Item 1. Business
ITEM 1. BUSINESS
Overview
Citi Trends, Inc. (“Citi Trends” or 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. 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. As a purpose-led company, we strive to consistently bring our purpose – Live BOLD, live PROUD and respect ALL – to life for both our customers and our associates, each and every day.
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 29, 2022, we operated 609 stores in 33 states with a focus on delivering a memorable store experience anchored in value.
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 that is fresh
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and fun for the family at prices that don’t break the bank . 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 team 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 primarily 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. In the first quarter of fiscal 2021, we launched our first “CTx” store, which represents the first major overhaul to our store format in over 10 years. Our CTx format is a completely redesigned floor layout with an emphasis on visual merchandising that provides an enhanced shopping experience for our customers and drives sales conversion. Going forward, all of our new and remodeled stores will be based on the CTx format.
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. We have always led with a diverse and inclusive workplace; more than 80% of our store associates are African American or Latinx, and more than 90% of our store management positions are filled by women. 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.
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
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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 and Expanding our Customer Base . We believe that we have the potential to grow to more than 1,000 stores as a result of a third-party study conducted in 2020. This represents a potential 65% increase in the size of our current fleet and will give us the opportunity to build stores in both African American and multicultural geographies. An integral component of growing our fleet is the introduction of our CTx format, an exciting refresh to our store format and experience. Along with adding new stores, we will continually remodel existing stores in this new CTx format, with expectations that more than 50% of our stores will have the new CTx format by the end of fiscal 2024.
Optimizing the Assortment . We believe that our unique ability to curate assortments for our target customers further differentiates our model. Through a combination of products made exclusively for our core customers and highly recognized brands grounded in everyday value, we are known for delivering constant newness and freshness, resulting in 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. We also leverage consumer insights and analytics to add incremental assortments to our offerings. Continued expansion of non-apparel categories and investments in systems and automation will further optimize our product mix. Further, we employ disciplined product development and pricing studies to expand margin in certain areas of our assortment, particularly with our products that are highly curated for our core customers.
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 are currently investing 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 are in progress and include upgrades to our distribution centers and system enhancements in order to increase speed and productivity.
● “Sell” relates to both operations at our retail stores and adding new stores to our fleet. Our investments in this area consist primarily of expanding and enhancing the chain in our new CTx format. In fiscal 2021, we implemented 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 are on a journey towards being more sustainable as a company, taking diversity and inclusion to the next level, and ensuring 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, including our CITI cares Council formed in August 2020 to create and oversee initiatives of change that will have a positive impact in the lives of our customers and associates .
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
2021
2020
2019
Ladies
26
%
26
%
26
%
Kids
22
%
23
%
23
%
Mens
18
%
18
%
16
%
Accessories & Beauty
18
%
16
%
17
%
Home & Lifestyle
9
%
9
%
7
%
Footwear
7
%
8
%
11
%
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. Our 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 exclusively 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.
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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 customer demands and determine the timing of markdowns to our merchandise. A store-level planning system assists our planning and allocation team in their efforts to allocate merchandise to individual stores based on sales performance and planned inventory levels. We plan to implement significant technology upgrades to each of these systems in fiscal 2022. Our buyers also regularly review the age and performance of merchandise and manage both the reordering and markdown 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 29, 2022, more than 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 in the underserved communities in which we operate. 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 609 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 a place to shop that is fresh and fun for the entire family at prices that don’t break the bank. 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 Customer Experience Manager (“CEM”), Citi Merchandise Manager (“CMM”) and Citi Operations Manager (“COM”), along with seven to eight part-time Sales Associates, all of whom rotate work days on a shift basis. Our associates are critical to achieving our goals, and we strive to hire associates 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 CEMs, CMMs and COMs. 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 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 more than 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
The substantial majority of 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 we continued to expand in fiscal 2021 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 fiscal 2021, we implemented a cloud-based business intelligence platform to provide robust analytical capabilities across our enterprise and extend visibility to granular levels of the business. In addition, we completed a project to replace our point-of-sale systems across the entire fleet of stores, which included new hardware, software and payment systems 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 fiscal 2022 with the planned implementation of an upgraded ERP system for our merchandising and finance teams in 2022, as well as an increased focus on modernizing our supply chain systems and further enhancing our merchandising, planning and allocation systems to advance our use of 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 assortment and layout of merchandise, use of carpeted floors and colorful signage, and fixtures that are easy to shop. Our competitors generally focus less on trend-driven 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
Our trademarks and service marks have significant value and are 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.
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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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 associates 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 associates and their communities.
Associates. As of January 29, 2022, we had approximately 3,000 full-time and approximately 2,400 part-time associates. Of these associates, approximately 4,500 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 associates are represented by a labor union.
Corporate Culture. In fiscal 2021 we launched a comprehensive new purpose and values culture platform. The foundation of “Citi Life” is that Life is best when you live BOLD, live PROUD and respect ALL. This is supported by our five core values that define who we are as a Company:
● One with My Citi. We connect with our neighborhoods to develop long-standing relationships with the people and places that need us.
● Respect is Our Style. We treat everyone like we want to be treated while celebrating our diversity and inclusion.
● Success is Your Trend. Our associates can plan a path, follow it and get the support needed to build a career.
● Amaze Our Customers. Our customers come first and it is our job to go above-and-beyond.
● Make it Fun. Make it Fresh. Make it Friendly. We encourage a healthy, energetic atmosphere for our customers, friends and family.
We believe these core values represent the emotional connection that our customers and associates have with Citi Trends and are integral to the successful achievement of our growth plans.
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 associates 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 29, 2022, more than 80% of our team members are African American or Latinx and 84% are female. In addition, three of our nine board members are African American females.
Citi Trends embraces diversity and is committed to continued improvements throughout the Company. The Corporate Social Responsibility (“CSR”) Committee of the board monitors the Company’s progress towards its diversity and inclusion objectives, metrics and compliance with the Company’s responsibilities as an equal opportunity employer. The CSR Committee works closely with the Compensation Committee and the Nominating and Corporate Governance Committee of the board to develop processes to achieve the Company’s diversity objectives and metrics .
In addition, our Chief Executive officer has signed the CEO Action Pledge for Diversity & Inclusion, the largest CEO-driven business commitment to advance diversity and inclusion in the workplace. We have delegated a diverse group of Company ambassadors to pursue the actions outlined in the pledge to advance diversity and inclusion in the workplace.
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 associates. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our associates as well as the communities in which we operate. We continue to follow guidance released by state and federal health officials to create a safe environment for our associates to work and our customers to shop. As of the end of fiscal 2021, many of the associates at the Company’s corporate and buying offices continued to work from home.
Compensation and Benefits . We provide competitive compensation and comprehensive benefits programs to help meet the needs of our associates. 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 associates are critical to achieving our goals, and we strive to hire associates with high energy levels and motivation. We have well-established store operating policies and procedures and an extensive 30-day in-store training
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program for new store management members. 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. Commensurate with the introduction of our new purpose and values, we are in the process of developing significant enhancements to our training and development programs to further ensure they provide associates 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 associates, 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 associates. 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.
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 provided ten $5,000 grants to Black business owners. In February 2022, we launched our second annual campaign for this program to build on the momentum from last year.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports, as well as other information that we file or furnish with the Securities and Exchange Commission (“SEC”) are available free of charge at https://ir.cititrends.com as soon as reasonably practicable after we file or furnish such material to the SEC. In addition, the SEC maintains a website at http://www.sec.gov that contains information we electronically file or furnish to the SEC. Our Corporate Governance Guidelines, Code of Ethics and the charters for the committees of our board of directors are also available free of charge at https://ir.cititrends.com or in print upon request. Information on our website is not part of this or any other report we file or furnish to the SEC .
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