase shares.
The Companys Incentive Plan
allows for grants of nonvested restricted stock. 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 closing market price on the date of grant times the number of shares
granted. Using an estimated forfeiture
rate equal to 8.5%, the Company expects to recognize $3,435,000 in future
compensation expense from the grants of nonvested stock over the requisite
service period. During fiscal 2008 and
2007, compensation expense arising from nonvested stock grants totaled
$1,213,000 and $565,000, respectively.
A summary of activity
related to nonvested stock grants during the year ended January 31, 2009
is as follows:
|
|
Nonvested
|
|
Wtd. Avg. Grant
|
|
|
|
Shares
|
|
Date Fair Value
|
|
Outstanding as of February 3, 2008
|
|
64,471
|
|
$
|
40.14
|
|
Granted
|
|
212,751
|
|
17.62
|
|
Vested
|
|
(18,983
|
)
|
40.17
|
|
Forfeited
|
|
(20,929
|
)
|
28.95
|
|
Outstanding as of January 31, 2009
|
|
237,310
|
|
$
|
20.87
|
|
(9) Commitments
and Contingencies
The Company leases its
stores under operating leases, which generally have an initial term of five
years with renewal options. Future minimum rent payments under operating leases
having noncancelable lease terms as of January 31, 2009 are as follows (in
thousands):
Fiscal Year:
|
|
|
|
2009
|
|
$
|
22,801
|
|
2010
|
|
19,887
|
|
2011
|
|
16,228
|
|
2012
|
|
11,008
|
|
2013
|
|
5,359
|
|
Thereafter
|
|
3,820
|
|
Total future minimum lease payments
|
|
$
|
79,103
|
|
Certain operating leases
provide for fixed monthly rents, while others provide for contingent rents
computed as a percentage of net sales and others provide for a combination of
both fixed monthly rents and contingent rents computed as a percentage of net
sales.
F-18
Table of Contents
Rent expense was $23.1
million, $19.3 million and $16.0 million for fiscal 2008, 2007 and 2006
(including $1.6 million, $1.9 million and $2.5 million of percentage rent),
respectively.
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
liquidity.
(10) Valuation and Qualifying Accounts
The following table summarizes
the allowance for inventory shrinkage (in thousands):
|
|
Inventory
|
|
|
|
Shrinkage
|
|
|
|
Reserve
|
|
Balance as of January 28, 2006
|
|
$
|
1,906
|
|
Additions charged to costs and expenses
|
|
6,398
|
|
Deductions
|
|
(6,035
|
)
|
Balance as of February 3, 2007
|
|
2,269
|
|
Additions charged to costs and expenses
|
|
8,374
|
|
Deductions
|
|
(8,109
|
)
|
Balance as of February 2, 2008
|
|
2,534
|
|
Additions charged to costs and expenses
|
|
7,331
|
|
Deductions
|
|
(7,885
|
)
|
Balance as of January 31, 2009
|
|
$
|
1,980
|
|
Additions charged to costs and
expenses are the result of estimated inventory shrinkage. Deductions represent
actual inventory shrinkage incurred from physical inventories taken during the
fiscal year.
F-19
Table of Contents
(11)
Unaudited Quarterly Results
of Operations
|
|
Quarter Ended
|
|
|
|
Jan. 31
|
|
Nov. 1
|
|
Aug. 2
|
|
May 3,
|
|
Feb. 2
|
|
Nov. 3
|
|
Aug. 4
|
|
May 5,
|
|
|
|
2009
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
(in thousands, except per share and share amounts)
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
146,603
|
|
$
|
104,948
|
|
$
|
115,655
|
|
$
|
120,996
|
|
$
|
134,571
|
|
$
|
99,542
|
|
$
|
96,826
|
|
$
|
106,576
|
|
Cost of sales
|
|
90,695
|
|
66,208
|
|
70,731
|
|
74,233
|
|
87,145
|
|
65,026
|
|
61,734
|
|
64,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
55,908
|
|
38,740
|
|
44,924
|
|
46,763
|
|
47,426
|
|
34,516
|
|
35,092
|
|
41,698
|
|
Selling, general and administrative expenses
|
|
37,409
|
|
36,482
|
|
36,877
|
|
36,241
|
|
32,892
|
|
32,455
|
|
31,548
|
|
30,575
|
|
Depreciation and amortization
|
|
4,346
|
|
4,134
|
|
4,078
|
|
3,703
|
|
3,488
|
|
3,265
|
|
3,009
|
|
2,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
14,153
|
|
(1,876
|
)
|
3,969
|
|
6,819
|
|
11,046
|
|
(1,204
|
)
|
535
|
|
8,302
|
|
Interest income (expense), net
|
|
229
|
|
696
|
|
482
|
|
781
|
|
583
|
|
415
|
|
415
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
14,382
|
|
(1,180
|
)
|
4,451
|
|
7,600
|
|
11,629
|
|
(789
|
)
|
950
|
|
8,803
|
|
Income tax expense (benefit)
|
|
4,326
|
|
(493
|
)
|
1,605
|
|
2,432
|
|
3,251
|
|
(276
|
)
|
323
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,056
|
|
$
|
(687
|
)
|
$
|
2,846
|
|
$
|
5,168
|
|
$
|
8,378
|
|
$
|
(513
|
)
|
$
|
627
|
|
$
|
5,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
$
|
0.71
|
|
$
|
(0.05
|
)
|
$
|
0.20
|
|
$
|
0.37
|
|
$
|
0.60
|
|
$
|
(0.04
|
)
|
$
|
0.05
|
|
$
|
0.41
|
|
Diluted (1)
|
|
$
|
0.70
|
|
$
|
(0.05
|
)
|
$
|
0.20
|
|
$
|
0.36
|
|
$
|
0.59
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
$
|
0.40
|
|
Weighted average shares used to compute net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,240,602
|
|
14,141,132
|
|
14,095,135
|
|
14,047,841
|
|
14,033,557
|
|
14,022,549
|
|
13,922,130
|
|
13,807,134
|
|
Diluted
|
|
14,289,848
|
|
14,141,132
|
|
14,278,985
|
|
14,216,580
|
|
14,187,870
|
|
14,022,549
|
|
14,249,255
|
|
14,218,634
|
|
(1)
Net income (loss) per share is computed
independently for each period presented. As a result, the total of the per
share earnings for the four quarters may not equal the annual amount.
F-20
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