Item 1. Business
ITEM 1. BUSINESS
Overview and History
We are a growing specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. Based on the strength of our brand and experienced leadership team, we believe we have fostered deep customer loyalty and high shopping frequency in the underserved communities in which we operate. Our stores are located at the crossroads of low to moderate income households and serve as a “one-stop-shop” for the entire family. Our stores average approximately 11,000 square feet of selling space and are typically located in outdoor community shopping centers across a variety of urban, suburban and rural markets. As of January 30, 2021, we operated 585 stores in 33 states. Our team is focused on delivering a memorable store experience anchored in value, and we currently maintain an informational website at www.cititrends.com that assists customers in finding stores and seeing the latest trends available in our stores.
Our predecessor, Allied Department Stores, was founded in 1946 and grew into a chain of family apparel stores operating in the Southeast. In 1999, the Company, then consisting of 85 stores, was acquired by a private equity firm. Following this acquisition, management rebranded the stores to “Citi Trends” and implemented several strategies to focus on offering curated assortments for our target customers and improve our operating and financial performance. After the successful implementation of these strategies and the growth of our chain from 85 stores to 212 stores, we completed an initial public offering of our common stock on May 18, 2005. Since our initial public offering, we have grown our chain 175% to 585 stores as of January 30, 2021. We opened 18 new stores in fiscal 2020 (and closed 4 stores) and we plan to open at least 30 new stores in fiscal 2021. We believe we have opportunity to grow our store base to 1,000 stores over time.
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We are a Delaware corporation, and our executive offices are located at 104 Coleman Boulevard, Savannah, Georgia 31408 and our telephone number is (912) 236-1561. Our Internet address is www.cititrends.com . The reference to our web site address in this Report does not constitute the incorporation by reference of the information contained at the web site into this Report. We make available, free of charge through publication on our web site, copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we have filed such materials with, or furnished such materials to, the SEC. In addition, you may read and print any materials we file with the SEC on the SEC’s web site at www.sec.gov .
Competitive Strengths and Strategies
Our goal is to be the leading specialty value retailer of apparel, accessories and home trends for African American and Latinx families with an average annual household income of approximately $40,000. We strive to provide our customers with a place to shop that is fashionable, fresh, friendly, fair and fun. We believe the following business strengths differentiate us from our competitors and are important to our success:
Focus on Fashion and Trend Mix . We focus our merchandise on being fashionable and trend-right to appeal to our core customers. We do not attempt to dictate trends, but rather, we devote considerable effort to identifying emerging trends and ensuring that our wide assortment of apparel and non-apparel merchandise is curated to appeal to the preferences of our target customers. Our buying staff tests new emerging trends before reordering and actively manages the mix of basic, fashion, trend and branded products in our stores to keep the offering fresh and current.
Superior Value Proposition . We seek to offer top quality, fashionable merchandise for way less spend. We believe our value proposition provides important access to trends that would otherwise be out of reach for the lower income customers we serve. We do not employ high-low pricing strategies; instead, our everyday low price points offer superior value, allowing our customers to purchase multiple items per visit. Our advertising expenses are low as we do not rely on promotion-driven sales and instead seek to build our reputation through word-of-mouth awareness of our value in the communities we serve.
One-Stop-Shop for the Entire Family . We merchandise our stores to create a specialty store environment that serves as a destination that meets the apparel and non-apparel needs of the entire family. Every store offers a wide variety of always-changing products for men and women of all sizes and children from newborn to size 20. Our stores include a wide assortment of sportswear, dresses, outerwear, footwear, intimate apparel and sleepwear, jewelry, handbags, beauty products, home goods, tech accessories, health and beauty aids, candy, fitness products, team sports products, toys and books. We believe that our small footprint stores, combined with a specialty store experience, friendly customer service where we often know the customer’s name and breadth of merchandise, distinguishes our stores from many competitors and creates an exciting and welcoming environment that encourages repeat visits from the local community.
Strong and Flexible Sourcing Relationships . We maintain strong sourcing relationships with a large group of suppliers. Our buying team located in New York City plans, develops and creates curated assortments by purchasing goods developed specifically with our customers in mind and opportunistically available excess inventory from reliable and trustworthy vendors, with the majority of our merchandise purchased for the current season and a lesser quantity held for sale in future seasons. To foster vendor relationships, we pay vendors promptly and do not ask for typical retail concessions, such as promotional and markdown allowances.
Dynamic Experience in a Friendly and Fun Environment . We seek to provide a fashion-focused shopping environment that is similar to a specialty apparel retailer, rather than a typical discount or big box retailer. Products are prominently displayed by style, rather than by size, on four-sided fixtures featuring multiple sizes, styles and suggested outfits. Non-apparel products are displayed on fixtures that highlight prints, patterns and themes of trend-right categories. Our stores are easy to navigate, carpeted, well-lit and feature upbeat and trend-right overhead music appropriate for our target customers. Our stores are neat, orderly and clean, offering a friendly and fun environment.
Friendly and Helpful Store Associates . Our store associates are trained to provide friendly and helpful customer service to deliver a positive shopping experience. Many of our store associates live in the neighborhoods where our stores are located and frequently shop our stores themselves. Approximately 80% of our associates identify as African American or Latinx, and we have always led with a diverse and inclusive workplace. As a result, our store associates cultivate a unique culture at our stores that creates a high level of connectivity with our customers. We strive to make our stores a destination where everyone is welcome, and our store associates foster that vision every day through enriched customer engagement.
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Cost-Effective Store Locations and New Store Economics . We locate our stores in high-traffic outdoor community shopping centers that are convenient to low and moderate income neighborhoods. We generally utilize previously occupied store sites which enables us to obtain attractive rents. At the same time, from an investment perspective, we seek to design stores that are inviting and easy to shop, while limiting startup and fixturing costs. Our store growth is supported by our new store economics, which we believe to be compelling. Our new store model assumes a store size of approximately 11,000 square feet that achieves sales of approximately $1.4 million in the first full year of operations and an initial cash investment of approximately $0.4 million comprised of store build-out costs (net of tenant allowances), inventory (net of accounts payable) and cash pre-opening expenses. Our new store model presents an attractive average payback period of two years on our initial investment.
Highly Talented and Motivated Leadership Team . Our senior management team, led by David Makuen, our Chief Executive Officer, has extensive value retail experience across a broad range of disciplines, including merchandising, real estate, finance, store operations, supply chain management and information technology. Our management team plans and drives our growth strategy, which is based on our constant focus on providing trend-driven merchandise anchored in value to the lower income, underserved African American and Latinx populations. We believe our management team is integral to our success and positions us well for long-term growth.
Growth Strategy
We believe that Citi Trends is in a unique position for growth. We have a loyal customer base, a long runway for store growth and a motivated leadership team, supported by a healthy balance sheet. We have identified four strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years. These areas of focus are:
Growing Our Fleet . We believe that we have the potential to grow to 1,000 stores as a result of a third-party study conducted in 2020. This represents a potential 70% increase in the size of our current fleet and will give us the opportunity to build stores in geographies for the following population segments: African American-centric geographies, Melting Pot geographies (containing a mix of African Americans and Latinx families), and Latinx-centric geographies.
Optimizing the Product Mix . We believe that our unique ability to curate assortments for our target customers further differentiates our model. Through a combination of directly sourced products and highly recognized brands grounded in everyday value, we are known for delivering constant newness and freshness, causing a high repeat shopping rate. We practice rigorous inventory management, prioritizing choice and breadth over depth, improving our speed to market and driving faster turns. Continued expansion of non-apparel categories and investments in systems and automation will further optimize our product mix.
Investing in Our Infrastructure . We believe that we have an opportunity to make strategic investments in our business that will improve our capabilities to “buy,” “move” and “sell” our assortments to effectively engage current and new customers.
● “Buy” is everything associated with buying, planning and allocating the assortments that we offer to our customers. We plan to invest in systems and data to enhance our teams’ roles and how they operate.
● “Move” translates to our supply chain and how we move goods from the time an order is placed through getting it to the selling floor. Investments in this area include upgrades to our distribution centers and system enhancements in order to increase speed and productivity.
● “Sell” relates to operations at our retail stores. Our investments in this area include expanding and enhancing the chain and implementing important tools such as a new point-of-sale system and workflow apps to improve store productivity.
Making a Difference . Our team is committed to making a difference in the African American and Latinx communities that we serve. We will start the journey towards being more sustainable as a company, towards taking diversity and inclusion to the next level, and ensuring that we operate with the highest of ethics. See “Community Involvement” under “Human Capital Management” below for more information on our initiatives to make a difference.
We strongly believe that our growth strategy centered around these four areas will accelerate our sales and earnings growth.
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Product and Value
Our merchandising strategy is to offer fresh and fashionable apparel, accessories and home trends for way less spend for value-conscious families. We seek to maintain a diverse assortment of in-season merchandise that appeals to the specific tastes and preferences of our core customers. Our assortment is comprised of privately-developed and nationally-recognized brands.
Our merchandise is represented by six distinct “Citis” within the store:
● Ladies: a wide selection of apparel for juniors and women (plus size), including fashion sportswear, outerwear, sleepwear, lingerie and scrubs.
● Mens: a wide selection of apparel for men and big men, including fashion sportswear and outerwear.
● Kids: fashion clothing for boys and girls up to size 20 and sizes for newborns, infants and toddlers, as well as kids uniforms and kids accessories.
● Accessories and Beauty: fashionable handbags, luggage, hats, belts, sunglasses, jewelry and watches for men and women, as well as basic undergarments for the entire family and expansive beauty and fragrance offerings for women and men.
● Home and Lifestyle: home goods for the bedroom, bathroom, kitchen and decorative accessories, plus an eclectic composition of wants and needs such as books, food, tech products, team sports products, toys, health and beauty products and seasonal items.
● Footwear: casual and dress footwear in sizes for mens, ladies and kids.
The following table provides the percentage of net sales for each Citi within the store:
Fiscal Year
Citis
2020
2019
2018
Ladies
26
%
26
%
27
%
Kids
23
%
23
%
24
%
Mens
18
%
16
%
17
%
Accessories & Beauty
16
%
17
%
15
%
Home & Lifestyle
9
%
7
%
7
%
Footwear
8
%
11
%
10
%
Our goal is to deliver outstanding value every day. We do this by offering access to fashion and trends at affordable prices that are desirable for low to moderate income customers. As a normal course, we do not engage in promotional activity such as high-low pricing, coupons or sales other than our regularly scheduled markdowns. The flexibility of our model allows our pricing structure to fluctuate in response to marketplace changes while maintaining our merchandise margins. Both branded and non-branded offerings validate our fashion and value to our customers.
Sourcing and Allocation
We believe that our flexible, value-conscious business model and ever-changing assortment that results from our fresh flow of inventory differentiates us from traditional retailers. We source our merchandise from thousands of domestic manufacturers and importers. Our merchandising division consists of a buying team and a planning and allocation team.
Our buyers have extensive experience and have developed long-standing relationships with many of our vendors. The buying office is located in New York City, and the team travels regularly to the major United States markets, visiting major manufacturers and attending national and regional trade shows.
Our buying team sources goods in a couple of ways. First, we source a curated compilation of the latest trends and fashion from a constantly growing base of vendors that manufacture products for Citi Trends’ core customers. Our buyers collaborate with these vendors to design products that are of high aesthetic value and appealing to our customers. Second, we maintain strong relationships with nationally recognized brands that we partner with to buy and customize products that are geared in size, color and style to our core customers. The majority of our merchandise is first-quality and purchased in season. High-quality excess inventory is purchased at advantageous pricing with the intent to sell later in the same season or the following season. This allows us to deliver exciting value on select highly desirable goods. Beginning in fiscal 2021, we launched an initiative to increase the penetration of Black and Brown-owned brands in our merchandise assortment. This initiative will further enable us to support many entrepreneurs that we believe will deepen our connection with our target customers.
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We allocate merchandise across our stores according to fact-based plans that are created by our planning and allocation teams. Our staff utilizes a centralized management system to monitor merchandise purchasing, planning and allocation in order to maximize inventory turnover, identify and respond to changing product demands and determine the timing of markdowns to our merchandise. A store-level planning system assists our team in their efforts to allocate merchandise to individual stores based on sales performance and planned inventory levels. The buyers also regularly review the age and performance of the merchandise and manage both the reordering and clearance processes.
Store Operations
Our stores are located in the heart of the vibrant lower income communities we serve. We hire a diverse staff of women and men from the local area surrounding our stores. As of January 31, 2021, nearly 80% of our store associates are African American or Latinx, and more than 90% of our store management positions are filled by women. We cater to entire families and offer a one-stop shopping experience that meets the vital needs of these underserved communities. We welcome everyone with “Hi, welcome to Citi Trends” and we develop a longstanding rapport with many of our customers, many of whom we know by name. Every Citi Trends store presents a specialty store environment with a wide array of offerings.
The average selling space of our 585 stores is approximately 11,000 square feet, which allows us the space and flexibility to organize our six “Citis” of business in exciting and appealing ways. The unobstructed floor plan allows the customer to see almost all of the different product areas from the store entrance and provides us the flexibility to easily expand and contract departments in response to customer demand, seasonality and merchandise availability. Nearly all of our inventory is displayed on the selling floor. Our mission is to curate highly appealing products at value prices for our core customers. We provide them a place to shop that is fashionable, friendly, fresh, fair and fun. A critical component of our success is to maintain an environment that is neat, clean and organized, where everyone is welcome.
The typical store is staffed with a Store Manager, two or three Assistant Managers and seven to eight part-time Sales Associates, all of whom rotate work days on a shift basis. Our employees are critical to achieving our goals, and we strive to hire employees from the local community with high energy levels and motivation. We have well-established store operating policies and procedures and an extensive 30-day in-store training program for new store managers and assistant managers. Sales associates also participate in a 14-day customer service and store procedures training program, which is designed to enable them to assist customers in a friendly and helpful manner.
We offer a layaway program that allows customers to purchase merchandise by initially paying a 20% deposit and a $2 service charge, although at various times, we reduce the deposit requirement to 10% and waive the service charge in connection with promotional events. The customer then makes additional payments every two weeks and has 60 days to complete the purchase. If the purchase is not completed, the customer receives a Citi Trends gift card for amounts paid less a re-stocking and layaway service fee.
Our unique focus on underserved African American and Latinx families offers us the opportunity to pinpoint highly targeted and highly visible store locations. Cost-effective store locations are an important part of our store profitability model. Accordingly, we look for locations in outdoor community shopping centers that offer attractive rents and meet our demographic and economic criteria. We have a dedicated real estate management team responsible for new store site selection and we employ rigorous analysis that is used during real estate committee meetings to approve final store selection decisions. In selecting a location, we target urban, suburban and rural markets and our strategy includes both further densification of existing markets and entering new markets over time. In addition, we require convenient site accessibility, as well as strong co-tenants, such as grocery stores, dollar stores, beauty stores and other value stores. We aim to be an integral part of our customers’ community by providing a compelling shopping destination and career opportunities. After completing a study in fiscal 2020 with a third-party provider, we believe we can grow our fleet to 1,000 stores over time.
Advertising and Marketing
Our marketing goals are to build the Citi Trends brand, promote customers’ association of the Citi Trends brand with value, quality, fashion and everyday low prices, and drive traffic into our stores. We generally focus our advertising efforts utilizing emails, social media and influencer marketing. We use our social media channels to highlight our brand and engage our customers with compelling digital content on a regular basis. We also maintain an informational website at www.cititrends.com which showcases our latest in-store products and provides information about our business, including a store locator.
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Distribution
All merchandise sold in our stores is shipped directly from our company-owned distribution centers in Darlington, South Carolina and Roland, Oklahoma, utilizing third-party delivery partners. Our stores receive multiple shipments of merchandise each week from our distribution centers. In addition, we initiated a drop-shipment program in fiscal 2020 that enables us to expedite the delivery of select merchandise to our stores by shipping directly from our vendors.
The Darlington distribution center has 550,000 square feet of space, while the Roland distribution center has 565,000 square feet of space. The distribution center value-added services include, but are not limited to, receiving, price ticketing, packing and shipping specific store-allocated quantities. We continue to evaluate distribution, transportation and supply chain alternatives to accelerate the movement of merchandise from our vendor origin points to our stores as optimally as possible.
Information Technology and Systems
We have information systems in place to support our core business functions, using a combination of industry-standard third party products and internally developed applications. These systems support purchase order management, price and markdown management, merchandise planning and allocation, general ledger, accounts payable, sales audit, loss prevention, store operations and supply chain functions.
We have developed and are executing on our strategic roadmap to upgrade our information systems. In 2020, we delivered a new cloud-based merchandise planning and forecasting solution to streamline processes, increase accuracy and leverage alternative modeling techniques. In addition, we are in the process of implementing a cloud-based business intelligence platform to provide robust analytical capabilities across our enterprise and extend visibility to granular levels of the business. We are currently engaged in a point-of-sale replacement project that includes new hardware, software and payment systems for our stores. The project will be completed in mid-2021 and is expected to improve our store operational processes, increase transactional efficiencies and provide enhanced visibility to the business. We will continue to execute on our roadmap in 2021 with increased focus on improving our supply chain and merchandising systems while further leveraging data and analytics.
Competition
The markets we serve are highly competitive. We compete with a broad range of retailers including national chains, mass merchants, discount stores and specialty stores with both physical locations and online stores. The principal measures of competition in the retail business are fashion, assortment, pricing and presentation. We believe we have a competitive advantage in our offering of fashion and trends at everyday low prices, and our strategy of focusing on African American and Latinx customers puts Citi Trends in a unique competitive position. We also believe we offer a more inviting store format than the traditional retailers, including our size and layout of merchandise, use of carpeted floors and colorful signage, and fixtures that are easy to shop. Our competitors do not focus on trend apparel and, within their apparel offering, lack the specialized focus on fashionable mix that appeals to our core customers. As a result, we believe there is significant demand for a specialty value retailer that addresses the market of low and moderate income customers generally and, particularly, African American, Latinx and other customers who seek extreme value for fashion apparel, accessories and home goods. See Item 1A. Risk Factors in this Report for additional information regarding competition in our markets.
Intellectual Property
We regard our trademarks and service marks as having significant value and as being important to our marketing efforts. We have registered “Citi Trends” as a trademark with the U.S. Patent and Trademark Office on the Principal Register for retail department store services. We have also registered the following trademarks with the U.S. Patent and Trademark Office on the Principal Register for various apparel brands: “Citi Steps,” “Citi Trends Fashion for Less,” “Lil Ms Hollywood,” “Red Ape,” and “Vintage Harlem.” Our policy is to pursue registration of our marks and to oppose vigorously infringement of our marks.
Human Capital Management
The success of Citi Trends is directly attributable to our people and their passion to achieve our performance goals. We recognize the importance of attracting and retaining top talent in our workforce that reflects the communities we serve. We strive to make Citi Trends a diverse, inclusive and safe workplace, with opportunities for our employees to grow and develop in their careers, supported by competitive compensation, benefits and health and wellness programs, and by programs that build connections between our employees and their communities.
As of January 30, 2021, we had approximately 3,000 full-time and approximately 2,200 part-time employees. Of these employees, approximately 4,300 are employed in our stores and the remainder are employed in our distribution centers, buying offices and corporate office. We are not a party to any collective bargaining agreements, and none of our employees are represented by a labor union.
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Diversity and Inclusion . We believe that a diverse and inclusive team is critical to our success. We strive to foster an intentionally inclusive, diverse and productive working environment where our employees are valued and respected. We continue to focus on attracting, developing and retaining team members that reflect the diverse communities we serve. As of January 31, 2021, nearly 80% of our employees are African American or Latinx and 83% of our employees are female.
Citi Trends embraces diversity and is committed to continued improvements throughout the Company. The Compensation Committee of the Board provides oversight of the Company’s diversity and inclusion programs and key metrics associated with the programs. Additionally, the newly formed Corporate Social Responsibility Committee of the Board will assist in developing processes to achieve the Company’s diversity objectives.
Health, Safety and Wellness . The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. On March 20, 2020, the Company temporarily closed all of its retail store locations and distribution centers. Beginning April 24, 2020, the Company started to reopen stores in select states in accordance with state and local government guidelines and implemented additional safety measures for employees and customers. As of July 18, 2020, the Company safely reopened all of its stores and distribution centers. As of the end of fiscal 2020, many of the employees at the Company’s corporate and buying offices continue to work from home.
Compensation and Benefits . We provide competitive compensation and comprehensive benefits programs to help meet the needs of our employees. In addition to salaries, these programs (which vary by position) include annual bonuses, stock awards, a 401(k) match, healthcare and insurance benefits, paid time off and personal/family leave.
Training and Development . Our employees are critical to achieving our goals, and we strive to hire employees with high energy levels and motivation. We have well-established store operating policies and procedures and an extensive 30-day in-store training program for new store managers and assistant managers. Sales associates also participate in a 14-day customer service and store procedures training program, which is designed to enable them to assist customers in a friendly and helpful manner. Our training and development programs provide employees with the resources they need to help achieve their career goals, build management skills and lead their organizations.
Community Involvement . We believe that building connections between our employees, their families and our communities creates a more meaningful, fulfilling and enjoyable workplace. We formed the CITI cares (cares: Citi Trends Against Racism Employee Solutions) Council in August 2020 to create and oversee initiatives of change that will have a positive impact in the lives of our customers and employees. The CITI cares Council is a diverse group of associates who are passionate about making a difference. They represent every division and level of the company, including both genders, multiple ethnicities and different geographies. The purpose of the CITI cares Council is to collaborate with community leaders, organizations, individuals and established programs in local underserved communities on the core areas of education, healthcare, employment and exposure.
Additionally, Citi Trends has been engaged in multiple community programs. In February 2021, we launched our Black History Makers program to honor Black entrepreneurs who are making an impact in their communities. The program is designed to increase awareness of Black-owned businesses and will provide ten $5,000 grants to Black business owners.
Seasonality
The nature of our business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year due to changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the COVID-19 pandemic. Furthermore, the seasonal nature of our business may affect comparisons between periods.
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