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Item 7. Management’s Discussion and Analysis

2022-04-14 compared with 2021-04-14 · 132 added, 133 removed, 87 unchanged (75% of the section changed)

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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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.

Discussions of our results of operations for the year ended February 1, 2020 compared to the year ended February 2, 2019 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Form 10-K for the year ended February 1, 2020, as amended, which was filed with the United States Securities and Exchange Commission on May 14, 2020.

We are a growing specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx families.

Discussions of our results of operations for the year ended January 30, 2021 compared to the year ended February 1, 2020 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Form 10-K for the year ended January 30, 2021, which was filed with the United States Securities and Exchange Commission on April 14, 2021.

Executive Overview

We are a growing specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families in the United States.

Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers.

As of January 29, 2022, we operated 609 stores in urban, suburban and rural markets in 33 states.

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

As a result, we temporarily closed all of our retail store locations and distribution centers effective March 20, 2020.

At the end of April 2020, we started to reopen stores in select states in accordance with government guidelines.

As of July 18, 2020, we safely reopened all of our stores.

The COVID-19 pandemic has resulted in a period of disruption, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products.

During this period, we continue to prioritize the health of our associates, customers and communities we serve.

The impacts of the pandemic have had, and may continue to have, an adverse impact on our financial condition, results of operations and liquidity.

We took numerous actions beginning in the first quarter of fiscal 2020 in light of the uncertainties resulting from the pandemic, including:

(i) the drawdown of $43.7 million in principal amount under the revolving credit facility on March 20, 2020, which we fully repaid on September 11, 2020;

(ii) an amendment to the revolving credit facility to extend the term to August 2021;

(iii) 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;

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

(v) extensions of payment terms with vendors and suppliers;

(vi) the suspension of share repurchases;

(vii) negotiations of rent concessions with landlords, some of which are ongoing;

and (viii) a substantial reduction in operating expenses, store occupancy costs, capital expenditures and other costs.

We expect continued uncertainty in our business and the global economy due to the duration and intensity of the COVID-19 pandemic, the duration and extent of economic stimulus, timing and effectiveness of vaccines, and volatility in employment trends and consumer confidence.

For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see “Item 1A – Risk Factors.”

Fiscal 2021 Business Highlights

● Launched and market tested our new “CTx” store formats, the first major overhaul to our store format in over 10 years

● Opened 27 new stores and remodeled 25 stores

● Navigated the supply chain challenges and disruptions while maintaining healthy inventory stock with high freshness

● Managed store and distribution labor headwinds with prudent leadership and effective staffing solutions

● Initiated investments in infrastructure, including system enhancements for our merchandising teams and capacity upgrades for our distribution centers

● Strengthened our diversity and leadership with two new additions to our board of directors

● Launched “Citi Life” which encapsulates our brand purpose values and represents the emotional connection that our customers and associates have with Citi Trends

Fiscal 2021 Financial Highlights

● Total sales of $991.6 million

● Operating margin of 8.0%

● Earnings of $6.91 per diluted share

● Cash of $49.8 million at the end of the year with no debt

● Repurchased $115.3 million of shares

For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see Item 1A.

Risk Factors in this Report.

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.

As described in more detail in “Item 1 – Business,” we have identified four strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Growing Our Fleet .

We believe that we have the potential to grow to more than 1,000 stores over time through both densification and new market entries.

By the end of fiscal 2024, we expect about 50% of our stores will be in our compelling new CTx format.

Optimizing the Assortment .

We believe that our unique ability to curate assortments for our customers further differentiates our model.

In addition, we leverage consumer insights and analytics to add incremental assortments, and we employ pricing studies to expand margin.

Investing in Our Infrastructure .

We believe that we have an opportunity to make strategic investments in our business that will improve our efficiencies and our capabilities to “buy,” “move” and “sell” our assortments to effectively engage current and new customers.

Making a Difference .

Our team is dedicated to our neighborhoods and committed to positively impacting the African American and Latinx communities that we serve.

We strongly believe that our growth strategy centered around these four areas will accelerate our sales and earnings growth.

Uncertainties and Challenges

The COVID-19 pandemic continues to evolve and has caused significant volatility and disruptions in our business during fiscal 2021 and 2020.

We remain focused on providing a safe store environment for our customers and associates while delivering an engaging shopping experience.

We also prioritize the wellness and safety of our associates in our corporate offices and distribution centers.

The communities we serve were severely impacted by the omicron variant at the end of fiscal 2021.

Despite the recent improvement in trends, we cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

In addition to COVID-19, we expect that our operations will continue to be influenced by general economic conditions, including the recent surge in prices for food, fuel and energy due to inflationary pressures, which are particularly impactful to the communities we serve.

In addition, we are closely monitoring the impacts of higher unemployment, wage inflation and costs to source our merchandise.

Supply Chain Disruptions

We have encountered increasing supply chain disruptions that began in the second half of fiscal 2021 and have continued through the date of this Report.

In particular, our vendors have faced production delays and we have been impacted by industry-wide U.S.

port and ground transportation delays.

In response, we have taken various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the drop shipping program that we initiated in fiscal 2020.

These supply chain disruptions have resulted in increased costs, and we expect supply chain pressures will persist through at least the first half of fiscal 2022.

Seasonality and Weather Patterns

The nature of our business is seasonal.

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

In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates.

While we have greatly expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.

Basis of Presentation

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Each of our fiscal quarters consists of four 13-week periods, with an extra week added to the fourth quarter every five to six years.

The years ended January 30, 2021, February 1, 2020 and February 2, 2019 are referred to as fiscal 2020, 2019 and 2018, respectively.

The years ended January 29, 2022, January 30, 2021 and February 1, 2020 are referred to herein as fiscal 2021, 2020 and 2019, respectively.

Results of Operations

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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 due to changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the COVID-19 pandemic.

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Statement of Operations Data

Cost of sales (exclusive of depreciation shown separately below)

Cost of sales (exclusive of depreciation)

Selling, general and administrative expenses

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Stores that are closed permanently or for an extended period are excluded from the comparable store sales results.

(2) 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.

Key Operating Statistics

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Fiscal 2021 Compared to Fiscal 2020

Net sales increased $1.4 million, or 0.2%, to $783.3 million in fiscal 2020 from $781.9 million in fiscal 2019, despite our stores being closed for approximately 16% of the total available store days in fiscal 2020 due to the COVID-19 pandemic.

Comparable store sales decreased 2.1% in fiscal 2020.

The increase in net sales was due to strong performance in the second, third and fourth quarters of 2020 (beginning in the second quarter as the Company reopened its stores from temporary closures due to COVID-19).

In the second quarter, comparable store sales increased 32.2% for reopened stores from their respective opening dates.

In the third and fourth quarters, comparable store sales increased 6.3% and 16.7%, respectively.

Also contributing to the total increase in sales was the opening of 18 new stores in 2020 and 16 new stores in 2019 for which there was not a full year of sales in 2019, partially offset by the closing of 4 stores in 2020 and 7 stores in 2019.

Store opening and closing activity resulted in a net increase of $18.3 million in sales in 2020, while the 2.1% decrease in comparable store sales in the 551 comparable stores caused sales to decrease $16.0 million and layaway fee income decreased $0.9 million.

Finally, despite the negative impact to sales from closures related to the pandemic, we experienced increased demand upon reopening partially due to government stimulus payments.

Net sales increased $208.3 million, or 26.6%, to $991.6 million in fiscal 2021 from $783.3 million in fiscal 2020, primarily due to temporary store closures in fiscal 2020 related to the COVID-19 pandemic.

The increase in net sales was also driven by government stimulus payments and the lifting of COVID-19 restrictions that created a surge in demand, particularly in the first quarter of 2021.

Cost of Sales (exclusive of depreciation).

Cost of sales (exclusive of depreciation) decreased $13.1 million, or 2.7%, to $471.6 million in 2020 from $484.7 million in 2019.

Cost of sales as a percentage of net sales decreased 180 basis points to 60.2% in 2020 from 62.0% in 2019 due to an increase of 140 basis points in the core merchandise margin (initial mark-up, net of markdowns), along with an improvement of 40 basis points in shrinkage.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased $0.6 million, or 0.2% to $260.2 million in fiscal 2020 from $259.6 million in fiscal 2019.

As a result of the temporary closure of all our stores, we took several steps to reduce selling, general and administrative expenses, including (i) temporarily furloughing substantially all store and distribution center personnel and a significant portion of the corporate staff;

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

(iii) negotiating rent concessions with landlords;

and (iv) executing substantial reductions in operating expenses and store occupancy costs.

These reductions were offset by an increase in incentive compensation expense resulting from improved operating results in relation to budget and the opening of 18 new stores in 2020 and 16 new stores in 2019.

As a percentage of net sales, selling, general and administrative expenses remained flat in 2020 relative to 2019 at 33.2%.

Cost of sales increased $112.5 million, or 23.8%, to $584.1 million in fiscal 2021 from $471.6 million in fiscal 2020.

As a percentage of net sales, cost of sales leveraged 130 basis points to 58.9% in fiscal 2021 from 60.2% in fiscal 2020 due to an increase of 195 basis points in the core merchandise margin (initial mark-up, net of markdowns) primarily driven by fewer markdowns, along with an improvement of 40 basis points in shrinkage, partially offset by 105 basis points deleverage in freight costs.

Selling, General and Administrative Expenses (“SG&A”).

SG&A expenses increased $47.4 million, or 18.2% to $307.6 million in fiscal 2021 from $260.2 million in fiscal 2020 driven primarily by reduced payroll and occupancy expenses in 2020 related to COVID-19 temporary store closures.

Also contributing to the increase in SG&A expenses was $8.0 million higher incentive-based compensation expense resulting from improved operating results in relation to budget, as well as the impact on expenses of opening 27 new stores in fiscal 2021 and 18 new stores in fiscal 2020.

As a percentage of net sales, SG&A expenses leveraged 220 basis points to 31.0% from 33.2%.

Depreciation.

Depreciation expense increased $0.8 million to $19.3 million in 2020 from $18.5 million in 2019.

Depreciation expense increased $1.1 million to $20.4 million in fiscal 2021 from $19.3 million in fiscal 2020.

Asset Impairment.

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

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

There were no impairment charges related to underperforming stores in fiscal 2021.

In fiscal 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.1 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset.

Income Tax Expense.

Income tax expense increased $3.9 million to $7.4 million in 2020 from $3.5 million in 2019 due primarily to an $11.4 million increase in pretax income.

Net income increased $7.5 million to $24.0 million in 2020 compared to $16.5 million in 2019, due to the factors discussed above.

Income tax expense increased $9.6 million to $17.0 million in fiscal 2021 from $7.4 million in fiscal 2020 due primarily to an increase of $47.8 million in pretax income.

Our effective tax rate for fiscal 2021 was 21.5% compared to 23.6% in fiscal 2020.

The decrease in the effective tax rate was primarily due to excess tax benefits from stock-based payment arrangements.

Net income increased $38.2 million to $62.2 million in fiscal 2021 compared to $24.0 million in fiscal 2020, due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs.

Our year-end cash and cash equivalents balance was $49.8 million compared to $123.2 million at the end of last year.

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

Our principal sources of liquidity consist of:

(i) cash and cash equivalents (which equaled $123.2 million as of January 30, 2021);

(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 million credit commitment (with no borrowings at the end of fiscal 2020).

Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors.

As of January 30, 2021, we had total cash and cash equivalents of $123.2 million, compared with $19.9 million as of February 1, 2020.

We had no short-term or long-term investment securities as of January 30, 2021, compared with $27.6 million and $15.7 million, respectively, as of February 1, 2020.

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

Treasury, states and municipalities.

Inventory represented 21.0% of our total assets as of January 30, 2021, compared with 30.1% as of February 1, 2020.

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.

(i) cash and cash equivalents on hand;

(ii) short-term trade credit arising from customary payment terms and trade practices with our vendors;

(iii) cash generated from operations on an ongoing basis;

and (iv) a revolving credit facility with a $75 million credit commitment.

In addition, on March 14, 2022, we entered into an agreement to consummate a sale and leaseback transaction of our distribution center in Darlington, South Carolina, and at our discretion, our distribution center in Roland, Oklahoma.

The sale of the Darlington property is expected to provide net proceeds (after tax and transaction-related costs) of approximately $37 million.

The sale of the Roland property, if elected by the Company, is expected to provide net proceeds of approximately $32 million.

The sale of the Roland property is subject to due diligence and other customary closing conditions.

Our year-end inventory balance was $123.8 million, compared with $103.8 million at the end of last year.

The increase was primarily due to depleted inventory levels at the end of last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021.

Capital Expenditures

Capital expenditures in fiscal 2021 were $29.7 million, an increase of $12.7 million over the prior year as we invested in our strategic initiatives, including opening 27 new stores, remodeling 25 stores and investing in system upgrades and distribution center enhancements.

We anticipate capital expenditures in fiscal 2022 of $40 million to $45 million, primarily for opening approximately 35 new stores and remodeling approximately 50 stores, combined with continued investments in our systems and distribution centers.

Share Repurchases

During fiscal 2021 and 2020, we returned $115.3 million and $32.9 million, respectively, to shareholders through share repurchases.

See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2026 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature.

Additional details of the credit facility are in Note 4 to the Financial Statements.

At the end of fiscal 2021, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

Cash Flows From Operating Activities.

Net cash provided by operating activities was $110.9 million in 2020 compared with $42.6 million in 2019.

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 $96.2 million in 2020 (compared with $84.0 million in 2019).

Other significant sources of cash in 2020 included (1) a $33.6 million decrease in inventory (compared to a $1.2 million decrease in 2019) due to efforts to reduce inventory levels, improve inventory turns and maintain as much inventory liquidity as possible in order to take advantage of opportunistic deals and trend changes;

(2) a $16.3 million increase in accrued compensation (compared to a $0.3 million increase in 2019) due to an increase in incentive compensation resulting from favorable operating results in relation to budget, combined with an increase in deferred payroll taxes under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act;

(3) a $5.8 million increase income tax payable (compared to a $1.6 million decrease in 2019) due to higher pretax income;

and (4) a $5.1 million increase in accounts payable (compared to a $5.6 million increase in 2019) due to improved inventory turns and a high volume of merchandise receipts during the final two months of the year, with nearly all of such purchases still in accounts payable at the end of the year.

Significant uses of cash from operating activities in 2020 included (1) a $38.4 million decrease in accrued expenses and other long-term liabilities (compared to a $45.3 million decrease in 2019) due primarily to payments of operating lease liabilities;

and (2) a $7.7 million increase in prepaid and other current assets (compared to a $1.6 million increase in 2019) due primarily to an employee retention credit receivable under the CARES Act, combined with increases in receivables for tenant improvement allowances and charge card receivables.

Cash provided by operating activities was $74.3 million in fiscal 2021 compared with $110.9 million in fiscal 2020.

For fiscal 2021, significant sources of cash included:

(1) $142.1 million from net income adjusted for non-cash expenses and insurance proceeds;

and (2) a $12.8 million increase in accounts payable.

Significant uses of cash included:

(1) a $53.2 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities;

(2) a $20.4 million increase in inventory due primarily to depleted inventory levels at the end of last year driven by outsized sales;

and (3) an $8.6 million change in income tax receivable/payable.

For fiscal 2020, significant sources of cash included:

(1) $96.2 million from net income adjusted for non-cash expenses and insurance proceeds;

(2) a $33.6 million decrease in inventory due to efforts to reduce inventory levels combined with outsized sales in the fourth quarter;

(3) a $16.3 million increase in accrued compensation due primarily to higher incentive compensation earned relative to 2019;

(4) a $5.8 million change in income tax payable;

and (5) a $5.1 million increase in accounts payable.

Significant uses of cash included:

(1) a $38.4 million decrease in accrued expenses and other long-term liabilities due primarily to payments of operating lease liabilities;

and (2) a $7.7 million increase in prepaid and other current assets due to a credit under the CARES Act and increases in tenant improvement allowances and charge card receivables.

Cash Flows From Investing Activities.

Cash provided by investing activities was $26.7 million in 2020 compared with cash used of $7.6 million in 2019.

Sales and redemptions of investment securities, net of purchases, provided cash of $43.3 million in 2020 (compared with $16.0 million in 2019) due to converting our investments to cash as a result of the COVID-19 pandemic.

Cash used for the purchase of property and equipment was $17.0 million in 2020 (compared with $24.2 million in 2019) due to reducing our capital expenditure plans as a result of the COVID-19 pandemic.

Cash used in investing activities was $29.5 million in fiscal 2021 compared to cash provided of $26.7 million in fiscal 2020.

Cash used in fiscal 2021 was primarily for capital expenditures in new and remodeled stores, along with investments in system upgrades and distribution center enhancements.

Cash provided in fiscal 2020 was the result of $43.3 million of net proceeds from the sale of investment securities, partially offset by $17.0 million of capital expenditures.

Cash Flows From Financing Activities.

Cash used in financing activities was $34.3 million in 2020 compared with $32.9 million in 2019.

Cash used for the repurchase of common stock totaled $32.9 million in 2020 and $28.4 million in 2019.

Dividends paid to stockholders used cash of $0.8 million in 2020 and $3.8 million in 2019.

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

Cash used in financing activities was $118.2 million in fiscal 2021 compared with $34.3 million in fiscal 2020.

Repurchases of common stock totaled $115.3 million in fiscal 2021, while repurchases of common stock and dividend payments totaled $33.7 million in fiscal 2020.

Cash Requirements and Commitments

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.

Our principal cash requirements consist of (1) inventory purchases;

(2) capital expenditures to invest in our infrastructure;

and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs.

We also use cash to repurchase stock under our stock repurchase programs.

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

As a result of the temporary closure of our stores due the COVID-19 pandemic, on March 20, 2020, we borrowed $43.7 million in principal amount under our revolving credit facility.

On September 11, 2020, we repaid the full amount outstanding under the credit facility.

In addition, we reduced our operating expenses, capital expenditure plans and inventory receipts, as appropriate.

The Company announced a share repurchase program on March 13, 2020.

On March 23, 2020, due to the economic uncertainty stemming from the COVID-19 pandemic, we suspended any repurchases and dividend payments.

On September 14, 2020, we announced the reinstatement of the share repurchase program.

During fiscal 2020, we repurchased shares of our common stock at an aggregate cost of $32.9 million, funded from cash on hand.

We have continued repurchases in fiscal 2021, including a block repurchase of 250,000 shares on March 23, 2021 for an aggregate purchase price of $21.9 million.

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

However, any significant reduction in customer willingness to visit shopping centers or levels of customer spending at our stores, or any future temporary closures of our stores or distribution centers, or any disruptions in the supply chains related to our merchandise could require us to take actions that could include material changes in our operations and seeking additional debt or equity capital.

We will continue to monitor the situation and take action as necessary to reduce our expenses and preserve our financial flexibility.

The following table discloses aggregate information about our contractual obligations as of January 30, 2021 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

(1) Represents fixed minimum rents in stores and does not include incremental rents which are computed as a percentage of net sales.

For example, in fiscal 2020 incremental percentage rent was approximately $0.5 million, which represented 0.9% 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.

On September 11, 2020, we repaid the full amount outstanding under the credit facility.

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.

Rent expense was $60.1 million in 2020 compared with $58.1 million in 2019 (including contingent rent of $0.5 million and $0.3 million in 2020 and 2019, respectively).

Purchase Obligations.

As of January 30, 2021, we had purchase obligations of $145.0 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.

As of January 29, 2022, our contractual commitments for operating leases totaled $234.0 million (with $53.3 million due within 12 months) and our purchase obligations for open merchandise orders totaled $249.8 million due within 12 months.

See Note 8 to the Financial Statements for more information regarding lease commitments.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S.

GAAP, which requires us to make estimates and apply judgments that affect the reported amounts.

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 our consolidated financial statements.

We believe the following critical

accounting policies describe the more significant judgments and estimates used in the preparation of our 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.

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

Inventory shrinkage as a percentage of sales was 0.8% in 2020, compared to 1.2% in 2019 and 1.3% in 2018.

The allowance for estimated inventory shrinkage was $5.2 million as of January 30, 2021 and $3.0 million as of February 1, 2020.

Inventory shrinkage as a percentage of sales in fiscal 2021, 2020 and 2019 was 0.4%, 0.8% and 1.2%, respectively.

The allowance for inventory shrinkage was $4.4 million as of January 29, 2022 and $5.2 million as of January 30, 2021.

As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as of January 29, 2022, would not have materially impacted our cost of goods sold in fiscal 2021.

Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory.

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There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2021.

Insurance Liabilities

We are largely self-insured for workers’ compensation costs, general liability claims 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 $2.9 million ($1.5 million current and $1.4 million noncurrent) as of January 30, 2021 and $2.6 million ($1.5 million current and $1.1 million noncurrent) as of February 1, 2020.

There were no material changes in the estimates or assumptions related to insurance liabilities during fiscal 2020.

Operating Leases

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Recent Accounting Pronouncements

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

We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.

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 7. Management’s Discussion and Analysis