Item 5. Market for Registrant’s Common Equity
ITEM 5.
MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Stock Market under the symbol “ CTRN. ” On March 25, 2024, there were 9 holders of record and approximately 3,500 beneficial holders of our common stock.
Dividends
In 2020, the Company announced it would suspend quarterly cash dividends. Any determination to declare and pay cash dividends in the future will be made by the Company ’ s board of directors.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
We did not repurchase any shares of our common stock during fiscal 2023. During fiscal 2022, we repurchased approximately 331,000 shares of our common stock at an aggregate purchase price of $10.0 million. As of February 3, 2024, approximately $50.0 million remained available under our previously announced share repurchase programs.
Equity Compensation Plan Information.
See Item 12 of this Report.
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Stock Performance Graph
Set forth below is a line graph comparing the last five years ’ percentage change in the cumulative total stockholder return on shares of our common stock against the cumulative total returns of the Russell 2000 Index and the Dow Jones US Specialty Retailers Index. This graph assumes that $100 was invested on January 31, 2019 in our common stock and in each of the market index and the industry indexes, and that all cash distributions were reinvested. Our common stock price performance shown on the graph is not indicative of future price performance.
Total Return Analysis
1/19
1/20
1/21
1/22
1/23
1/24
Citi Trends, Inc.
100.00
115.73
294.39
243.09
157.07
134.37
Russell 2000
100.00
109.21
142.16
140.45
135.70
138.96
Dow Jones US Specialty Retailers
100.00
109.87
154.82
156.21
148.97
174.71
ITEM 6. RESERVED
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ITEM 7.
MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “ Risk Factors ” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Discussions of our results of operations for the year ended January 28, 2023 compared to the year ended January 29, 2022 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 28, 2023, which was filed with the United States Securities and Exchange Commission on April 13, 2023.
Executive Overview
We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and multicultural families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of February 3, 2024, we operated 602 stores in urban, suburban and rural markets in 33 states.
Fiscal 2023 Business Highlights
● Elevated our in-store experience with our strong value offering, improved inventory levels and assortment optimization focused on African American and multicultural families
● Demonstrated expense control throughout the year while investing in sales-driving initiatives such as marketing tests and inventory rebuilds
● Opened 5 new stores, remodeled 15 stores and closed 14 stores; ended the year with 15% of the fleet upgraded to our CTx store format
● Leveraged distribution center upgrades made in fiscal 2022 to expand shipping partnerships, resulting in freight rate improvements and greater supply chain flexibility
● Completed the implementation of our upgraded ERP system
Fiscal 2023 Financial Highlights
● Total sales of $747.9 million
● Net loss of $1.46 per share
● Cash of $79.7 million at the end of the fiscal year, with no debt
Our Strategy
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:
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 believe that we have the potential to grow our fleet to approximately 1,000 locations over time, giving us the opportunity to increase our presence in African-American and multicultural geographies 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.
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Investing in Our Infrastructure . We believe that we have an opportunity to make strategic investments in our business that will improve our efficiencies and our capabilities to “ buy, ” “ move ” and “ sell ” our assortments to effectively engage current and new customers.
Making a Difference . Our team is dedicated to our neighborhoods and committed to positively impacting the African American and multicultural neighborhoods that we serve. We ’ ll leverage our “ CITI cares ” Council to continue making an impact.
We strongly believe that our business strategy centered around these four areas will accelerate our long-term sales and earnings growth.
Uncertainties and Challenges
General Economic Conditions
We expect that our operations in the short-term will continue to be influenced by general economic conditions, including on-going 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 and to tightly manage their discretionary spend through the majority of fiscal 2024. In addition, we continue to monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions .
Seasonality and Weather Conditions
The nature of our business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have expanded our product offerings to become a one-stop shop, traffic to our stores is still influenced by weather patterns to some extent.
Cyber Disruption
As previously disclosed, in January 2023, we experienced a disruption of our back office and distribution center IT systems, (the “ January 2023 cyber disruption ” ) . 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. We do not retain sensitive customer data on our systems. The impact of the January 2023 cyber disruption was not material to our fiscal 2023 financial results.
In the third quarter of fiscal 2023, we received insurance proceeds (reflected on our Statement of Cash Flows) related to the January 2023 cyber disruption. This resulted in a gain of $1.2 million that is recorded in Selling, general and administrative expenses on our Statement of Operations . In fiscal 2023, we recognized $1.7 million of costs related to the cyber disruption in Selling, general and administrative expenses on our Statement of Operations. We expect to incur ongoing costs to enhance data security and take further steps to prevent unauthorized access to, or manipulation of, our systems and data. Several putative class action lawsuits have been filed against the Company and several inquiries have been made to the Company with respect to the January 2023 cyber disruption. At February 3, 2024, we had an accrual of $0.8 million for estimated losses in connection with these matters recorded in Accrued expenses on our Balance Sheet. See Note 7 to the Financial Statements for more information . For additional information on cybersecurity and cybersecurity threats, see Item 1C. Cybersecurity.
Basis of Presentation
Net sales consist of store sales and layaway fees, net of returns by customers. 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. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs. The years ended February 3, 2024, January 28, 2023 and January 29, 2022 are referred to herein as fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Fiscal 2023 is comprised of 53 weeks, while fiscal years 2022 and 2021 are each comprised of 52 weeks.
Results of Operations
The following discussion of our financial performance is based on the consolidated financial statements set forth in the financial pages of this Report. The nature of our business is seasonal. Results may fluctuate due to changes in our business, consumer spending patterns, and the macroeconomic environment. Furthermore, the seasonal nature of our business may affect comparisons between periods.
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Net Sales and Additional Operating Data
The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:
Fiscal Year
2023
2022
2021
(dollars in thousands)
Statement of Operations Data
Net sales
$
747,941
100.0
%
$
795,011
100.0
%
$
991,595
100.0
%
Cost of sales (exclusive of depreciation)
(462,824)
(61.9)
%
(484,022)
(60.9)
%
(584,063)
(58.9)
%
Selling, general and administrative expenses
(284,530)
(38.0)
%
(279,177)
(35.1)
%
(307,622)
(31.0)
%
Depreciation
(18,990)
(2.5)
%
(20,595)
(2.6)
%
(20,393)
(2.0)
%
Asset impairment
(1,051)
(0.1)
%
—
8.1
%
—
0.0
%
Gain on sale-leasebacks
—
0.0
%
64,088
0.0
%
—
0.0
%
(Loss) income from operations
(19,454)
(2.6)
%
75,305
9.5
%
79,517
8.0
%
Interest income
3,874
0.5
%
1,034
0.1
%
31
0.0
%
Interest expense
(306)
(0.0)
%
(306)
(0.0)
%
(306)
(0.0)
%
(Loss) income before income taxes
(15,886)
(2.1)
%
76,033
9.6
%
79,242
8.0
%
Income tax benefit (expense)
3,907
0.5
%
(17,141)
(2.2)
%
(17,002)
(1.7)
%
Net (loss) income
$
(11,979)
(1.6)
%
$
58,892
7.4
%
$
62,240
6.3
%
The following table provides information about store activity and the change in comparable store sales for each fiscal year:
Fiscal Year
2023
2022
2021
Total stores open, beginning of year
611
609
585
New stores
5
12
27
Closed stores
(14)
(10)
(3)
Total stores open, end of year
602
611
609
Comparable store sales (decrease) increase (1)
(6.8)
%
(22.1)
%
25.1
%
(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, while stores that are closed permanently or for an extended period are excluded from the comparable store sales results.
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Key Operating Statistics
We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been open for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13th month of operation at the earliest or until its 24th month at the latest. As an example, stores opened in fiscal 2022 and fiscal 2023 were not considered comparable stores in fiscal 2023. Relocated 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. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established outdoor community shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.
Fiscal 2023 Compared to Fiscal 2022
Net Sales. Net sales decreased $47.1 million, or 5.9%, to $747.9 million in fiscal 2023 from $795.0 million in fiscal 2022. The decrease in sales was due to a 6.8% decrease in comparable store sales, as well as a decrease of $6.1 million from net store opening and closing activity. The decrease in comparable store sales was the result of continued inflationary pressures in fiscal 2023 that were particularly impactful to our core customers.
Cost of Sales (exclusive of depreciation). Cost of sales decreased $21.2 million, or 4.4%, to $462.8 million in fiscal 2023 from $484.0 million in fiscal 2022. As a percentage of net sales, cost of sales deleveraged 100 basis points to 61.9% in fiscal 2023 from 60.9% in fiscal 2022 driven by higher freight costs due to rebuilding inventory in certain categories, as well as an increase in shrinkage costs.
Selling, General and Administrative ( “ SG&A ” ) Expenses. SG&A expenses increased $5.3 million, or 1.9%, to $284.5 million in fiscal 2023 from $279.2 million in fiscal 2022. The increase was primarily due to (1) $2.7 million of rent related to our two distribution center sale-leaseback transactions completed in fiscal 2022; (2) $1.9 million of store rent and occupancy costs; (3) $1.9 million of distribution center payroll; (4) $0.9 million for traffic driving marketing tests; and (5) $0.6 million for cloud based technology subscriptions. These increases were partially offset by $2.7 million lower insurance costs. As a percentage of sales, SG&A expenses deleveraged 290 basis points to 38.0% in fiscal 2023 from 35.1% in fiscal 2022, primarily due to the deleveraging effect of lower sales.
Depreciation. Depreciation expense decreased $1.6 million to $19.0 million in fiscal 2023 from $20.6 million in fiscal 2022.
Asset Impairment . Impairment charges for fiscal 2023 related to underperforming stores totaled $1.0 million, comprised of $0.9 million for leasehold improvements and fixtures and equipment, and $0.1 million for an operating lease right-of-use asset. There was no impairment expense in fiscal 2022.
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 Benefit (Expense). Income tax benefit was $3.9 million in fiscal 2023 compared to income tax expense of $17.0 million in fiscal 2022. The difference is attributable to a pretax loss this year compared to pretax income last year that included the gain on sale-leasebacks.
Net (Loss) Income. Net loss was $12.0 million in fiscal 2023 compared to net income of $59.0 million in fiscal 2022, due to the factors discussed above.
Liquidity and Capital Resources
Capital Allocation
Our capital allocation strategy is to maintain adequate liquidity to maintain current operations while investing in opportunities to profitably grow our business, then to return excess cash to shareholders through our share repurchase programs. Our year-end cash and cash equivalents balance was $79.7 million compared to $103.5 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; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment.
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In fiscal 2022, we completed sale-leaseback transactions of our distribution centers in Darlington, South Carolina and Roland, Oklahoma that resulted in combined pretax proceeds of $81.1 million.
Inventory
Our year-end inventory balance was $130.4 million, compared with $105.8 million at the end of fiscal 2022. The increase was the result of targeted inventory rebuilds versus 2022 inventory levels that were too light and an earlier set of the fresh spring assortment in advance of two important selling moments – tax refund season and the earlier 2024 Easter holiday.
Capital Expenditures
Capital expenditures in fiscal 2023 were $14.9 million, a decrease of $7.4 million from the prior year, primarily due to opening fewer stores in fiscal 2023. We anticipate capital expenditures in fiscal 2024 of approximately $20 million, primarily for opening up to 5 new stores and remodeling approximately 40 stores, combined with continued investments in our systems and distribution centers.
Share Repurchases
We did not repurchase any shares of our common stock during fiscal 2023. In fiscal 2022, we returned $10.0 million to shareholders through share repurchases. See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.
Revolving Credit Facility
We have a revolving credit facility that matures in April 2026 and provides a $75 million credit commitment and a $25 million uncommitted “ accordion ” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of fiscal 2023, we had no borrowings under the credit facility and $1.4 million in letters of credit outstanding.
Cash Flows
Cash Flows From Operating Activities. Cash used in operating activities was $9.6 million in fiscal 2023 compared with cash provided of $5.8 million in fiscal 2022. For fiscal 2023, significant sources of cash included $3.5 million from insurance proceeds related to operating activities and a $17.9 million increase in accounts payable. Significant uses of cash included (1) a $58.3 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) a $24.6 million increase in inventory due primarily to depleted inventory levels at the end of the prior year; and (3) a $3.5 million increase in income tax receivable.
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) an $15.1 million decrease in accrued compensation due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.
Cash Flows From Investing Activities. Cash used in investing activities was $13.4 million in fiscal 2023 compared to cash provided of $60.2 million in fiscal 2022. Cash used in fiscal 2023 consisted of $14.9 million for purchases of property and equipment, partially offset by $1.5 million from insurance proceeds related to investing activities. Cash provided in fiscal 2022 consisted of $81.1 million net proceeds from the sale of the buildings in the sale-leaseback transactions, partially offset by $22.3 million for purchases of property and equipment.
Cash Flows From Financing Activities. Cash used in financing activities was $0.9 million in fiscal 2023 compared with $12.2 million in fiscal 2022. Cash used in fiscal 2023 was to settle withholding taxes on the vesting of restricted stock. Cash used in fiscal 2022 was primarily for repurchases of our common stock.
Cash Requirements and Commitments
Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We have also historically used cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of February 3, 2024, our contractual commitments for operating leases totaled $307.3 million (with $57.0 million due within 12 months) and our purchase obligations for open merchandise orders totaled $132.8 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.
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Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. Actual results could differ from those estimates. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Inventory
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. Inherent in the retail inventory calculation are certain management judgments and estimates, including, among others, merchandise markups, 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. As a result, we believe the retail inventory method results in a more conservative inventory valuation than other accounting methods. We estimate and record 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. Inventory shrinkage as a percentage of sales in fiscal 2023, fiscal 2022 and fiscal 2021 was 1.0%, 0.7% and 0.4%, respectively. The allowance for inventory shrinkage was $3.9 million as of February 3, 2024 and $5.8 million as of January 28, 2023. As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as of February 3, 2024, would not have materially impacted our cost of goods sold in fiscal 2023. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2023.
Operating Leases
We lease all of our retail store locations, our distribution centers and certain office space and equipment. All leases are classified as operating leases. We record right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term. In determining the present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. Our lessors do not provide an implicit rate, nor is one readily available, therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company ’ s existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. We record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord. 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 are 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.
The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for management ’ s judgment in their application. There are also areas in which management ’ s judgment in selecting any available alternative would not produce a materially different result.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, “ Improvement to Income Tax Disclosures (Topic 740) ” , which requires additional disclosures for income tax rate reconciliations, income taxes paid, and certain other tax disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Adoption is required for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
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