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Item 5. Market for Registrant’s Common Equity

2021-04-14 compared with 2020-05-14 · 16 added, 410 removed, 33 unchanged (93% of the section changed)

MARKET FOR THE REGISTRANT’S 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.”

On April 14, 2020, there were 37 holders of record and approximately 2,700 beneficial holders of our common stock.

In 2019, we paid a quarterly dividend of $0.08 per common share on March 19, 2019, June 18, 2019, September 17, 2019 and December 24, 2019.

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

On March 20, 2020, as part of the actions the Company has taken to increase our cash position and preserve financial flexibility in light of current uncertainties resulting from the COVID-19 pandemic as described further below, the Company drew down $43.7 million under its revolving credit facility.

Pursuant to the terms of the revolving credit facility, the Company is restricted from paying cash dividends if there were any borrowings outstanding in the 30 days prior to the dividend payment or any borrowings are expected in the 30 days subsequent to the payment.

The Company announced on April 28, 2020, the suspension of future cash dividends.

Determinations to declare and pay cash dividends on our common stock in the future (quarterly or otherwise) will be based, among other things, upon our financial condition, results of operations, business and cash requirements and our board of directors’

conclusion in each instance that the declaration and payment of a cash dividend is in the best interest of our stockholders and is in compliance with all laws and agreements applicable to the dividend.

MARKET FOR THE REGISTRANT’S 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.” On March 31, 2021, there were 37 holders of record and approximately 6,500 beneficial holders of our common stock.

On March 17, 2020, we paid a dividend of $0.08 per common share.

On April 28, 2020, we announced the suspension of future cash dividends.

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

Recent Sales of Unregistered Securities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

On March 13, 2020, the Company announced that its board of directors approved a $30.0 million stock repurchase program.

Due to the uncertainty stemming from the COVID-19 pandemic, on March 23, 2020, the Company temporarily suspended any repurchases.

On September 14, 2020, the Company announced the reinstatement of this program.

On December 22, 2020, the Company announced that its board of directors approved an additional $30.0 million stock repurchase program.

The number of shares of common stock that we repurchased during the fourth quarter of fiscal 2020 and the average price paid per share are as follows:

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(1) Includes commissions for the shares repurchased under the stock repurchase program.

(2) On November 22, 2019, the Company’s board of directors approved a $25.0 million stock repurchase program, under which approximately $6.2 million of shares remained available as of February 1, 2020.

This repurchase program was completed in February 2020.

(2) On March 13, 2020, the Company announced that its board of directors approved a $30.0 million stock repurchase program.

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 December 22, 2020, the Company announced that its board of directors approved an additional $30.0 million stock repurchase program.

Neither program has an expiration date.

In the first quarter of fiscal 2021, the Company has continued to repurchase shares under these stock repurchase programs.

In addition, the Company completed a b lock repurchase of 250,000 shares on March 23, 2021 for an aggregate purchase price of $21.9 million.

Equity Compensation Plan Information.

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Stock Performance Graph

Set forth below is a line graph comparing the last five years’

percentage change in the cumulative total stockholder return on shares of our common stock against (i) the cumulative total return of the Russell 2000 Index, (ii) the cumulative total return of companies listed on The NASDAQ Stock Market and (iii) the cumulative total return of the NASDAQ Retail Trade Index.

We have elected to replace the NASDAQ Composite Index with the Russell 2000 Index because we believe that it is a more appropriate comparison.

In this transition year, the stock performance graph below includes the comparative performance of the new index and the previously reported index.

Set forth below is a line graph comparing the last five years’ percentage change in the cumulative total stockholder return on shares of our common stock against the cumulative total returns of the Russell 2000 Index and the NASDAQ Retail Trade Index.

This graph assumes that $100 was invested on January 31, 2016 in our common stock and in each of the market index and the industry index, and that all cash distributions were reinvested.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Citi Trends, Inc., the Russell 2000 Index, the NASDAQ Composite Index and the NASDAQ Retail Trade Index

Among Citi Trends, Inc., the Russell 2000 Index and the NASDAQ Retail Trade Index

*$100 invested on 1/31/16 in stock or index, including reinvestment of dividends .

Fiscal year ending on or about January 31.

Total Return Analysis

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Russell 2000 Index

NASDAQ Composite

NASDAQ Retail Trade

SELECTED FINANCIAL DATA

Selected Financial and Operating Data

The following table provides selected consolidated financial and operating data for each of the fiscal years in the five-year period ended February 1, 2020.

The selected consolidated 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

included in Item 7 of this Report and our consolidated 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)

(dollars in thousands, except per share amounts)

Statement of Operations Data:

Cost of sales (exclusive of depreciation shown separately below)

Selling, general and administrative expenses

Asset impairment

Income from operations

Interest, net

Income before income taxes

Income tax expense

Net income per common share:

Weighted average shares used to compute net income per share:

Cash dividends per common share

Additional Operating Data:

Number of stores:

Opened during period

Closed during period

Open at end of period

Selling square footage at end of period

Comparable store sales increase (decrease) (2)

Average sales per store (4)

Balance Sheet Data:

Cash and cash equivalents

Short-term investments

Long-term investments

Total liabilities

Total stockholders’

Our fiscal year ends on the Saturday closest to January 31 of each year.

The years ended February 1, 2020, February 2, 2019, February 3, 2018, January 28, 2017 and January 30, 2016 are referred to as fiscal 2019, 2018, 2017, 2016 and 2015, respectively.

Fiscal 2017 is comprised of 53 weeks, while fiscal years 2019, 2018, 2016 and 2015 are each comprised of 52 weeks.

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.

The Company is reporting comparable store sales on a comparable store and comparable weeks basis;

for fiscal 2018, the 52 weeks ended February 2, 2019 were compared to the 52 weeks ended February 3, 2018;

for fiscal 2017, the 53 weeks ended February 3, 2018 were compared to the 53 weeks ended February 4, 2017.

Average sales per store is defined as net sales divided by the average number of stores open at the end of the prior fiscal year and stores open at the end of the current fiscal year.

MANAGEMENT’S 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 consolidated financial statements and the 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.

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 preferences of fashion conscious consumers, particularly African-Americans.

As of February 1, 2020, we operated 571 stores in both urban and rural markets in 33 states.

Current Material Development

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

The World Health Organization has declared COVID-19 a pandemic resulting in federal, state and local governments and private entities mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus.

After closely monitoring and taking into consideration the guidance from federal, state and local governments, in an effort to mitigate the spread of COVID-19, along with other retailers, we initially temporarily closed all of our retail store locations effective March 20, 2020 through April 3, 2020.

However, this closure was further extended on March 26 for an indefinite period as a result of federal, state and local level requirements and recommendations.

We also closed our buying and corporate offices, and our distribution centers, and we instituted “work from home”

measures for certain of our associates.

The Company continues to monitor developments, including government requirements and recommendations at the federal, state and local level to evaluate when we will reopen our stores, offices and facilities.

We expect the cadence of store reopenings to vary by state and locality in the U.S.

On April 28, 2020, the Company announced that it has started to re-open stores in some markets in accordance with state and local guidelines.

The temporary closure of our stores is having a significant negative impact on the Company’s financial performance.

We have taken several proactive measures to increase our cash position and preserve financial flexibility in light of current uncertainties resulting from the COVID-19 pandemic.

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

We also implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including (i) furloughing substantially all of our store and distribution center personnel, as well as about 40% of our corporate staff, starting April 3, 2020;

(ii) implementing temporary tiered salary reductions for management level corporate employees, including executive officers;

(iii) temporarily reducing the cash portion of the fees payable to our non-employee board members;

(iv) extending payment terms with vendors and suppliers;

(v) abating payments of rent as appropriate;

(vi) deferring certain merit based awards;

(vii) suspending the 401(k) company matching program;

(viii) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs, including through reduced inventory purchases;

(ix) suspending any repurchases of shares under our stock repurchase program;

and (x) suspending the payment of dividends.

On May 12, 2020, we entered into an amendment to our revolving credit facility to, among other things, extend the maturity date (which had been set to expire August 18, 2020) to August 18, 2021.

For discussion of our revolving credit facility, see “Liquidity Sources and Requirements and Contractual Cash Requirements and Commitments.”

Due to the developing situation, the results of the first quarter ending May 2, 2020 and the full fiscal year ending January 30, 2021 could be impacted in ways we are not able to predict today.

As a result, we withdrew our first quarter and full year fiscal 2020 financial guidance issued on March 13, 2020.

Given the unprecedented uncertainty of this situation and the unknown impact on consumer demand, the Company cannot reasonably estimate the full impact of this pandemic on its business.

However, the Company expects the impact from the pandemic and the related economic disruption will have a material adverse effect on its financial condition, results of operations and liquidity in fiscal 2020.

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.

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 February 1, 2020, February 2, 2019 and February 3, 2018 are referred to as fiscal 2019, 2018 and 2017, respectively.

Fiscal years 2019 and 2018 are each comprised of 52 weeks, while fiscal 2017 is comprised of 53 weeks.

Results of Operations

The following discussion of our financial performance is based on the consolidated 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 of the fiscal year 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.

Net Sales and Additional Operating Data

The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:

Fiscal Year Ended

(dollars in thousands)

Statement of Operations Data

Cost of sales (exclusive of depreciation shown separately below)

Selling, general and administrative expenses

Asset impairment

Income from operations

Interest income

Interest expense

Income before income taxes

Income tax expense

The following table provides information about the number of total stores open at the beginning of each year, stores opened and closed during each year, total stores open at the end of each year and the change in comparable store sales for each year:

Fiscal Year Ended

Total stores open, beginning of year

Closed stores

Total stores open, end of year

Comparable store sales (decrease) increase (1)

Stores included in the comparable store sales calculation for any year are those stores that were opened prior to the beginning of the preceding fiscal year and were still open at the end of such year.

Relocated stores and expanded stores are included in the comparable store sales results.

The Company is reporting comparable store sales on a comparable weeks basis;

for fiscal 2018, the 52 weeks ended February 2, 2019 were compared to the 52 weeks ended February 3, 2018;

for fiscal 2017, the 53 weeks ended February 3, 2018 were compared to the 53 weeks ended February 4, 2017.

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 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 2018 and fiscal 2019 were not considered comparable stores in fiscal 2019.

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 above are critical components of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, excluding non-cash asset impairment expenses, interim CEO related 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 other 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 generally accepted accounting principles (“GAAP”) and should not be used as the only measures of operating performance or as a substitute for GAAP results.

Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018:

Fiscal Year Ended

February 1, 2020

February 2, 2019

February 3, 2018

(dollars in thousands)

Interest expense

Income tax expense

Interest income

Asset impairment

Interim CEO related expenses

Proxy contest expenses

Adjusted EBITDA

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

We believe that excluding these expenses and their related tax effects and the effect of the Tax Cuts and Jobs Act 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 and diluted net income 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.

Fiscal Year Ended

February 1, 2020

February 2, 2019

February 3, 2018

(in thousands, except per share data)

Asset impairment and related tax effects

Interim CEO related expenses and related tax effects

Proxy contest expenses and related tax effects

Tax Cuts and Jobs Act effect

Adjusted net income

Diluted Adjusted net income per common share

Diluted shares outstanding

Fiscal 2019 Compared to Fiscal 2018

Net sales increased $12.3 million, or 1.6%, to $781.9 million in fiscal 2019 from $769.6 million in fiscal 2018.

The increase in net sales was due primarily to 16 new store openings in 2019 and 19 new store openings in 2018 for which there was not a full year of sales in 2018.

These sales increases were partially offset by the closing of seven stores in 2019 and six stores in 2018, and a 0.1% decrease in comparable store sales.

The decrease in comparable store sales was reflected in a 1.2% decrease in customer transactions, partially offset by a 1.1% increase in the average ticket size.

Comparable store sales changes, by major merchandise class, were as follows:

Accessories +6%;

Men’s -3%;

Children’s -4%;

and Ladies’

Store opening and closing activity resulted in a net increase of $13.2 million in sales in fiscal 2019, while the 0.1% decrease in comparable store sales in the 536 comparable stores caused sales to decrease $0.9 million.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $8.4 million, or 1.8%, to $484.7 million in fiscal 2019 from $476.3 million in fiscal 2018 due to the effect of the increase in sales discussed above and an increase in cost of sales as a percentage of sales to 62.0% in 2019 from 61.9% in 2018.

The increase in cost of sales as a percentage of sales was due primarily to a 20 basis points increase in freight costs as a result of pressures in the trucking industry, partially offset by a 10 basis points increase in the core merchandise margin (initial mark-up, net of markdowns).

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $11.7 million, or 4.7% to $259.6 million in fiscal 2019 from $247.9 million in fiscal 2018 due to the opening of 16 new stores in 2019 and 19 stores in 2018, along with normal inflationary pressure on expenses such as payroll and rent, $2.1 million in costs associated with the CEO transition and changes to the Company’s board of directors, and $1.0 million of expenses incurred in connection with a proxy contest in 2019.

These factors that caused the increase in selling, general and administrative expenses were partially offset by a $1.3 million decrease in incentive compensation expense resulting from unfavorable operating results in relation to budget, as well as a $1.2 million gain on insurance claims received in fiscal 2019.

Selling, general and administrative expenses as a percentage of sales increased to 33.2% in 2019 from 32.2% in 2018.

Depreciation.

Depreciation expense decreased $0.4 million to $18.5 million in 2019 from $18.9 million in fiscal 2018 due to the slowing of our store opening pace in relation to previous years.

Asset Impairment.

Impairment charges related to an underperforming store totaled $0.5 million in fiscal 2019, comprised of $0.3 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset.

In fiscal 2018, impairment charges related to underperforming stores totaled $1.3 million, comprised of leasehold improvements and fixtures and equipment.

Income Tax Expense.

Income tax expense decreased $1.5 million to $3.5 million in fiscal 2019 from $5.0 million in fiscal 2018 due primarily to pretax income decreasing $6.4 million.

Net income decreased $4.9 million to $16.5 million in fiscal 2019 compared to $21.4 million in fiscal 2018, due to the factors discussed above.

Fiscal 2018 Compared to Fiscal 2017

Net sales increased $14.4 million, or 1.9%, to $769.6 million in the 52-week fiscal 2018 from $755.2 million in the 53-week fiscal 2017.

The increase in net sales was due primarily to nineteen new store openings in 2018 and twenty new store openings in 2017 for which there was not a full year of sales in 2017, together with a 1.6% increase in comparable store sales on a 52-week versus 52-week basis.

These sales increases were partially offset by the closing of six stores in 2018 and four stores in 2017, along with the extra week in fiscal 2017 which contributed $10.9 million in sales.

The increase in comparable store sales on a 52-week basis was reflected in a 2.5% increase in the average ticket size, partially offset by a 0.9% decrease in the number of customer transactions.

Comparable store sales changes on a 52-week basis, by major merchandise class, were as follows:

Accessories +4%;

Men’s +1%;

Children’s less than +1%;

and Ladies’

Store opening and closing activity resulted in a net increase of $13.8 million in sales in fiscal 2018, and the 1.6% comparable store sales increase in the 523 comparable stores totaled $11.5 million, while the aforementioned extra week last year accounted for a decrease of $10.9 million in sales.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) increased $10.3 million, or 2.2%, to $476.3 million in fiscal 2018 from $466.0 million in fiscal 2017 due to the effect of the increase in sales discussed above and an increase in cost of sales as a percentage of sales to 61.9% in 2018 from 61.7% in 2017.

The increase in cost of sales as a percentage of sales was due primarily to a 40 basis points increase in freight costs as a result of pressures in the trucking industry and higher fuel surcharges.

The core merchandise margin (initial mark-up, net of markdowns) for the year was flat with last year, while shrinkage was 20 basis points lower.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $0.8 million, or 0.4%, to $247.9 million in fiscal 2018 from $247.1 million in fiscal 2017 due to the opening of nineteen new stores in 2018 and twenty stores in 2017, along with normal inflationary pressure on expenses such as payroll and rent.

These factors that caused the increase in selling, general and administrative expenses were partially offset by a $3.9 million decrease in incentive compensation expense resulting from unfavorable operating results in relation to budget, together with $3.5 million to $4.0 million of expenses attributable to the extra week in fiscal 2017 and $2.5 million of expenses incurred in connection with a proxy contest in 2017.

Selling, general and administrative expenses as a percentage of sales decreased to 32.2% in 2018 from 32.7% in 2017 due primarily to the leveraging effect resulting from higher comparable store sales and the 2017 proxy contest.

Depreciation.

Depreciation expense of $18.9 million in fiscal 2018 was unchanged from fiscal 2017, attributable to the acceleration of our store opening pace in relation to previous years being entirely offset by distribution center additions and expansions in prior years becoming fully depreciated during 2018.

Asset Impairment.

Impairment charges related to property and equipment at underperforming stores totaled $1.3 million and $0.5million in fiscal 2018 and 2017, respectively.

Income Tax Expense.

Income tax expense decreased $3.9 million to $5.0 million in fiscal 2018 from $8.9 million in fiscal 2017 as the impact of a $2.8 million increase in pretax income was more than offset by a decrease in the effective income tax rate to 18.8% from 38.0%.

The decrease in the effective tax rate was due primarily to the full-year impact of the reduction in the federal income tax rate from 35% to 21% in the Tax Cuts and Jobs Act tax reform legislation (“TCJA”) which was enacted in December 2017, as well as last year’s $1.9 million write-down of net deferred tax assets resulting from the revaluation of deferred tax assets and liabilities to reflect the TCJA’s reduced federal income tax rate.

Net income increased $6.8 million to $21.4 million in fiscal 2018 compared to $14.6 million in fiscal 2017, due to the factors discussed above.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital and for capital expenditures for our 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, and with the temporary closure of all store locations for an extended period of time, we anticipate that we will be required to rely far more heavily on our existing balances of cash and investment securities and borrowings under our revolving credit facility (described below), and we expect to carefully monitor and manage our cash position in light of ongoing conditions and results of operations.

Fiscal 2019 Compared to Fiscal 2018

As of February 1, 2020, we had total cash and cash equivalents of $19.9 million, compared with $17.9 million as of February 2, 2019.

Additionally, we had $27.6 million and $15.7 million of short-term and long-term investment securities, respectively, as of February 1, 2020, compared with $50.4 million and $8.9 million, respectively, as of February 2, 2019.

These securities are comprised of bank certificates of deposit and obligations of the U.S.

Treasury, states and municipalities.

Inventory represented 30.1% of our total assets as of February 1, 2020, compared with 46.9% as of February 2, 2019.

Management’s 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 $42.6 million in fiscal 2019 compared with $30.4 million in fiscal 2018.

Net income, adjusted for non-cash expenses such as depreciation, non-cash operating lease costs, asset impairment, loss on disposal of property and equipment, insurance proceeds from operating activities, deferred income taxes and stock-based compensation expense, provided cash of $84.0 million in fiscal 2019 (compared with $44.0 million in fiscal 2018).

Other significant sources of cash in fiscal 2019 included (1) a $5.6 million increase in account payable (compared to a $2.8 million decrease in fiscal 2018) due to improved inventory turns in the fourth quarter of 2019 as reflected in higher sales and lower inventory, which resulted in more merchandise purchases in January 2020;

since this higher level of purchases occurred in the last month of the fiscal year, all such purchases were still in accounts payable at the end of the fiscal year;

and (2) a $1.2 million decrease in inventory (compared to a $2.3 million increase in fiscal 2018) due to efforts to improve inventory turns and maintain as much inventory liquidity as possible in order to take advantage of opportunistic deals and trend changes.

Significant uses of cash from operating activities in fiscal 2019 included (1) a $1.6 million change in the income tax payable/receivable (compared to a $1.5 million change in fiscal 2018) due to estimated tax payments made during the year;

and (2) a $1.6 million increase in prepaid and other current assets (compared to a $2.1 million increase in fiscal 2018) due primarily to increases in tenant improvement allowances for new stores that opened in the fourth quarter of fiscal 2019.

Cash Flows Used in Investing Activities.

Cash used in investing activities was $7.6 million in fiscal 2019 compared with $15.3 million in fiscal 2018.

Cash used for the purchase of property and equipment was $24.2 million in fiscal 2019 and $13.3 million in fiscal 2018, with the increase due primarily to (1) purchases of equipment for our point-of-sale replacement project, (2) capital expenditures to complete major remodels in 20 of our stores;

and (3) purchases of store fixtures needed to facilitate a shift towards more home merchandise and enhanced holiday merchandise presentation.

Sales/redemptions of investment securities, net of purchases, provided cash of $16.0 million in fiscal 2019 and used cash of $2.3 million in fiscal 2018.

Cash Flows Used in Financing Activities.

Cash used in financing activities was $32.9 million in fiscal 2019 compared with $45.7 million in fiscal 2018.

Cash used for the repurchase of common stock totaled $28.4 million in fiscal 2019 and $40.4 million in fiscal 2018.

Dividends paid to stockholders used cash of $3.8 million in fiscal 2019 and $4.2 million in fiscal 2018.

Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Fiscal 2018 Compared to Fiscal 2017

As of February 2, 2019, we had total cash and cash equivalents of $17.9 million, compared with $48.5 million as of February 3, 2018.

Additionally, we had $50.3 million and $8.9 million of short-term and long-term investment securities, respectively, as of February 2, 2019, compared with $31.5 million and $25.5 million, respectively, as of February 3, 2018.

These securities are comprised of bank certificates of deposit and obligations of the U.S.

Treasury, states and municipalities.

Inventory represented 46.9% of our total assets as of February 2, 2019, compared with 42.1% as of February 3, 2018.

Management’s 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 $30.4 million in fiscal 2018 compared with $42.3 million in fiscal 2017.

Net income, adjusted for non-cash expenses such as depreciation, asset impairment, loss on disposal of property and equipment, insurance proceeds from operating activities, deferred income taxes and stock-based compensation expense, provided cash of $44.0 million in fiscal 2018 (compared with $39.8 million in fiscal 2017).

Significant uses of cash included (1) a $4.3 million decrease in accrued compensation (compared with an $8.1 million increase in fiscal 2017) primarily as a result of lower incentive compensation accruals due to unfavorable financial performance relative to budget in fiscal 2018;

(2) a $2.8 million decrease in accounts payable (compared with a $0.2 million increase in fiscal 2017) due to significant sales increases in the fourth quarter of 2017 which required an increase in merchandise purchases in January 2018;

since this higher level of purchases occurred in the last month of the fiscal year, all such purchases were still in accounts payable as of February 3, 2018;

(3) a $2.3 million increase in inventory (compared with a $3.9 million increase in fiscal 2017) due primarily to having thirteen more stores than at the previous year end;

(4) a $2.1 million increase in prepaid and other current assets (compared with a $2.4 million increase in fiscal 2017) due primarily to increases in tenant improvement allowances for new and expanded stores that opened in the fourth quarter of fiscal 2018 and prepaid insurance as the renewal of the Company's insurance policies on December 1, 2018 included higher property insurance premiums;

and (5) a $1.5 million decrease in income tax payable (compared with a $3.6 million increase in fiscal 2017) due to higher prepayments of estimated taxes during 2018.

Cash Flows Used in Investing Activities.

Cash used in investing activities was $15.3 million in fiscal 2018 compared with $12.8 million in fiscal 2017.

Cash used for the purchase of property and equipment was $13.3 million in fiscal 2018 and $21.0 million in fiscal 2017, with the decrease resulting primarily from capital expenditures made in fiscal 2017 for store fixtures needed to facilitate a shift towards more home merchandise, together with the completion of the Roland distribution center expansion in fiscal 2017 and opening one fewer store and relocating two fewer stores in fiscal 2018.

Sales/redemptions of investment securities, net of purchases, used cash of $2.3 million in fiscal 2018 and provided cash of $7.8 million in fiscal 2017.

Cash Flows Used in Financing Activities.

Cash used in financing activities was $45.7 million in fiscal 2018 compared with $30.3 million in fiscal 2017.

Cash used for the repurchase of common stock totaled $40.4 million in fiscal 2018 and $25.0 million in fiscal 2017.

Dividends paid to stockholders used cash of $4.2 million in fiscal 2018 and fiscal 2017.

Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Liquidity Sources and Requirements and Contractual Cash Requirements and Commitments

Our principal sources of liquidity consist of:

(i) cash and cash equivalents (which equaled $19.9 million as of February 1, 2020);

(ii) short-term and long-term investment securities (which equaled $27.5 million and $15.7 million, respectively, as of February 1, 2020);

(iii) short-term trade credit;

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

and (v) a $50 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 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 “Indebtedness”

below 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.

Additionally, we 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

The following table discloses aggregate information about our contractual obligations as of February 1, 2020 and the periods in which payments are due:

Payments Due by Period

(in thousands)

Contractual obligations:

Operating leases (1)

Purchase obligations

Total contractual cash obligations

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 2019 incremental percentage rent was approximately $0.3 million, which represented 0.6% of total rent expense.

Indebtedness.

On October 27, 2011, we entered into a five-year, $50 million credit facility with Bank of America.

The facility was amended on August 18, 2015, extending the maturity date to August 18, 2020.

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

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

On May 12, 2020, the Company entered into a Second Amendment to Credit Agreement and Waiver (the “Second Amendment”) with Bank of America and the Company’s wholly-owned subsidiary, Citi Trends Marketing Solutions, Inc., as guarantor (the “Second Amendment”) to amend the credit facility (as amended, the “Revolving Credit Facility”) as described below.

The Revolving Credit Facility provides a $50 million credit commitment and a $25 million uncommitted “accordion”

feature that under certain circumstances could allow us to increase the size of the facility to $75 million.

The Revolving Credit Facility is secured by our inventory, accounts receivable and related assets, but not our 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.

The Second Amendment amends the Revolving Credit Facility to, among other things, extend the maturity date (which had been set to expire August 18, 2020) to August 18, 2021, increase the pricing for the loans and modify certain covenant and reporting terms.

Following the effective date of the Second Amendment, 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.

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 2019, rent expense was $58.1 million compared with $55.3 million in fiscal 2018 (including contingent rent of $0.3 million and $0.5 million in fiscal 2019 and 2018, respectively).

Purchase Obligations.

As of February 1, 2020, we had purchase obligations of $114.0 million, all of which were for less than one year.

These purchase obligations consist of outstanding merchandise orders.

Critical Accounting Policies and Estimates

The preparation of our 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 consolidated 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 consolidated financial statements.

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory.

Under the retail inventory method, the cost of inventory is 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 management judgments and estimates, including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting cost of sales.

Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores.

As a result, we believe the retail inventory method results in a more conservative inventory valuation than other accounting methods.

We estimate and record an allowance for shrinkage for the period between the last physical count and the balance sheet date.

The estimate of shrinkage can be affected by changes in actual shrinkage trends.

Inventory shrinkage as a percentage of sales was 1.3% in fiscal 2019, compared to 1.3% in fiscal 2018 and 1.5% in fiscal 2017.

The allowance for estimated inventory shrinkage was $3.0 million as of February 1, 2020 and $3.1 million as of February 2, 2019.

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 2019.

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.

If facts and circumstances indicate that a long-lived asset 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.

Non-cash impairment losses related to operating lease right-of-use assets, leasehold improvements and fixtures and equipment at underperforming stores totaled $0.5 million, $1.3 million and $0.5 million in fiscal 2019, 2018 and 2017, respectively.

Impairment losses in the future are dependent on a number of factors such as site selection and general economic trends on a localized, regional, or national basis, and thus could be significantly different from historical results.

To the extent our estimates for net sales, cost of sales and store expenses are not realized, future assessments of recoverability could result in impairment charges.

There were no changes in our impairment loss methodology during fiscal 2019.

Insurance Liabilities

We are largely self-insured for workers’

compensation costs and employee medical claims.

Our self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims.

We use current and historical claims data, together with information from actuarial studies, in developing our estimates.

The insurance liabilities we record are primarily influenced by the frequency and severity of claims and the Company’s growth.

If the underlying facts and circumstances related to the claims change, then we may be required to record more or less expense which could be material in relation to our results of operations.

Our self-insurance liabilities totaled $2.6 million ($1.5 million current and $1.1 million noncurrent) as of February 1, 2020 and $2.4 million ($1.4 million current and $1.0 million noncurrent) as of February 2, 2019.

There were no material changes in the estimates or assumptions related to insurance liabilities during fiscal 2019.

Operating Leases

We lease all of our retail store locations and certain office space and equipment.

All leases are classified as operating leases.

We record right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term.

In determining the present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term.

Our lessors do not provide an implicit rate, nor is one readily available, therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments.

We record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord.

Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term.

In addition, 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 can be reasonably estimated.

If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

Accounting for Income Taxes

We account for income taxes under the asset and liability method.

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.

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 an assessment as to the

realization of these assets.

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 and net operating losses may be utilized, management may determine that some or all of the Company’s deferred tax assets may not ultimately be deductible and income tax credits and net operating losses may expire unused.

Should such an assessment be made, a valuation allowance against some or all of the Company’s $6.7 million in deferred tax assets would have to be recorded with a resulting charge to income tax expense.

During the fourth quarter of fiscal 2017, the Company revalued its deferred tax assets and liabilities to reflect the reduced federal income tax rate expected to be in effect at the time of future reversals.

Such reduction was the result of the Tax Cuts and Jobs Act tax reform legislation enacted in December 2017 which reduced the federal statutory rate from 35% to 21%.

Such revaluation resulted in the reduction of net deferred tax assets and a charge to income tax expense of $1.9 million.

There were no material changes in the estimates or assumptions related to income taxes during fiscal 2019.

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.

GAAP, with no need for management’s judgment in their application.

There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included in this Report.

The selected financial data previously required by Item 301 of Regulation S-K has been omitted in reliance on SEC Release No.

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-K

Item 5. Market for Registrant’s Common Equity