Citi Trends Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, capital allocation expectations or statements regarding the outcome or impact of pending or threatened litigation. These, and similar statements, are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements. The factors that may result in actual results differing from such forward-looking information include, but are not limited to: uncertainties relating to general economic conditions, including inflation, energy and fuel costs, unemployment levels, and any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory) or other factors; changes in market interest rates and market levels of wages; the imposition of new taxes on imports, new tariffs and changes in existing tariff rates; the imposition of new trade restrictions and changes in existing trade restrictions; impact of natural disasters such as hurricanes; uncertainty and economic impact of pandemics, epidemics or other public health emergencies; transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to attract and retain workers; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; consumer confidence and changes in consumer spending patterns; competition within the industry; competition in our markets; the duration and extent of any economic stimulus programs; changes in product mix; interruptions in suppliers’ businesses; risks related to cybersecurity, data privacy and intellectual property; temporary changes in demand due to weather patterns; seasonality of the Company’s business; the results of pending or threatened litigation; delays and costs associated with building, opening, remodeling, assuming leases and operating new stores; delays and costs associated with building, opening or expanding new or existing distribution centers; changes in regulatory requirements or stackholder’s expectations on environmental, social and sustainability related topics, challenges effectively managing the use of artificial intelligence; strategic transactions that could negatively impact our liquidity, increase our expenses, or present significant distractions to management; debt and equity market conditions, including the ability to access capital markets on favorable terms or at all; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2026 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K. Executive Overview We are a leading off-price value retailer of apparel, accessories and home trends primarily for Black families in the United States. Our high quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-concious customers. As of August 1, 2026, we operated 594 stores in urban, suburban and rural markets in 33 states. 14 Table of Contents Uncertainties and Challenges General Economic Conditions We are monitoring trends in general economic conditions including inflation, tariffs and changes in consumer sentiment. We also regularly monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, gas prices, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions. Seasonality and Weather Patterns 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have expanded our product offerings to balance discretionary with non-discretionary product, traffic to our stores is still influenced by weather patterns to some extent. Basis of 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. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs, and advertising costs. The following discussion contains references to fiscal years 2026 and 2025, which represent fiscal years ending or ended on January 30, 2027 and January 31, 2026, respectively. Fiscal 2026 and fiscal 2025 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part I, Item 1 of this Report. Results of Operations The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. 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 as a result of the seasonality of our business, and the current economic uncertainty. Key Operating Statistics 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 open for at least 14 full consecutive months without closure for more than seven days within the same fiscal month. Remodeled and relocated stores are included in the comparable store sales results if the selling square footage is not changed significantly, the store is not closed for more than five days in any fiscal month and the store remains in the same trade area. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability. In addition to sales, we measure cost of sales 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 the overall performance of each individual store. Finally, we monitor corporate and distribution center expenses against budgeted amounts. 15 Table of Contents Thirteen Weeks Ended August 1, 2026 and August 2, 2025 Net Sales. Net sales increased $20.9 million, or 10.9%, to $211.6 million in the second quarter of 2026 from $190.8 million in the second quarter of 2025. Comparable store sales increased 10.5%, resulting in an increase of $19.8 million in sales. Net store opening and closing activity resulted in a net increase of $1.0 million in sales. Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $11.3 million, or 9.8%, to $125.7 million in the second quarter of 2026 from $114.5 million in the second quarter of 2025. Cost of sales as a percentage of sales was 59.4% in the second quarter of 2026 and 60.0% in the second quarter of 2025. The change was due to higher merchandise margin and lower shrink, partially offset by higher freight expense. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.4 million, or 4.3%, to $82.3 million in the second quarter of 2026 from $78.9 million in the second quarter of 2025. The increase was primarily driven by certain store expenses to support additional sales. As a percentage of sales, selling, general and administrative expenses decreased to 38.9% in the second quarter of 2026 from 41.4% in the second quarter of 2025, primarily driven by the aforementioned items. Depreciation. Depreciation expense increased $1.0 million, or 19.7%, to $5.4 million in the second quarter of 2026 from $4.5 million in the second quarter of 2025. Impairment. There were no non-cash impairment expenses related to underperforming stores in the second quarter of 2026 compared to $0.2 million in the second quarter of 2025, comprised of leasehold improvements and fixtures and equipment. Gain on Sale of Building. Gain on sale of the corporate office building was $11.0 million in the second quarter of 2025. Income Tax Benefit. Income tax benefit of $.3 million was recognized in the second quarter of 2026. No income tax benefit was recognized in the second quarter of 2025. We used the annual effective tax rate to determine income tax benefit based upon interim period results. Net Income (Loss). Net loss was $0.9 million in the second quarter of 2026 compared to net income of $3.8 million in the second quarter of 2025 due to the factors discussed above. Twenty-Six Weeks Ended August 1, 2026 and August 2, 2025 Net Sales. Net sales increased $50.0 million, or 12.7%, to $442.5 million in the first twenty-six weeks of 2026 from $392.5 million in the same period of 2025. Comparable store sales increased 12.2%, resulting in an increase of $47.5 million in sales. Net store opening and closing activity resulted in a net increase of $2.5 million in sales. Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $28.0 million, or 11.8%, to $264.4 million in the first twenty-six weeks of 2026 from $236.4 million in the same period of 2025. Cost of sales as a percentage of sales decreased to 59.7% in the first twenty-six weeks of 2026 from 60.2% in the same period of 2025. The change was due to higher merchandise margin and lower shrink, partially offset by higher freight expense. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $8.2 million, or 5.4%, to $162.0 million in the first twenty-six weeks of 2026 from $153.8 million in the same period of 2025. The increase was primarily driven by certain store expense to support additional sales. As a percentage of sales, Selling, general and administrative expenses decreased to 36.6% in the first twenty-six weeks of 2026 from 39.2% in the same period of 2025, due to the aforementioned items. Depreciation. Depreciation expense increased $1.7 million, or 18.3%, to $10.6 million in the first twenty-six weeks of 2026 from $8.9 million in the same period of 2025 primarily due to increase in property and equipment. Impairment. There were no non-cash impairment expenses related to underperforming stores in the first twenty-six weeks of 2026 compared to $0.3 million in the first twenty-six weeks of 2025, comprised of leasehold improvements and fixtures and equipment. 16 Table of Contents Gain on Sale of Building. Gain on sale of the corporate office building was $11.0 million in the second quarter of 2025. Income Tax Benefit. Income tax benefit of $.14 million was recognized in the first twenty-six weeks of 2026. No income tax benefit was recognized in the first twenty-six weeks of 2025. We used the annual effective tax rate to determine income tax benefit based upon interim period results. Net Income (Loss). Net income was $6.8 million in the first twenty-six weeks of 2026 compared to net income of $4.7 million in the same period of 2025 due to the factors discussed above. Liquidity and Capital Resources Capital Allocation Our capital allocation strategy is to maintain adequate liquidity to prioritize investments in opportunities to profitably grow our business and maintain current operations. Our existing share repurchase authorization also remains in place with $40 million of authorization outstanding. We will deploy or return capital based on the opportunities available to us, market conditions, and ultimately, where we believe we can generate the greatest long term value for our shareholders. Our quarter-end cash and cash equivalents balance was $55.9 million compared to $50.4 million at the end of the second quarter last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts. Our principal sources of liquidity consist of: (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment. On August 25, 2026, the Company filed a registration statement on Form S-3 relating to the potential offer and sale from time to time of up to $100 million of its common stock. Once effective, the registration statement will provide the Company with additional flexibility to access the capital markets and support potential future capital needs. The Company currently has no definitive plans to issue securities under the registration statement, and no securities have been issued thereunder as of the date of this report. Inventory Our quarter-end inventory balance was $126.4 million, a 7.5% increase compared to $117.6 million at the end of the second quarter last year. The increase was primarily driven by inventory investments to support strong customer demand. Capital Expenditures Capital expenditures in the first twenty-six weeks of 2026 were $15.6 million, an increase of $7.9 million over the first t wenty-six weeks of 2025, as we increased our investments in new stores and remodels. We anticipate capital expenditures in fiscal 2026 to be in the range of $35 million to $40 million, primarily for new stores and remodeling of existing stores. ​ 17 Table of Contents Share Repurchases No shares were repurchased in the first tweny-six weeks of fiscal 2026. In the first twenty-six weeks of fiscal 2025, we returned $6.3 million to stockholders through share repurchases. See Part II, Item 2 of this Report and Note 8 to the Financial Statements for more information. Revolving Credit Facility We have a revolving credit facility that matures in April 2030 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements . At the end of the second quarter of 2026, we had no borrowings under the credit facility and $2.2 million in letters of credit outstanding. Cash Flows Cash Flows From Operating Activities . Net cash provided by operating activities was $6.7 million in the first twenty-six weeks of 2026 compared to net cash used in operating activities of $7.1 million in the same period of 2025. Significant sources of cash for the first twenty-six weeks of 2026 included net income adjusted for non-cash items totaling $45.0 million compared to net income adjusted for non-cash items of $29.9 million in the first twenty-six weeks of 2025. Significant uses of cash from operating activities in the first twenty-six weeks of 2026 included (1) a $21.8 million decrease in accrued expenses and other long-term liabilities (compared to a $29.6 million decrease in the first twenty-six weeks of 2025) due primarily to payments of operating lease liabilities; (2) a $7.9 million increase in prepaid and other current assets compared to a $9.4 million dollar increase in the first twenty-six weeks of 2025; (3) a $12.9 million increase in inventory in the first twenty-six weeks of 2026 compared to a $5.1 million decrease in inventory for the same period in 2025 and (4) a $2.8 million decrease in accrued compensation in the first twenty-six weeks of 2026 compared to a $2.0 increase in the same period last year. Cash Flows From Investing Activities. Cash used in investing activities was $15.6 million in the first twenty-six weeks of 2026 compared to $3.5 million provided in the same period last year. Cash used of $15.6 million in the first twenty-six weeks of fiscal 2026 consisted of purchases of property and equipment. The cash provided of $3.5 million in the first twenty-six weeks of 2025 was from the sale of a building for $11.2 million, offset by $7.7 million used for the purchases of property and equipment. Cash Flows From Financing Activities. Cash used in financing activities was $1.3 million in the first twenty-six weeks of 2026 compared to $7.1 million in the same period last year. Cash used in the first twenty-six weeks of fiscal 2026 was $1.3 million to settle withholding taxes on the vesting of restricted stock, compared to $0.8 million used to settle withholding taxes on the vesting of restricted stock and $6.3 million for share repurchases in the first twenty-six weeks of fiscal 2025. Cash Requirements and Commitments Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We may also use cash to fund any share repurchases, make any required debt payments and satisfy other contractual obligations. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of August 1, 2026, our contractual commitments for operating leases totaled $224.8 million (with $64.9 million due within 12 months). See Note 11 to the Financial Statements for more information regarding lease commitments. Critical Accounting Policies The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 18 Table of Contents There have been no material changes to the Critical Accounting Policies outlined in our Annual Report on Form 10-K for the fiscal year ended January 31, 2026. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in our market risk during the twenty-six weeks ended August 1, 2026 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2026 .