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Item 8. Financial Statements and Supplementary Data

2022-04-14 compared with 2021-04-14 · 471 added, 3 removed, 3 unchanged (99% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item and the report of the independent accountant thereon required by Item 14(a)(2) appear beginning on page F-2 of this Report.

See accompanying Index to the consolidated financial statements on page F-1.

The supplementary financial data required by Item 302 of Regulation S-K appears in Note 10 to the consolidated financial statements.

Citi Trends, Inc.

Index to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firms (Deloitte & Touche LLP - PCAOB ID:

34 ) (KPMG LLP - PCAOB ID:

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Citi Trends, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Citi Trends, Inc.

and subsidiary (the "Company") as of January 29, 2022, the related consolidated statements of operations, cash flows, and stockholders’ equity, for the year ended January 29, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2022, and the results of its operations and its cash flows for the year ended January 29, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 14, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory – Retail Inventory Method – Refer to Note 2 to the financial statements

Critical Audit Matter Description

Inventory is stated at the lower of cost or net realizable value as determined by the retail inventory method for store 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 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.

The Company estimates and records 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.

The balance of ending inventory was $123.8 million as of January 29, 2022.

Given the valuation of inventory under the retail inventory method requires management to make significant judgments and estimates, performing audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of markdowns and the allowance for shrinkage used in the valuation of inventory required a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures to evaluate the reasonableness of the judgments and estimates related to the timing of markdowns and the allowance for shrinkage used in the valuation of inventory included the following, among others:

● We tested the effectiveness of controls over the measurement of inventory under the retail inventory method, including merchandise markdowns and allowance for shrinkage.

● We tested the timing of markdowns by:

o Making a selection of markdowns recorded throughout the year and after year-end to test the accuracy and timeliness of the markdowns recorded.

o Making a selection of purchases made throughout the year;

determining if those purchases were subsequently marked down;

and, if marked down, that the markdown was recorded timely.

o Developing an expectation of markdowns in ending inventory based on historical relationships between markdowns and inventory balances on hand and compared to recorded markdowns.

● We evaluated the assumptions used by management to estimate the allowance for shrinkage by:

o Attending a selection of store physical inventories and recalculating the shrinkage for locations using the results of the store physical inventory.

o Comparing management’s prior-year assumptions of expected shrinkage activity to actual activity incurred during the current year to determine the appropriateness of the allowance for shrinkage.

o Developing an expectation of shrinkage in ending inventory based on historical relationships between shrinkage and inventory balances on hand and compared to recorded shrinkage.

o Comparing the Company’s historical and current year inventory shrinkage to industry reports.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

April 14, 2022

We have served as the Company's auditor since 2021.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Citi Trends, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Citi Trends, Inc.

and subsidiary (the Company) as of January 30, 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years ended January 30, 2021 and February 1, 2020, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021, and the results of its operations and its cash flows for each of the years ended January 30, 2021 and February 1, 2020, in conformity with U.S.

generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of February 3, 2019 due to the adoption of Accounting Standards Update No.

2016-02, Leases (Topic 842), as amended.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We served as the Company’s auditor from 2002 to 2021.

Jacksonville, Florida

April 14, 2021

Citi Trends, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

Current assets:

Cash and cash equivalents

Prepaid and other current assets

Income tax receivable

Total current assets

Property and equipment, net of accumulated depreciation

Operating lease right of use assets

Deferred income taxes

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Operating lease liabilities

Accrued expenses

Accrued compensation

Income tax payable

Layaway deposits

Total current liabilities

Noncurrent operating lease liabilities

Other long-term liabilities

Total liabilities

Stockholders’ equity:

Common stock, $ 0.01 par value.

Authorized 32,000,000 shares;

16,090,365 shares issued as of January 29, 2022 and 15,981,394 shares issued as of January 30, 2021;

8,617,210 shares outstanding as of January 29, 2022 and 9,876,901 shares outstanding as of January 30, 2021

Paid in capital

Retained earnings

Treasury stock, at cost;

7,473,155 shares held as of January 29, 2022 and 6,104,493 shares held as of January 30, 2021

Total stockholders’ equity

Commitments and contingencies (Note 7)

Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial statements .

Citi Trends, Inc.

Consolidated Statements of Operations

(in thousands, except per share 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

Basic net income per common share

Diluted net income per common share

Weighted average number of shares outstanding

See accompanying notes to consolidated financial statements

Citi Trends, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Operating activities:

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

Non-cash operating lease costs

Asset impairment

Loss on disposal of property and equipment

Deferred income taxes

Insurance proceeds related to operating activities

Non-cash stock-based compensation expense

Changes in assets and liabilities:

Prepaid and other current assets

Accounts payable

Accrued expenses and other long-term liabilities

Accrued compensation

Income tax payable/receivable

Layaway deposits

Net cash provided by operating activities

Investing activities:

Sales/redemptions of investment securities

Purchases of investment securities

Purchases of property and equipment

Insurance proceeds related to investing activities

Net cash (used in) provided by investing activities

Financing activities:

Borrowings under revolving credit facility

Repayments of revolving credit facility

Payment of debt issuance costs

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

Dividends paid to stockholders

Repurchase of common stock

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents:

Beginning of year

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash payments of income taxes

Supplemental disclosures of non-cash investing activities:

Accrual for purchases of property and equipment

Conversion of nonvested cash-settled units to nonvested shares under incentive plan

See accompanying notes to consolidated financial statements .

Citi Trends, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

Treasury Stock

Balances — February 2, 2019

Adoption of lease accounting standard

Vesting of nonvested shares

Issuance of nonvested shares under incentive plan

Forfeiture of nonvested shares

Stock-based compensation expense

Net share settlement of nonvested shares and units

Repurchase of common stock

Dividends paid to stockholders ( $ 0.08 per common share)

Balances — February 1, 2020

Vesting of nonvested units

Issuance of nonvested shares under incentive plan

Forfeiture of nonvested shares

Stock-based compensation expense

Net share settlement of nonvested shares

Repurchase of common stock

Dividends paid to stockholders ( $ 0.08 per common share)

Balances — January 30, 2021

Vesting of nonvested units

Conversion of nonvested cash-settled units to nonvested shares under incentive plan

Issuance of nonvested shares under incentive plan

Forfeiture of nonvested shares

Stock-based compensation expense

Net share settlement of nonvested shares

Repurchase of common stock

Balances — January 29, 2022

See accompanying notes to consolidated financial statements.

Citi Trends, Inc.

Notes to Consolidated Financial Statements

Organization and Business

Citi Trends, Inc.

and its subsidiary (the “Company”) is 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.

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

Since early 2020, the global economy has been affected by COVID-19.

The COVID-19 pandemic has caused, and may continue to cause, significant volatility and disruptions in the Company’s business , including the temporary closure of stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of products.

Certain government actions to gradually ease restrictions, provide economic stimulus and distribute vaccines have resulted in signs of economic recovery.

However, t he Company cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.

All intercompany transactions and balances have been eliminated in consolidation.

The Company’s fiscal year ends on the Saturday closest to January 31 of each year.

The years ended January 29, 2022, January 30, 2021 and February 1, 2020 are referred to as fiscal 2021, fiscal 2020 and fiscal 2019, respectively, in the accompanying consolidated financial statements.

Fiscal 2021, 2020 and 2019 are all comprised of 52 weeks.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates and apply judgments that affect the reported amounts.

Actual results could differ from those estimates.

The most significant estimates include those used in the valuation of inventory, property and equipment, self-insurance liabilities, leases and income taxes.

Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness.

Appropriate adjustments, if any, to the estimates used are made prospectively.

Cash and Cash Equivalents/Concentration of Credit Risk

For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents.

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents.

The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds.

The Company maintains cash accounts that exceed federally insured limits.

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.

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

Inventory is recorded net of an allowance for shrinkage based on the most recent physical inventory counts and other assumptions for shrinkage activity.

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

Property and Equipment, net

Property and equipment, net are stated at cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the lesser of the estimated useful lives (primarily three to five years for computer equipment and furniture, fixtures and equipment, seven years for major purchased software systems, ten years for leasehold improvements and fifteen to twenty years for buildings and building improvements) of the related assets or the relevant lease term.

Impairment of 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.

There was no impairment expense in fiscal 2021.

Non-cash impairment expense in fiscal 2020 and 2019 totaled $ 0.3 million and $ 0.5 million, respectively, related primarily to leasehold improvements and fixtures and equipment at underperforming stores.

Insurance Liabilities

The Company is largely self-insured for workers’ compensation costs, general liability claims and employee medical claims.

The Company’s self-insured retention or deductible, as applicable, for each claim involving workers’ compensation and employee medical is limited to $ 250,000 and $ 100,000 , respectively.

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.

Current and historical claims data, together with information from actuarial studies, are used in developing the estimates.

The insurance liabilities that are recorded 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 the Company may be required to record more or less expense which could be material in relation to results of operations.

Stock-Based Compensation

The Company recognizes compensation expense associated with all nonvested restricted stock and performance-based restricted stock units based on the grant-date fair value of each award.

The fair value of the awards is calculated based on the stock price on the grant date, incorporating an analysis of the performance measure where applicable.

Compensation expense is recognized ratably over the requisite service period.

See Note 6 for additional information on the Company’s stock-based compensation plans.

Revenue Recognition

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

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

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

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

Breakage on gift cards is minimal as the cards are generally subject to escheat regulations of the state in which the gift card subsidiary is located.

Sales Returns

The Company allows customers to return merchandise for up to thirty days after the date of sale.

Expected refunds to customers are recorded based on estimated margin using historical return information.

The refund liability for merchandise returns is recorded in accrued expenses on the consolidated balance sheet and totaled $ 0.2 million and $ 0.3 million as of January 29, 2022 and January 30, 2021.

The corresponding asset for the recoverable cost of expected refunds is included in prepaid and other current assets and totaled $ 0.1 million as of both January 29, 2022 and January 30, 2021.

Disaggregation of Revenue

In the following table, the Company’s revenue is disaggregated by “Citi” or major product category.

The following table provides the percentage of net sales for each Citi within the merchandise assortment:

Accessories & Beauty

Home & Lifestyle

Cost of Sales

Cost of sales includes the cost of inventory sold during the period and transportation costs, including inbound freight related to inventory sold and freight from the distribution centers to the stores, net of discounts and allowances.

Distribution center costs, store

occupancy expenses and advertising expenses are not considered components of cost of sales and are included as part of selling, general and administrative expenses.

Depreciation is also not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations.

Distribution center costs (exclusive of depreciation) for fiscal 2021, 2020 and 2019 were $ 24.9 million, $ 20.3 million and $ 20.8 million, respectively.

Earnings per Share

Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period.

Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock.

During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding because the inclusion of common stock equivalents would be antidilutive.

The following table provides a reconciliation of the number of average common shares outstanding used to calculate basic earnings per share to the number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share:

Weighted average number of common shares outstanding

Incremental shares from assumed vesting of nonvested restricted stock

Average number of common shares and common stock equivalents outstanding

The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method.

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

For fiscal 2021, 2020 and 2019, respectively, there were 47,000 , 131,000 and 128,000 shares of nonvested restricted stock excluded from the calculation of diluted earnings per share because of antidilution.

The Company expenses advertising as incurred.

Advertising expense for fiscal 2021, 2020 and 2019 was $ 1.2 million, $ 1.6 million and $ 1.8 million, respectively.

Operating Leases

The Company leases all of its retail store locations and certain office space and equipment.

All leases are classified as operating leases.

The Company records right-of-use assets and lease liabilities based on the present value of future minimum lease payments using an incremental borrowing rate.

The incremental borrowing rate is determined based on rates and terms from the Company’s existing borrowing facility with adjustments to bridge for differences in collateral, terms and payments.

Lease costs are recognized over the estimated term of the lease, which includes any reasonably certain lease periods associated with available renewal periods.

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 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.

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

The Company adopted ASU 2016-20, Leases (Topic 842), as amended, on February 3, 2019 using the optional transition method that allowed for prospective application of the standard.

The Company elected the package of practical expedients for transition that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard.

Further, the Company elected to account for lease and non-lease components as a single lease component.

Lease impairment, net of the related deferred taxes, totaled approximately $ 2.1 million as of February 3, 2019 and is reflected as an adjustment to retained earnings at the transition date.

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

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be

recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Business Operating Segment

The Company is a specialty value retailer of fashion apparel, accessories and home goods for the entire family.

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

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

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

All sales and assets are located within the United States .

Property and Equipment, net

Property and equipment, net, consists of the following (in thousands):

Leasehold improvements

Furniture, fixtures and equipment

Computer equipment

Construction in progress

Accumulated depreciation

Revolving Line of Credit

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

The facility was amended in August 2015 and May 2020 to extend the maturity dates.

The facility was further amended on April 15, 2021 to modify terms and extend the maturity date to April 15, 2026.

The amended facility provides a $ 75 million credit commitment and a $ 25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $ 100 million.

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

The facility has an unused commitment fee of 0.20 % and permits the payment of cash dividends subject to certain limitations.

Borrowings under the credit facility bear interest (a) for Eurodollar Loans, at a rate equal to the Eurodollar Rate plus either 1.25 % , 1.50 % or 1.75 % , 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) the Eurodollar Rate plus 1.0 % , plus, in each case either 0.25 % , 0.50 % or 0.75 % , based in any such case on the average daily availability for borrowings under the facility.

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

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

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

As of January 29, 2022, the Company had no borrowings under the credit facility and $ 0.6 million of letters of credit outstanding.

Income tax expense consists of the following (in thousands):

Total current

Total deferred

Total income tax expense

Income tax expense computed using the federal statutory rate is reconciled to the reported income tax expense as follows (in thousands):

Statutory rate applied to income before income taxes

State income taxes, net of federal benefit

State tax credits

State tax credits - valuation allowance (net of federal benefit)

Tax exempt interest

General business credits

Nondeductible compensation

Excess (deficit) tax benefits from stock-based compensation

Income tax expense

Deferred tax assets and deferred tax liabilities consist of the following (in thousands):

Deferred tax assets:

Inventory capitalization

Vacation liability

Operating lease liabilities

State tax credits

Stock compensation

Deferral of FICA tax

Legal expense reserve

Insurance liabilities

Subtotal deferred tax assets

State tax credits valuation allowance - net

Total deferred tax assets

Deferred tax liabilities:

Right of use asset

Book and tax depreciation differences

Prepaid expenses

Total deferred tax liabilities

Net deferred tax asset

The Company files income tax returns in U.S.

federal and state jurisdictions where it does business and is subject to examinations by the Internal Revenue Service (“IRS”) and other taxing authorities.

With a few exceptions, the Company is no longer subject to U.S.

federal and state income tax examinations by tax authorities for years prior to fiscal 2016.

The Company reviews and assesses uncertain tax positions, if any, with recognition and measurement of tax benefit based on a “more-likely-than-not” standard with respect to the ultimate outcome, regardless of whether this assessment is favorable or unfavorable.

As of January 29, 2022, there were no benefits taken on the Company’s income tax returns that do not qualify for financial statement recognition.

If a tax position does not meet the minimum statutory threshold to avoid payment of penalties and interest, a company is required to recognize an expense for the amount of the interest and penalty in the period in which the company claims or expects to claim the position on its tax return.

For financial statement purposes, companies are allowed to elect whether to classify such charges as either income tax expense or another expense classification.

Should such expense be incurred in the future, the Company will classify such interest as a component of interest expense and penalties as a component of income tax expense.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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 this assessment.

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 may be utilized, management believes it is more likely than not that the Company will realize the benefits of these deductible differences with the exception of certain tax credits available in one state.

Beginning in 2011, the Company concluded that its ability to utilize a portion of such state’s tax credits was no longer more likely than not.

Such recognition resulted in the establishment of a valuation allowance which necessitated a charge to income tax expense and a reduction in deferred tax assets.

Subsequent to 2011, the Company has continued to earn such state credits and has further adjusted the related valuation allowance.

At January 29, 2022, the valuation allowance, net of federal tax benefit, totaled $ 1.6 million.

The effective income tax rate for fiscal 2021, 2020 and 2019 included the recognition of benefits arising from various federal and state tax credits.

Under current IRS and state income tax regulations, these credits may be carried back for one year or carried forward for periods up to 20 years .

The income tax benefit included $ 1.6 million, $ 1.7 million and $ 1.7 million related to such credits in each of fiscal 2021, 2020 and 2019, respectively .

Stockholders’ Equity

Repurchases of common stock

The Company periodically repurchases shares of its common stock under board-authorized repurchase programs.

Such repurchases may be made in the open market, through block trades or through other negotiated transactions.

Share repurchases are as follows (in thousands, except per share data):

Total number of shares purchased

Average price paid per share (including commissions)

Total investment

At January 29, 2022, $ 30.0 million remained available under the Company’s stock repurchase authorization.

In March 2022, the Company announced that its board of directors approved an additional $ 30.0 million stock repurchase program.

Stock-Based Compensation

The Company maintains the Citi Trends, Inc.

Incentive Plan (the “Plan”) which permits the grant of stock-based incentive awards to employees, officers, directors and consultants.

The Plan provides for the grant of incentive and nonqualified options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other forms of stock-based and cash-based compensation.

At January 29, 2022, the Company had 678,356 shares reserved for future grants under the Plan.

During fiscal 2021, 2020 and 2019, non-cash stock-based compensation expense recorded in selling and general and administrative expenses totaled $ 4.8 million, $ 2.9 million and $ 2.1 million, respectively.

The income tax (benefit) expense resulting from the fair market value of restricted stock at vesting versus the cumulative compensation cost of such stock is recorded as a component of income tax expense and was ( $ 1.2 ) million, $ 0.1 million and $ 0.1 million, respectively.

The Company issues shares of restricted stock to key team members and non-employee directors.

Restricted stock granted to employees vests in equal installments over three years from the date of grant.

Restricted stock granted to non-employee directors vests one year from the date of grant.

The Company also issues performance-based restricted stock units (“PSUs”) to key team members that cliff vest at the end of a three-year period based upon the Company’s achievement of pre-established goals.

The number of units earned and vested is subject to scaling based on a pre-established performance matrix.

Prior to fiscal 2021, the Company issued cash-settled restricted stock units (“CSUs”) to certain team members.

In the fourth quarter of fiscal 2021, all outstanding CSUs were converted to time-based restricted stock, with vesting criteria based on the original vesting criteria for the CSUs.

This conversion resulted in the reclassification of a $ 3.4 million liability from accrued compensation to equity .

The following table summarizes activity related to nonvested restricted stock and PSUs during fiscal 2021:

Time-Based Restricted Stock

Performance-Based

Restricted Stock Units

Weighted Average

Outstanding as of January 30, 2021

Conversion of cash-settled units

Outstanding as of January 29, 2022

At January 29, 2022, there was $ 8.4 million of unrecognized compensation expense related to restricted stock.

Based on current probable performance, there was $ 3.9 million of unrecognized compensation expense related to PSUs .

Commitments and Contingencies

The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, employees or former employees.

Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, it establishes appropriate reserves.

While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.

The Company leases its retail store locations and certain office space and equipment.

Leases for store locations are typically for a term of five years with options to extend for one or more five-year periods.

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

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

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

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

Lease costs consisted of the following (in thousands):

Operating lease cost

Variable lease cost

Short term lease cost

Total lease cost

In response to the impact of the COVID-19 pandemic on the Company’s operations in fiscal 2020, the Company suspended certain lease payments under its existing lease agreements.

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

The Company negotiated contractual rent concessions on certain leases in the form of early renewals, rent deferrals and rent abatements.

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

As a result of this election, the Company recognized rent abatement credits of approximately $ 0.7 million and

$ 1.0 million in fiscal 2021 and 2020, respectively.

The balance of accrued lease liabilities related to these suspended payments was $ 0.4 million at January 29, 2022.

Future minimum lease payments as of January 29, 2022 are as follows (in thousands):

Total future minimum lease payments

imputed interest

Total present value of lease liabilities

(1) Calculated using the discount rate for each lease.

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

Certain operating leases provide for fixed monthly rents, while others provide for contingent rents computed as a percentage of net sales and others provide for a combination of both fixed monthly rents and contingent rents computed as a percentage of net sales.

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

Cash paid for operating leases

Right of use assets obtained in exchange for new operating lease liabilities

Weighted average remaining lease term (years) - operating leases

Weighted average discount rate - operating leases

Subsequent Events

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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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What changed 10-K

Item 8. Financial Statements and Supplementary Data