What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-04-13 compared with 2022-04-14 · 65 added, 64 removed, 410 unchanged (24% of the section changed)

12 unchanged sentences

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 audited the accompanying consolidated balance sheets of Citi Trends, Inc.

and subsidiary (the "Company") as of January 28, 2023 and January 29, 2022, the related consolidated statements of operations, cash flows, and stockholders’ equity, for each of the two years in the period ended January 28, 2023, 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 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the two years in the period ended January 28, 2023, 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 28, 2023, 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 13, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

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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.

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

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.

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 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.

Our audits 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.

Our audits 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 audits provide a reasonable basis for our opinion.

Critical Audit Matter

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The balance of ending inventory was $105.8 million as of January 28, 2023.

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.

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

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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:

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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.

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Citi Trends, Inc.

and subsidiary (the Company) for the year ended January 30, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended January 30, 2021, 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.

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

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.

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 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.

Our audit 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.

Our audit 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 audit provides a reasonable basis for our opinion.

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

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Accrued compensation

Income tax payable

Layaway deposits

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Asset impairment

Gain on sale-leasebacks

Income from operations

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Non-cash stock-based compensation expense

Gain on sale-leasebacks

Changes in assets and liabilities:

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Insurance proceeds related to investing activities

Net cash (used in) provided by investing activities

Proceeds from sale-leasebacks

Net cash provided by (used in) investing activities

Financing activities:

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Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents:

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Balances — February 1, 2020

Adoption of lease accounting standard

Vesting of nonvested shares

Issuance of nonvested shares under incentive plan

Issuance of nonvested shares

Forfeiture of nonvested shares

Stock-based compensation expense

Net share settlement of nonvested shares and units

Net share settlement of nonvested shares

Repurchase of common stock

Dividends paid to stockholders ( $ 0.08 per common share)

Balances — February 1, 2020

Balances — January 30, 2021

Vesting of nonvested units

Issuance of nonvested shares under incentive plan

Conversion of nonvested cash-settled units to nonvested shares

Issuance of nonvested shares

Forfeiture of nonvested shares

2 unchanged sentences

Repurchase of common stock

Dividends paid to stockholders ( $ 0.08 per common share)

Balances — January 29, 2022

Vesting of nonvested units

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

Issuance of nonvested shares under incentive plan

Issuance of nonvested shares

Issuance of common stock under incentive plan, net of shares withheld for taxes

Forfeiture of nonvested shares

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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.

and its subsidiary (the “Company”) is 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.

As of January 28, 2023, the Company operated 611 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.

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

Certain lingering economic effects of the pandemic, such as supply chain disruptions, continued to impact results in fiscal 2022.

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

Summary of Significant Accounting Policies

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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.

The years ended January 28, 2023, January 29, 2022 and January 30, 2021 are referred to as fiscal 2022, fiscal 2021 and fiscal 2020, respectively, in the accompanying consolidated financial statements.

Fiscal 2022, 2021 and 2020 are all comprised of 52 weeks.

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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.

There was no impairment expense in fiscal 2022 or 2021 and non-cash impairment expense of $ 0.3 million in fiscal 2020 related primarily to leasehold improvements and fixtures and equipment at underperforming stores.

Insurance Liabilities

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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.

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.

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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.

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.

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

Tax exempt interest

General business credits

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Stock compensation

Deferral of FICA tax

Legal expense reserve

Insurance liabilities

Research and development

Subtotal deferred tax assets

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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.

As of January 28, 2023, there were no material 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.

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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.

At January 28, 2023, $ 50.0 million remained available under the Company’s previously announced stock repurchase authorization.

Stock-Based Compensation

4 unchanged sentences

During fiscal 2022, 2021 and 2020, non-cash stock-based compensation expense recorded in selling and general and administrative expenses totaled $ 3.6 million, $ 4.8 million and $ 2.9 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 income tax expense (benefit) 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 $ 0.5 million, ($ 1.2 ) million and $ 0.1 million, respectively.

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

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Outstanding as of January 29, 2022

Conversion of cash-settled units

Outstanding as of January 28, 2023

At January 28, 2023, there was $ 5.7 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 .

Based on current probable performance, there was no unrecognized compensation expense related to PSUs .

Commitments and Contingencies

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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.

In January 2023, the Company 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 the Company’s fourth quarter fiscal 2022 financial results and, while the Company’s 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.

The Company has cyber insurance and is working diligently with its insurance carriers on claims to recover costs incurred.

The Company anticipates that its financial costs related to the cyber disruption will ultimately be covered by insurance, subject to a retention.

The Company expects to incur ongoing costs related to the cyber disruption, including costs to enhance data security, and plans to take further steps to prevent unauthorized access to, or manipulation of, its systems and data.

The Company is unable to estimate the ultimate direct and indirect financial impacts of this cyber disruption.

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

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

In April 2022, the Company completed a sale-leaseback of its distribution center in Darlington, South Carolina for net proceeds of approximately $ 45.5 million.

The total annual rent for this property starts at approximately $ 3.2 million with increases of 2 % annually over the 20-year lease term.

The net proceeds included $ 5.6 million of advance funding for a capital improvement project that will be amortized over the 20-year lease term.

The lease contains the option to extend for six additional periods of five years each.

The transaction met the requirements for sale-leaseback accounting, resulting in a gain of approximately $ 34.9 million on the condensed consolidated statements of operations.

The related land and property were removed from property and equipment, and an operating lease right-of-use asset and lease liability of $ 42.6 million and $ 37.0 million, respectively, were recorded in the condensed consolidated balance sheets.

In September 2022, the Company completed a sale-leaseback of its distribution center in Roland, Oklahoma for net proceeds of approximately $ 35.6 million.

The total annual rent for this property starts at approximately $ 2.7 million with increases of 2 % annually over the 15-year lease term.

The net proceeds included $ 0.6 million of advance funding for a capital improvement project that will be amortized over the 15-year lease term.

The lease contains the option to extend for six additional periods of five years each.

The transaction met the requirements for sale-leaseback accounting, resulting in a gain of approximately $ 29.2 million on the condensed consolidated statements of operations.

The related land and property were removed from property and equipment, and an operating lease right-of-use asset and lease liability of $ 25.8 million each were recorded in the condensed consolidated balance sheets.

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.

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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.

As a result of this election, the Company recognized rent abatement credits of approximately $ 0.3 million and $ 0.7 million in fiscal 2022 and 2021, respectively.

The balance of accrued lease liabilities related to these suspended payments was $ 0.2 million at January 28, 2023.

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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

1 unchanged sentence

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 8. Financial Statements and Supplementary Data