What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-04-13 compared with 2022-04-14 · 84 added, 84 removed, 135 unchanged (55% of the section changed)

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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 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.

Discussions of our results of operations for the year ended January 29, 2022 compared to the year ended January 30, 2021 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 Annual Report on Form 10-K for the year ended January 29, 2022, which was filed with the United States Securities and Exchange Commission on April 14, 2022.

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.

We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and multicultural 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.

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Fiscal 2022 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

● Elevated our in-store experience with the expansion of queue line and the introduction of Missy and Tween girl lines

● Continued to expand our assortment reach with enhancements to our multicultural merchandise offering

● Delivered $10.0 million of cost savings in the second half of the year to streamline the organization and align expenses with revised sales expectations

● Opened 12 new stores, remodeled 35 stores and closed 10 stores;

ended the year with 13% of the fleet upgraded to our CTx store format

● Completed sale-leaseback transactions on our two distribution centers

● Completed capacity upgrades in our distribution centers and made significant progress on our ERP upgrade

Fiscal 2022 Financial Highlights

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● Repurchased $10.0 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.

We believe that Citi Trends is in a unique position to serve our loyal customer base, with 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.

Driving Comparable Store Productivity .

We believe that we can drive sales productivity improvements by sharpening our focus on trend development and actively refining our assortment strategies, broadening the appeal of the brand and continuing to roll out the CTx store format.

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

Managing Inventory and Maximizing Margin .

We believe that our sourcing methodology 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 newness and freshness, resulting in a high-repeat shopping rate, and our ample monthly liquidity will enable us to chase trends to excite our customer base.

In addition, we leverage consumer insights and analytics to

add incremental assortments, and we employ pricing studies to expand margin while ensuring a balanced “good, better, best” assortment.

Investing in Our Infrastructure .

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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.

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

We strongly believe that our business strategy centered around these four areas will accelerate our long-term 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.

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

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.

General Economic Conditions

We expect that our operations in the short-term will continue to be influenced by general economic conditions, including the recent inflationary pressures, which are particularly impactful to the communities we serve.

Given the macro-economic environment, we expect low-income families to remain under pressure through the majority of fiscal 2023.

In addition, we monitor the impacts of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions 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

While the supply chain disruptions that began in the second half of fiscal 2021 have largely mitigated as of the date of this report, these disruptions resulted in decreased capacity and increased costs.

These pressures persisted through the majority of fiscal 2022.

In response, we took various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the vendor direct-to-store shipping program that we initiated in fiscal 2020.

Seasonality and Weather Conditions

The nature of our business is seasonal.

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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.

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

Cyber Disruption

In January 2023, we experienced a disruption of our back office and distribution center IT systems, which was due to what is known as Hive ransomware.

In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident.

The Company can confirm that sensitive customer data is not retained on its systems.

The impact of this disruption was not material to our fourth quarter fiscal 2022 financial results and, while our investigation and remediation efforts remain ongoing, it is not expected to be material to the Company’s full year fiscal 2023 financial results.

In fiscal 2022, cyber disruption related costs incurred totaled $0.1 million, primarily comprised of third-party consulting services and legal counsel.

We do have cyber insurance, and we are working diligently with our insurance carriers on claims to recover costs incurred.

We anticipate that our financial costs related to the cyber disruption will ultimately be covered by insurance, subject to a retention.

We expect to incur ongoing costs related to the cyber disruption, including costs to enhance data security, and plan to take further steps to prevent unauthorized access to, or manipulation of, our systems and data.

We are unable to estimate the ultimate direct and indirect financial impacts of this cyber disruption.

Basis of Presentation

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Cost of sales consists of the cost of products we sell and associated freight costs.

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

Depreciation is not considered a component of cost of sales and is included as a separate line

item in the consolidated statements of operations.

Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs.

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

The years ended January 28, 2023, January 29, 2022 and January 30, 2021 are referred to herein as fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

Results of Operations

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The nature of our business is seasonal.

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.

Results may fluctuate 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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Asset impairment

Gain on sale-leasebacks

Income from operations

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

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

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

Relocated stores and expanded stores are included in the comparable store sales results, while stores that are closed permanently or for an extended period are excluded from the comparable store sales results.

Key Operating Statistics

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Fiscal 2022 Compared to Fiscal 2021

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.

Net sales decreased $196.6 million, or 19.8%, to $795.0 million in fiscal 2022 from $991.6 million in fiscal 2021.

The decrease in sales was due to a 22.1% decrease in comparable store sales, partially offset by a $16.9 million increase from net store opening and closing activity.

The decrease in comparable store sales was due to unprecedented demand last year driven by government stimulus payments, combined with inflationary pressures in fiscal 2022 that were particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation).

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%.

Cost of sales decreased $100.1 million, or 17.1%, to $484.0 million in fiscal 2022 from $584.1 million in fiscal 2021.

As a percentage of net sales, cost of sales deleveraged 200 basis points to 60.9% in fiscal 2022 from 58.9% in fiscal 2021 due to a decrease of 145 basis points in the core merchandise margin (initial mark-up, net of markdowns) primarily driven by unusually low markdowns last year during outsized stimulus-driven demand, along with an increase of 35 basis points in shrinkage and an increase of 20 basis points in freight costs in the current year.

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

SG&A expenses decreased $28.4 million, or 9.2%, to $279.2 million in fiscal 2022 from $307.6 million in fiscal 2021.

The decrease was due to (1) a $21.4 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget in fiscal 2022 (compared to overperformance last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs for the conversion of nonvested cash-settled units to nonvested shares;

(2) a decrease of $6.3 million in payroll expenses related to reduced headcount (3) $2.9 million of one-time items consisting of an insurance gain, adjustments to accrued vacation expense and the capitalization of payroll related to a technology upgrade;

and (4) decreases in fees for credit card processing, professional services and insurance.

These decreases were partially offset by a $4.8 million increase in rent related to the sale-leasebacks of our distribution centers, higher utility costs and the general impact to expenses from higher inflation.

As a percentage of sales, SG&A expenses deleveraged 410 basis points to 35.1% in fiscal 2022 from 31.0% in fiscal 2021, primarily due to the deleveraging effect of lower sales.

Depreciation.

Depreciation expense increased $0.2 million to $20.6 million in fiscal 2022 from $20.4 million in fiscal 2021.

Asset Impairment.

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.

Gain on Sale-leasebacks .

In fiscal 2022, we completed sale-leaseback transactions for our distribution centers in Darlington, South Carolina and Roland, Oklahoma that resulted in a combined gain of $64.1 million.

Income Tax Expense.

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.

Income tax expense increased $0.1 million to $17.1 million in fiscal 2022 from $17.0 million in fiscal 2021, due to a slightly higher effective tax rate after the prior year had a favorable tax impact from restricted stock vestings.

Net income decreased $3.3 million to $58.9 million in fiscal 2022 compared to $62.2 million in fiscal 2021, 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 capital allocation strategy is to maintain adequate liquidity 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 $103.5 million compared to $49.8 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 on hand;

Our principal sources of liquidity consist of (i) cash and cash equivalents on hand;

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

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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.

In addition, in April 2022, we completed a sale-leaseback transaction of our distribution center in Darlington, South Carolina, for pretax proceeds of $45.5 million.

In September 2022, we completed a sale-leaseback transaction of our distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.

Our year-end inventory balance was $105.8 million, compared with $123.8 million at the end of fiscal 2021.

The decrease was the result of disciplined inventory management and the deployment of packaway inventory that was opportunistically acquired 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.

Capital expenditures in fiscal 2022 were $22.3 million, a decrease of $7.4 million over the prior year, primarily due to opening fewer stores in fiscal 2022.

We anticipate capital expenditures in fiscal 2023 of $20 million to $25 million, primarily for opening approximately 8 new stores and remodeling approximately 28 stores, combined with continued investments in our systems and distribution centers.

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Cash provided by operating activities was $5.8 million in fiscal 2022 compared with $74.3 million in fiscal 2021.

For fiscal 2021, significant sources of cash included:

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

For fiscal 2022, significant sources of cash included (1) $72.0 million from net income adjusted for non-cash expenses, insurance proceeds and gain on sale-leasebacks;

(2) a $16.8 million decrease in inventory;

and (3) a $3.4 million decrease in income tax receivable.

Significant uses of cash included (1) a $54.8 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities;

(2) an $18.3 million decrease in accounts payable due primarily to the decrease in inventory;

and (3) a $15.1 million decrease in accrued compensation due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.

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;

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 the prior year;

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

Cash provided by investing activities was $60.2 million in fiscal 2022 compared to cash used of $29.5 million in fiscal 2021.

Cash provided in fiscal 2022 consisted of $81.1 million net proceeds from the sale of buildings in the sale-leaseback transactions, partially offset by $22.3 million for purchases of property and equipment.

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 $12.2 million in fiscal 2022 compared with $118.2 million in fiscal 2021.

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 used in each year was primarily for repurchases of our common stock.

Cash Requirements and Commitments

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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 in fiscal 2021, 2020 and 2019 was 0.4%, 0.8% and 1.2%, respectively.

Inventory shrinkage as a percentage of sales in fiscal 2022, fiscal 2021 and fiscal 2020 was 0.7%, 0.4% and 0.8%, respectively.

The allowance for inventory shrinkage was $5.8 million as of January 28, 2023 and $4.4 million as of January 29, 2022.

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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