What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-09-08 compared with 2020-06-11 · 137 added, 302 removed, 189 unchanged (70% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

May 2, 2020 and February 1, 2020

(in thousands, except share data)

5 unchanged sentences

Total current assets

Property and equipment, net of accumulated depreciation of $267,330 and $262,570 as of May 2, 2020 and February 1, 2020, respectively

Property and equipment, net of accumulated depreciation of $ 271,749 and $ 262,570 as of August 1, 2020 and February 1, 2020, respectively

Operating lease right of use assets

1 unchanged sentence

Deferred income taxes

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities:

9 unchanged sentences

Total liabilities

Stockholders’

Stockholders’ equity:

Common stock, $ 0.01 par value.

Authorized 32,000,000 shares;

15,950,332 shares issued as of May 2, 2020 and 15,907,666 shares issued as of February 1, 2020;

10,616,546 shares outstanding as of May 2, 2020 and 10,834,134 shares outstanding as of February 1, 2020

15,967,948 shares issued as of August 1, 2020 and 15,907,666 shares issued as of February 1, 2020;

10,634,162 shares outstanding as of August 1, 2020 and 10,834,134 shares outstanding as of February 1, 2020

Paid in capital

1 unchanged sentence

Treasury stock, at cost;

5,333,786 shares held as of May 2, 2020 and 5,073,532 shares held as of February 1, 2020

Total stockholders’

5,333,786 shares held as of August 1, 2020 and 5,073,532 shares held as of February 1, 2020

Total stockholders’ equity

Commitments and contingencies (note 8)

Total liabilities and stockholders’

Total liabilities and stockholders’ equity

See accompanying notes to the condensed consolidated financial statements (unaudited).

1 unchanged sentence

Condensed Consolidated Statements of Operations

Thirteen Weeks Ended May 2, 2020 and May 4, 2019

(in thousands, except per share amounts)

Thirteen Weeks Ended

Cost of sales (exclusive of depreciation shown separately below)

Twenty-Six Weeks Ended

Cost of sales (exclusive of depreciation)

Selling, general and administrative expenses

9 unchanged sentences

Weighted average number of shares outstanding

Citi Trends, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

Thirteen Weeks Ended

Cost of sales (exclusive of depreciation)

Selling, general and administrative expenses

Asset impairment

Income from operations

Interest income

Interest expense

Income before income taxes

Income tax provision

Basic net income per common share

Diluted net income per common share

Weighted average number of shares outstanding

See accompanying notes to the condensed consolidated financial statements (unaudited).

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Thirteen Weeks Ended May 2, 2020 and May 4, 2019

(in thousands)

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Operating activities:

Net (loss) income

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Non-cash operating lease costs

2 unchanged sentences

Deferred income taxes

Insurance proceeds related to operating activities

Non-cash stock-based compensation expense

11 unchanged sentences

Purchases of property and equipment

Net cash provided by investing activities

Insurance proceeds related to investing activities

Net cash provided by (used in) investing activities

Financing activities:

Borrowings under revolving credit facility

Repayments of revolving credit facility

Cash used to settle withholding taxes on the vesting of nonvested restricted stock

8 unchanged sentences

Cash paid for interest

Cash refunds of income taxes

Cash payments of income taxes

Supplemental disclosures of non-cash investing activities:

2 unchanged sentences

Citi Trends, Inc.

Condensed Consolidated Statements of Stockholders’

Thirteen Weeks Ended May 2, 2020 and May 4, 2019

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

Thirteen Weeks Ended May 2, 2020

Treasury Stock

Balances —February 1, 2020

Balances — February 1, 2020

Vesting of nonvested restricted stock units

Issuance of nonvested shares under incentive plan

Forfeiture of nonvested shares by employees and directors

Forfeiture of nonvested shares

Stock-based compensation expense

2 unchanged sentences

Dividends paid to stockholders ($ 0.08 per common share)

Balances —May 2, 2020

Thirteen Weeks Ended May 4, 2019

Balances — May 2, 2020

Issuance of nonvested shares under incentive plan

Stock-based compensation expense

Net share settlement of nonvested shares and restricted stock units

Balances — August 1, 2020

Treasury Stock

Balances —February 2, 2019

Adoption of lease accounting standard (see Note 12)

Balances — February 2, 2019

Adoption of lease accounting standard

Vesting of nonvested restricted stock units

4 unchanged sentences

Dividends paid to stockholders ($ 0.08 per common share)

Balances—May 4, 2019

Balances — May 4, 2019

Issuance of nonvested shares under incentive plan

Forfeiture of nonvested shares

Stock-based compensation expense

Net share settlement of nonvested shares and restricted stock units

Repurchase of common stock

Dividends paid to stockholders ($ 0.08 per common share)

Balances — August 3, 2019

See accompanying notes to the condensed consolidated financial statements (unaudited).

1 unchanged sentence

Notes to the Condensed Consolidated Financial Statements (unaudited)

August 1, 2020

Significant Accounting Policies

1 unchanged sentence

Citi Trends, Inc.

(collectively referred to herein with its wholly owned subsidiary as the “Company”) is a value-priced retailer of fashion apparel, accessories and home goods for the entire family.

As of May 2, 2020, the Company operated 574 stores in 33 states, including temporarily closed stores.

(collectively referred to herein with its wholly owned subsidiary as the “Company”) is a value-priced retailer of fashion apparel, accessories and home goods for the entire family.

As of August 1, 2020, the Company operated 579 stores in 33 states.

The condensed consolidated financial statements are prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP”) for interim reporting and are unaudited.

generally accepted accounting principles (“U.S.

GAAP”) for interim reporting and are unaudited.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.

The condensed consolidated balance sheet as of February 1, 2020 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “2019 Form 10-K”).

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2019 Form 10-K.

Operating results for the thirteen weeks ended May 2, 2020 are not necessarily indicative of the results that may be expected for the fiscal year, as a result of the seasonality of the business and the current uncertainty surrounding the economic impact of the novel coronavirus (“COVID-19”) pandemic.

Operating results for the twenty-six weeks ended August 1, 2020 are not necessarily indicative of the results that may be expected for the fiscal year as a result of the seasonality of the business and changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the novel coronavirus (“COVID-19”) pandemic.

The following contains references to fiscal years 2020 and 2019, which represent fiscal years ending or ended on January 30, 2021 and February 1, 2020, respectively.

1 unchanged sentence

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments –

Credit Losses (Topic 326), which introduced an expected credit loss model for the impairment of financial assets measured at amortized costs.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduced an expected credit loss model for the impairment of financial assets measured at amortized costs.

The model replaces the incurred loss model for those assets and broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost.

1 unchanged sentence

2016-13 on February 2, 2020.

The adoption of the new standard did not have a material impact to the Company’s consolidated financial position, results of operations or cash flows.

Impact of the COVID-19 Pandemic

2 unchanged sentences

After closely monitoring and taking into consideration the guidance from federal, state and local governments, the Company temporarily closed all of its retail store locations and distribution centers effective March 20, 2020.

The temporary closure of the Company’s stores has had an adverse impact on the Company’s financial condition, results of operations and liquidity.

The Company has taken several steps to increase its cash position and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic.

On March 20, 2020, the Company borrowed $43.7 million in principal amount under its revolving credit facility.

Other measures taken to mitigate the operating and financial impact of the pandemic, included (i) furloughing substantially all store and distribution center personnel, and a significant portion of the corporate staff starting as of April 3, 2020, with employee benefits for eligible employees continuing through the temporary furlough;

(ii) implementing temporary tiered salary reductions for management level corporate employees and reducing the cash portion of non-employee director fees;

(iii) extending payment terms with vendors and suppliers;

(iv) abating payments of rent as appropriate;

(v) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs, including through reduced inventory purchases and eliminating the 401(k) plan match;

(vi) suspending any repurchases of shares and payment of dividends;

and (vii) amending the revolving credit facility to extend the term to August 2021.

Beginning April 24, 2020, the Company started to reopen stores in select states in accordance with state and local government guidelines.

As of May 2, 2020, the Company had reopened 16 stores.

As of June 9, 2020, the Company had reopened more than 530 stores, while also opening 4 new stores.

As of July 18, 2020, the Company safely reopened all of its stores and distribution centers.

The temporary closure of the Company’s stores has had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity.

In the first quarter of 2020, the Company took several steps to increase its cash position and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic, including (i) the drawdown of $ 43.7 million in principal amount under the revolving credit facility on March 20, 2020 and an amendment to the revolving credit facility to extend the term to August 2021;

(ii) temporary furloughs of substantially all store and distribution center personnel and a significant portion of the corporate staff, with employee benefits for eligible employees continued through the temporary furloughs;

(iii) temporary tiered salary reductions for management level corporate employees and a reduction to the cash portion of non-employee director fees;

and (iv) extensions of payment terms with vendors and suppliers.

Other measures taken by the Company to mitigate the impact of the pandemic that began in the first quarter of 2020 and are continuing include (i) negotiating rent concessions with landlords;

(ii) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs;

and (iii) temporarily suspending share repurchases and dividend payments.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law.

The provisions include technical corrections to tax depreciation methods for qualified improvement property which allow for accelerated depreciation, an employee retention tax credit and the deferral of the employer portion of social security deposits.

Under the CARES Act, the Company deferred payment of approximately $ 1.7 million of amounts due for the employer portion of social security tax deposits during the six months ended August 1, 2020.

The Company expects to defer approximately $ 3.0 million of additional tax deposits during the remainder of the calendar year as allowed by the CARES Act.

The total amounts of deferred payroll taxes will be paid in

two equal installments during the fourth calendar quarters of 2021 and 2022.

In addition, in the second quarter of 2020, the Company recognized a $ 1.5 million benefit related to the employee retention credit created under the CARES Act based on qualified wages paid primarily to store and distribution center associates.

The retention credit is included in selling, general and administrative expenses on the condensed consolidated statements of operations for the twenty-six and thirteen weeks ended August 1, 2020.

Cash and Cash Equivalents/Concentration of Credit Risk

9 unchanged sentences

The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized.

For the thirteen weeks ended May 2, 2020 and May 4, 2019, there were 179,000 and 108,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.

For the twenty-six weeks ended August 1, 2020 and August 3, 2019, there were 173,000 and 135,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.

For the thirteen weeks ended August 1, 2020 and August 3, 2019, there were 165,000 and 143,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.

The following table provides a reconciliation of the weighted average number of 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:

Twenty-Six Weeks Ended

August 1, 2020

August 3, 2019

Weighted average number of common shares outstanding

Incremental shares from assumed vesting of nonvested restricted stock

Weighted average number of common shares and common stock equivalents outstanding

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

Weighted average number of common shares outstanding

1 unchanged sentence

Weighted average number of common shares and common stock equivalents outstanding

Fair Value Measurement

Fair value is defined 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.

Fair value is established according to a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

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.

Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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 May 2, 2020, the Company’s investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity.

Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):

Obligations of the U.S.

Treasury and U.S.

government agencies (Level 1)

As of February 1, 2020, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):

Obligations of the U.S.

Treasury and U.S.

government agencies (Level 1)

Bank certificates of deposit (Level 2)

Obligations of the U.S.

Treasury (Level 1)

Bank certificates of deposit (Level 2)

The amortized cost and fair market value of investment securities as of February 1, 2020 by contractual maturity were as follows (in thousands):

Mature in one year or less

Mature after one year through five years

During the thirteen weeks ended May 2, 2020, in response to the COVID-19 pandemic and in order to enhance its liquidity position, the Company sold substantially all of its investment securities which were classified as held-to-maturity as of February 1, 2020.

Net gains from the sales of investment securities were $38,300 and $12,500 for short-term and long-term investment securities, respectively.

Impairment of Assets

1 unchanged sentence

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.

In the thirteen weeks ended May 2, 2020, non-cash impairment expense related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

There was no impairment expense recorded in the thirteen weeks ended May 4, 2019.

Non-cash impairment expenses consisted of the following (in thousands):

Twenty-Six Weeks Ended

Thirteen Weeks Ended

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Operating lease right-of-use asset impairment

Store asset impairment

Total asset impairment

Revolving Credit Facility

2 unchanged sentences

The facility was amended again on May 12, 2020, extending the maturity date to August 18, 2021.

The amended facility provides a $50 million credit commitment and a $25 million uncommitted “accordion”

feature that under certain circumstances could allow the Company

to increase the size of the facility to $75 million.

The facility is secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances.

The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment.

Borrowings under the Revolving Credit Facility will bear interest (a) for Eurodollar Loans, at a rate equal to LIBOR plus either 2.25% or 2.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the Federal Funds Rate plus 0.5% or (iii) LIBOR for a period of one month plus 1.0%, plus, in each case either 1.25% or 1.5%, based in any such case on the average daily availability for borrowings under the facility.

The amended facility provides a $ 50 million credit commitment and a $ 25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $ 75 million.

The facility has an unused commitment fee of 0.25 % and permits the payment of cash dividends subject to certain limitations.

Borrowings under the Revolving Credit Facility bear interest (a) for Eurodollar Loans, at a rate equal to LIBOR plus either 2.25 % or 2.5 %, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate, (ii) the Federal Funds Rate plus 0.5 % or (iii) LIBOR for a period of one month plus 1.0 %, plus, in each case either 1.25 % or 1.5 % , based in any such case on the average daily availability for borrowings under the facility.

On March 20, 2020, in response to the COVID-19 pandemic, the Company borrowed $ 43.7 million on the credit facility to enhance its liquidity position.

Such borrowings accrued interest ranging from 1.625 % to 3.5 % .

During the second quarter of 2020, the Company repaid $ 2.1 million of the outstanding borrowings.

Income taxes are accounted for under the asset and liability method.

3 unchanged sentences

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.

For the thirteen weeks ended May 2, 2020, the Company utilized the discrete effective tax rate method to determine its tax expense based upon interim period results.

For the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company utilized the discrete effective tax rate method to determine its tax expense based upon interim period results.

The Company concluded that the use of the discrete method was more appropriate than the annual effective tax rate method because the full-year tax rate is not reliably predictable.

The effective income tax rate was 24.0% for the thirteen weeks ended May 2, 2020, compared to 14.2% for the thirteen weeks ended May 4, 2019.

The difference in the effective income tax rate was due to a pretax loss for the thirteen weeks ended May 2, 2020 compared to pretax income in the prior year.

The effective income tax rate was 27.6 % for the twenty-six weeks ended August 1, 2020, compared to 14.9 % for the twenty-six weeks ended August 3, 2019.

The difference in the effective income tax rate was due to a pretax loss for the twenty-six weeks ended August 1, 2020 compared to pretax income in the prior year and lower federal and state tax credits this year.

On March 27, 2020, the CARES Act was enacted into law.

The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, reduce the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act.

As a result of the CARES Act, to the extent that there are taxable losses at the end of fiscal 2020, the Company estimates that it will be able to obtain a tax refund from the carryback of federal NOLs.

As a result of the CARES Act, to the extent that there are taxable losses at the end of fiscal 2020, the Company believes that it will be able to obtain a tax refund from the carryback of federal NOLs.

Commitments and Contingencies

4 unchanged sentences

Repurchases of Common Stock

In November 2018, the Company’s board of directors approved a program that authorized the repurchase of up to $25.0 million in shares of the Company’s common stock.

During the thirteen weeks ended May 4, 2019, the Company repurchased 82,312 shares of its common stock at an aggregate cost of $1.6 million.

In November 2019, the Company’s board of directors approved a new program that authorized the repurchase of up to $25.0 million in shares of the Company’s common stock.

During the thirteen weeks ended May 2, 2020, the Company repurchased 260,254 shares of its common stock at an aggregate cost of $6.3 million.

On March 13, 2020, the Company’s board of directors approved another new program that authorized the repurchase of up to $30.0 million in shares of the Company’s common stock.

In November 2018, the Company’s board of directors approved a program that authorized the repurchase of up to $ 25.0 million in shares of the Company’s common stock.

During the twenty-six weeks ended August 3, 2019, the Company repurchased 82,312 shares of its common stock at an aggregate cost of $ 1.6 million.

This repurchase program was completed in October 2019.

In November 2019, the Company’s board of directors approved a new program that authorized the repurchase of up to $ 25.0 million in shares of the Company’s common stock.

During the twenty-six weeks ended August 1, 2020, the Company repurchased 260,254 shares of its common stock at an aggregate cost of $ 6.3 million.

This repurchase program was completed in February 2020.

On March 13, 2020, the Company’s board of directors approved another new program that authorized the repurchase of up to $ 30.0 million in shares of the Company’s common stock.

Due to the current economic uncertainty stemming from the COVID-19 pandemic, the Company has temporarily suspended any repurchases as of March 23, 2020 and plans to continue to monitor the situation based on business conditions and regard for its financial liquidity needs.

On February 18, 2020, the Company’s board of directors declared a dividend of $0.08 per common share, which was paid on March 17, 2020 to stockholders of record as of March 3, 2020.

On February 18, 2020, the Company’s board of directors declared a dividend of $ 0.08 per common share, which was paid on March 17, 2020 to stockholders of record as of March 3, 2020.

On April 28, 2020, the Company announced the suspension of future cash dividends due to the current economic uncertainty stemming from the COVID-19 pandemic.

Any determination to declare and pay cash dividends for future quarters will be made by the Company’s board of directors.

Revenue Recognition

The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise.

Sales taxes collected by the Company from customers are excluded from revenue.

Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation.

The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise.

3 unchanged sentences

Disaggregation of Revenue

The Company’s retail operations represent a single operating segment based on the way the Company manages its business.

Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation.

The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.

In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line.

The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.

In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line.

The percentage of net sales related to each classification of its merchandise assortment was approximately:

Twenty-Six Weeks Ended

Thirteen Weeks Ended

2 unchanged sentences

The Company analyzes all leases at inception to determine if a right-of-use asset and lease liability should be recognized.

Leases with an initial term of 12

months or less and leases with mutual termination clauses are not included on the condensed consolidated balance sheets.

Leases with an initial term of 12 months or less and leases with mutual termination clauses are not included on the condensed consolidated balance sheets.

The lease liability is measured at the present value of future lease payments as of the lease commencement date.

Total lease cost is comprised of operating lease costs, short-term lease costs, and variable lease costs, which include rent paid as a percentage of sales, common area maintenance, real estate taxes and insurance for the Company’s real estate leases.

Total lease cost is comprised of operating lease costs, short-term lease costs and variable lease costs, which include rent paid as a percentage of sales, common area maintenance, real estate taxes and insurance for the Company’s real estate leases.

Lease costs consisted of the following (in thousands):

Thirteen Weeks Ended

Twenty-Six Weeks Ended

August 1, 2020

August 3, 2019

Operating lease cost

2 unchanged sentences

Total lease cost

Future minimum lease payments as of May 2, 2020 are as follows (in thousands):

In response to the impact of the COVID-19 pandemic on the Company’s operations, the Company suspended certain lease payments under its existing lease agreements.

During the suspension of payments, the Company continued to recognize expenses and liabilities for lease obligations and corresponding right-of-use assets on the balance sheet in accordance with the applicable accounting guidance.

The Company is engaging in ongoing discussions with landlords regarding the potential restructuring of lease payments and rent concessions.

As of August 1, 2020, the Company negotiated contractual rent concessions on certain leases in the form of early renewals, rent deferrals and rent abatements.

The Company has elected to account for qualifying COVID-19 related rent concessions as if they were part of the enforceable rights and obligations under the existing lease agreements, as permitted by the updated guidance provided by the FASB in April 2020.

As a result of this election, the Company recognized rent abatement credits of approximately $ 0.6 million in the second quarter of 2020.

Future minimum lease payments as of August 1, 2020 are as follows (in thousands):

Remainder of 2020

2 unchanged sentences

Total present value of lease liabilities

Calculated using the discount rate for each lease.

(1) Calculated using the incremental borrowing rate for each lease.

(2) Includes short-term and long-term operating leases.

1 unchanged sentence

Supplemental cash flows and other information related to operating leases are as follows (in thousands, except for weighted average amounts):

Thirteen Weeks Ended

Twenty-Six Weeks Ended

August 1, 2020

August 3, 2019

Cash paid for operating leases

2 unchanged sentences

Weighted average discount rate - operating leases

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, capital allocation expectations or statements regarding the outcome or impact of pending or threatened litigation.

These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements.

All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors.

The words “believe,”

“anticipate,”

“project,”

“plan,”

“expect,”

“estimate,”

“objective,”

“forecast,”

“goal,”

“intend,”

“could,”

“will likely result,”

or “will continue”

and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language.

The Company believes the assumptions underlying these forward-looking statements are reasonable;

however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.

The factors that may result in actual results differing from such forward-looking information include, but are not limited to:

the ongoing COVID-19 pandemic and associated containment and remediation efforts;

the potential negative impacts of COVID-19 on the global economy and foreign sourcing;

the impacts of COVID-19 on the Company’s financial condition, business operation and liquidity, including the reopening of the Company’s retail stores;

transportation and distribution delays or interruptions;

changes in freight rates;

the Company’s ability to negotiate effectively the cost and purchase of merchandise;

inventory risks due to shifts in market demand;

the Company’s ability to gauge fashion trends and changing consumer preferences;

changes in consumer spending on apparel;

changes in product mix;

interruptions in suppliers’

a deterioration in general economic conditions, whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory), or other factors;

the results of pending or threatened litigation;

temporary changes in demand due to weather patterns;

seasonality of the Company’s business;

delays associated with building, opening and operating new stores;

delays associated with building, opening or expanding new or existing distribution centers;

and other factors described in the section titled “Item 1A.

Risk Factors”

and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020 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.

We are a value-priced retailer of fashion apparel, accessories and home goods for the entire family.

Our merchandise offerings are designed to appeal to the fashion preferences of value-conscious consumers, particularly African-Americans.

We operated 574 stores in both urban and rural markets in 33 states as of May 2, 2020, including temporarily closed stores.

Current Material Development

In December 2019, a novel coronavirus (“COVID-19”) emerged and spread worldwide.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

After closely monitoring and taking into consideration the guidance from federal, state and local governments, we temporarily closed all of our retail store locations and distribution centers effective March 20, 2020.

The temporary closure of our stores has had and, as some stores remain closed or are closed again in the future, may continue to have an adverse impact on our financial condition, results of operations and liquidity.

We have taken several steps to increase our cash position and preserve financial flexibility in light of uncertainties resulting

from the COVID-19 pandemic.

On March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit facility.

(ii) implementing temporary tiered salary reductions for management level corporate employees and reducing the cash portion of non-employee director fees;

(iii) extending payment terms with vendors and suppliers;

(iv) abating payments of rent as appropriate;

(vi) suspending any repurchases of shares and payment of dividends;

and (vii) amending the revolving credit facility to extend the term to August 2021.

Beginning April 24, 2020, we started to reopen stores in select states in accordance with state and local government guidelines.

As of June 9, 2020, we have reopened more than 530 of our 574 stores, while also opening 4 new stores.

Starting in late May 2020, there have been demonstrations in cities throughout the United States.

While they have generally been peaceful, in some locations demonstrations have become violent and resulted in governmental restrictions.

We plan to continue to reopen our closed stores in a phased approach as more states reopen for retail businesses and conditions permit.

As we reopen stores, we have taken numerous measures to protect the health of our associates, customers and communities we serve.

Such measures include implementing occupancy limits, providing personal protective equipment for our associates and customers, encouraging social distancing, adjusting our processes for merchandise returns and implementing new cleaning procedures.

We are planning to incur incremental costs going forward for personal protective equipment, including masks, gloves and hand sanitizer for our associates and customers, as well as additional cleaning supplies.

Accounting Periods

The following discussion contains references to fiscal years 2020 and 2019, which represent fiscal years ending or ended on January 30, 2021 and February 1, 2020, respectively.

Fiscal 2020 and fiscal 2019 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 1, 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.

The nature of the Company’s business is seasonal.

Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year.

Expenses and, to a greater extent, operating income, vary by quarter.

Results of a period shorter than a full year may not be indicative of results expected for the entire year, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic.

Furthermore, as a result of the closure of our stores for at least five weeks related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the thirteen weeks ended May 2, 2020.

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 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 2019 and fiscal 2020 are not considered comparable stores in fiscal 2020.

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.

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 overall

performance of each individual store.

Finally, we monitor corporate expenses against budgeted amounts.

All of the statistics discussed below are critical components of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, excluding non-cash asset impairment expense, CEO transition expenses and expenses related to proxy contests), which are considered our most important operating statistics.

We believe that excluding these expenses from our financial results reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior and future periods, and as such, provides an enhanced understanding of our past financial performance and prospects for the future.

Although non-GAAP measures such as EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense and should not be regarded as comparable to similarly titled measures used by other companies.

Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under U.S.

GAAP and should not be used as a singular measure of operating performance or as a substitute for U.S.

GAAP results.

Provided below is a reconciliation of net income (loss) to EBITDA and to Adjusted EBITDA for the thirteen week periods ended May 2, 2020 and May 4, 2019 (in thousands):

Thirteen Weeks Ended

Net (loss) income

Interest expense

Income tax expense

Interest income

Income tax benefit

Asset impairment

CEO transition expenses

Proxy contest expenses

Adjusted EBITDA

Provided below is a reconciliation of net income (loss), the closest comparable GAAP measure, to (i) net income (loss) adjusted for non-cash asset impairment expenses, CEO transition related expenses and proxy contest expenses (“Adjusted net income (loss)”) and (ii) diluted Adjusted net income (loss) per common share.

We believe that excluding these expenses and their related tax effects from our financial results reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior periods, and as such, may provide investors with an enhanced understanding of our past financial performance and prospects for the future.

These non-GAAP measures should be used as a supplement to net income (loss) and diluted net income (loss) per common share as reported under GAAP and should not be used as the only measures of operating performance or as a substitute for GAAP results.

Thirteen Weeks Ended

Net (loss) income

Asset impairment and related tax effects

CEO transition expenses and related tax effects

Proxy contest expenses and related tax effects

Adjusted net (loss) income

Diluted adjusted net (loss) income per share

Diluted shares outstanding

Thirteen Weeks Ended May 2, 2020 and May 4, 2019

Net sales decreased $88.9 million, or 43.4%, to $116.1 million in the thirteen weeks ended May 2, 2020 from $205.0 million in the thirteen weeks ended May 4, 2019.

The decrease in sales was due to a 44.5% decrease in comparable store sales and the impact of closing seven stores since the end of the first quarter last year, partially offset by the opening of 15 new stores since the end of the first quarter last year.

The decrease in comparable store sales was due to closing all 574 of our stores as a result of the COVID-19 pandemic from March 20 until April 23, at which point we began to gradually reopen certain stores.

Prior to the onset of the COVID-19 pandemic, comparable store sales increased 3.1% from the beginning of the first quarter through March 7, 2020.

Cost of sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $43.9 million, or 34.2%, to $84.4 million in the first quarter of 2020 from $128.2 million in the first quarter of 2019.

Cost of sales as a percentage of sales increased to 72.7% in the first quarter of 2020 from 62.5% in last year’s first quarter, due primarily to a 1000 basis points increase in merchandise markdowns, as more markdowns were needed on transitional or seasonal merchandise due to our store closures during the COVID-19 pandemic.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased $9.4 million, or 14.8%, to $54.1 million in the first quarter of 2020 from $63.4 million in the first quarter of 2019.

The decrease was due primarily to lower payroll costs as a result of furloughing substantially all of our store and distribution center personnel and a significant portion of the corporate staff, combined with a decrease in other variable costs such as credit card processing fees and travel expenses, as well as $1.0 million of expenses incurred in the first quarter of 2019 in connection with a proxy contest.

As a percentage of sales, selling, general and administrative expenses increased to 46.6% in the first quarter of 2020 from 30.9% in the first quarter of 2019.

Depreciation.

Depreciation expense increased $0.3 million, or 7.2%, to $4.9 million in the first quarter of 2020 from $4.6 million in the first quarter of 2019.

Asset Impairment.

Impairment charges related to an underperforming store totaled $0.3 million in the first quarter of 2020, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

There was no impairment expense recorded in the first quarter of 2019.

Income Tax Benefit/Expense.

Income tax benefit was $6.6 million in the first quarter of 2020 compared to income tax expense of $1.3 million in the first quarter of 2019, as a result of a pretax loss in the first quarter of 2020.

For the first quarter of 2020, we utilized the discrete effective tax rate method to determine tax expense based upon interim period results, as the full-year tax rate is not reliably predictable.

Net Loss/Income.

Net loss was $20.9 million in the first quarter of 2020 compared to net income of $7.8 million in the first quarter of 2019 due to the factors discussed above.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital and capital expenditures for stores, distribution infrastructure and information systems.

We also use cash to repurchase stock under our stock repurchase program and to pay dividends.

Historically, we have met these cash requirements using cash flow from operations and short-term trade credit.

As further noted below, due to the COVID-19 pandemic and related economic disruptions, on March 20, 2020, we drew down $43.7 million on our revolving credit facility.

We expect to be able to meet future cash requirements for at least the next 12 months with cash flow from operations, short-term trade credit, existing balances of cash and cash equivalents, and borrowings under our revolving credit facility.

We intend to carefully monitor and manage our cash position in light of ongoing conditions and results of operations.

Cash Flows From Operating Activities .

Net cash provided by operating activities was $12.8 million in the thirteen weeks ended May 2, 2020 compared to $8.9 million in the same period of 2019.

Significant sources of cash in the first quarter of 2020 were (1) a $16.4 million decrease in inventory (compared to an $8.6 million decrease in the first quarter of 2019) due to the suspension of purchases as we closed stores due to the COVID-19 pandemic;

and (2) a $14.0 million increase in accounts payable (compared to a $9.6 million decrease in the first quarter of 2019) due to extending payment terms with vendors and suppliers as a result of the COVID-19 pandemic.

Significant uses of cash during the first quarter of 2020 included a net loss adjusted for non-cash expenses such as depreciation, amortization of operating lease right of use assets, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling ($11.1) million (compared to $25.0 million in the first quarter of 2019).

Other significant uses of cash from operating activities in the first quarter of 2020 were (1) a $6.8 million decrease in accrued expenses and other long-term liabilities (compared with an $11.9 million decrease in the first quarter of 2019) due primarily to payments of operating lease liabilities;

and (2) a $5.5 million decrease in accrued compensation (compared to a $4.6 million decrease in the first quarter of 2019) due to the furlough of substantially all of our store and distribution center personnel, along with a significant portion of our corporate staff, which resulted in lower payroll costs due at the end of the quarter.

Cash Flows From Investing Activities.

Cash provided by investing activities was $39.3 million in the first quarter of 2020 compared to $6.0 million in the first quarter of 2019.

Sales and redemptions of investment securities, net of purchases, provided cash of $43.2 million and $8.3 million in the first quarter of 2020 and 2019, respectively.

Cash used for purchases of property and equipment totaled $4.0 million and $2.3 million in the first quarter of 2020 and 2019, respectively.

Cash Flows From Financing Activities.

Cash provided by financing activities was $36.1 million in the first quarter of 2020 compared to cash used of $3.3 million in the first quarter of 2019.

The principal source of cash in the first quarter of 2020 was a drawdown of $43.7 million on our revolving credit facility, partially offset by the repurchase of common stock for an aggregate purchase price of $6.3 million.

Cash Requirements

Our principal sources of liquidity consist of:

(i) cash and cash equivalents (which equaled $108.1 million as of May 2, 2020);

(ii) short-term trade credit;

(iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory;

and (iv) a revolving credit facility with a $50.0 million credit commitment (with borrowings of $43.7 million as of May 2, 2020).

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 part of the actions we have taken to increase our cash position and preserve financial flexibility in light of current uncertainties resulting from the COVID-19 pandemic, as described above in “Current Material Developments,”

on March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit facility.

In addition, on May 12, 2020, we entered into an amendment to our revolving credit facility to, among other things, extend the maturity date to August 18, 2021.

See Note 7 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for more information.

In addition to the drawdown on our credit facility, we have reduced our operating expenses, capital expenditure plans and inventory receipts, as appropriate.

The Company previously announced a share repurchase program on March 13, 2020, but no repurchases have been made under such program as of the date of this filing and the Company does not intend to repurchase any shares for the time being.

The Company has also suspended the payment of quarterly dividends.

We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months.

Should the reopening of our stores and recovery of our sales fall materially below our expectations, we may be required to take other actions that could include material changes in our operations and seeking additional debt or equity capital.

We plan to continue to monitor the rapidly developing situation and to take further action to reduce our expenses and preserve our financial flexibility, as necessary.

Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 1 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

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.

There have been no other material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.

Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the thirteen weeks ended May 2, 2020 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 1, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements