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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

(Mark One)

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For the quarterly period ended May 1, 2021

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Commission File Number  000-51315

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CITI TRENDS, INC.

(Exact name of registrant as specified in its charter)

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Registrant’s telephone number, including area code (912) 236-1561

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

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As of May 17, 2021, the registrant had 9,287,006 outstanding shares of common stock, $0.01 par value per share.

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CITI TRENDS, INC.

FORM 10-Q

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PART I - FINANCIAL INFORMATION

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Item 1. Financial Statements.

Citi Trends, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

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See accompanying notes to the condensed consolidated financial statements (unaudited).

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Citi Trends, Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

May 1, 2021

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Forward-Looking Statements

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Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, capital allocation expectations or statements regarding the outcome or impact of pending or threatened litigation. These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.

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The factors that may result in actual results differing from such forward-looking information include, but are not limited to: uncertainties relating to general economic conditions, including any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory); the ongoing COVID-19 pandemic and associated containment and remediation efforts; the potential negative impacts of COVID-19 on the global economy and foreign sourcing; the impacts of COVID-19 on the Company's financial condition, business operation and liquidity, including the re-closure of any or all of the Company’s retail stores and distribution centers, growth risks, consumer spending patterns; competition within the industry; competition in our markets; the ability to anticipate and respond to fashion trends; the duration and extent of any economic stimulus programs; transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; changes in consumer spending on apparel; changes in product mix; interruptions in suppliers’ businesses; the results of pending or threatened litigation; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening and operating new stores; delays associated with building, opening or expanding new or existing distribution centers; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.

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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K.

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Overview

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We are a growing specialty value retailer of apparel, accessories and home trends primarily for African American and Latinx 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 May 1, 2021, we operated 584 stores in urban, suburban and rural markets in 33 states.

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COVID-19 Pandemic

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In March 2020, the World Health Organization declared COVID-19 a global pandemic. Since that time, the global economy has been, and continues to be, affected by COVID-19. The pandemic has caused and may continue to cause significant disruptions in the U.S. economy as the virus continues to spread or has a resurgence in certain jurisdictions. Effective March 20, 2020, we temporarily closed all of our retail store locations and distribution centers as governments implemented measures in an effort to contain the virus, including lockdowns, physical distancing, travel restrictions, limitations on public gatherings, work from home and restrictions on nonessential businesses. At the end of April 2020, we started to reopen stores in select states in accordance with government guidelines. As of July 18, 2020, we safely reopened all of our stores. The COVID-19 pandemic has resulted in a period of disruption, including the temporary closure of our stores and limited store operating hours, reduced customer traffic and consumer spending, and delays in the manufacturing and shipping of

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products. We saw improvement in our financial results and positive trends during the latter half of fiscal 2020 and into the first quarter of 2021 as certain governments began to gradually ease restrictions and provide economic stimulus and vaccine distribution accelerated, leading to an increase in spending and increased customer demand.

We took numerous actions beginning in the first quarter of fiscal 2020 in light of the uncertainties resulting from the pandemic, including: (i) the drawdown of $43.7 million in principal amount under the revolving credit facility on March 20, 2020, which we fully repaid on September 11, 2020; (ii) an amendment to the revolving credit facility to extend the term to August 2021; (iii) temporary furloughs of substantially all store and distribution center personnel and a significant portion of the corporate staff, with employee benefits for eligible employees continued through the temporary furloughs; (iv) temporary tiered salary reductions for management level corporate employees and a reduction to the cash portion of non-employee director fees; (v) extensions of payment terms with vendors and suppliers; (vi) the suspension of share repurchases; (vii) negotiations of rent concessions with landlords, some of which are ongoing; and (viii) a substantial reduction in operating expenses, store occupancy costs, capital expenditures and other costs.

We expect continued uncertainty in our business and the global economy, although the extent and duration is unknown, by the COVID-19 pandemic and its effects on the economy in a variety of ways, potentially including volatility in employment trends and consumer confidence, the direction or extent of current or future restrictive actions that may be imposed by governments or public health authorities, timing and effectiveness of vaccines, the duration and extent of any economic stimulus programs, supply chain interruptions, increased distribution and transportation costs, increased payroll expenses, and increased costs in an effort to maintain safe work and shopping environments. Due to the significant uncertainty surrounding the COVID-19 pandemic and its effects, there may be consequences that we do not anticipate at this time or that develop in unexpected ways. The impacts of the pandemic have had, and may continue to have, an adverse impact on the Company’s financial condition, results of operations and liquidity. We will continue to monitor the effects of COVID-19 and take the necessary actions to serve our associates, customers, communities and shareholders.

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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 the section entitled "RISK FACTORS" in ITEM 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

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Accounting Periods

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The following discussion contains references to fiscal years 2021 and 2020, which represent fiscal years ending or ended on January 29, 2022 and January 30, 2021, respectively. Fiscal 2021 and fiscal 2020 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part 1, Item 1 of this report.

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Results of Operations

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The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. The nature of the Company’s 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, particularly in light of the current uncertainty surrounding the economic impact of the COVID-19 pandemic. Furthermore, as a result of the closure of our stores for at least five weeks in fiscal 2020 related to the COVID-19 pandemic, comparisons of expense ratios and year-over-year trends are not a meaningful way to evaluate our operating results for the first quarter of 2021.

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Key Operating Statistics

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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 opened 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 2020 and fiscal 2021 are not considered comparable stores in fiscal 2021. 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 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. In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales.

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These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts.

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Thirteen Weeks Ended May 1, 2021 and May 2, 2020

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Net Sales. Net sales increased $169.3 million, or 145.8%, to $285.4 million in the first quarter of 2021 from $116.1 million in the first quarter of 2020. The increase in sales was due to a 142.0% increase in comparable store sales and the opening of 17 new stores since the end of the first quarter last year, partially offset by the impact of closing seven stores. The increase in comparable store sales was due primarily to the temporary closure in the first quarter of last year of all 574 of our stores as a result of the COVID-19 pandemic. Compared to the first quarter of 2019, comparable store sales in the first quarter of 2021 increased 35.0%, driven primarily by an increase in the average basket combined with a slight increase in the number of transactions.

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Cost of sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $79.4 million, or 94.1%, to $163.8 million in the first quarter of 2021 from $84.4 million in the first quarter of 2020. Cost of sales as a percentage of sales decreased to 57.4% in the first quarter of 2021 from 72.7% in the first quarter of 2020, due primarily to a decrease of 1,330 basis points in merchandise markdowns, as more markdowns were taken in the first quarter last year on transitional or seasonal merchandise due to our temporary store closures. Compared to the first quarter of 2019, cost of sales decreased 510 basis points, due to an improvement of 490 basis points in the core merchandise margin (initial mark-up, net of markdowns) and an improvement of 100 basis points in shrinkage, partially offset by an increase of 80 basis points in freight costs as a result of pressures in the trucking industry.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $23.8 million, or 44.0%, to $77.9 million in the first quarter of 2021 from $54.1 million in the first quarter of 2020. The increase was due primarily to expense reductions in the first quarter of 2020 due to the pandemic, consisting of lower payroll costs as a result of associate furloughs and decreases in other variable costs such as credit card processing fees and travel expenses. As a percentage of sales, selling, general and administrative expenses decreased to 27.3% in the first quarter of 2021 from 46.6% in the first quarter of 2020 and 30.9% in the first quarter of 2019.

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Depreciation. Depreciation expense decreased $0.2 million, or 5.0%, to $4.7 million in the first quarter of 2021 from $4.9 million in the first quarter of 2020.

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Asset Impairment. There was no impairment expense recorded in the first quarter of 2021. In the first quarter of 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.2 million for an operating lease right-of-use asset and $0.1 million for leasehold improvements and fixtures and equipment.

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Income Tax Expense/Benefit. Income tax expense was $8.1 million in the first quarter of 2021 compared to an income tax benefit of $6.6 million in the first quarter of 2020, as a result of pretax income this year versus the pretax loss in the first quarter of last year.

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Net Income/Loss. Net income was $30.9 million in the first quarter of 2021 compared to a net loss of $20.9 million in the first quarter of 2020 due to the factors discussed above.

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Liquidity and Capital Resources

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Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $131.3 million as of May 1, 2021); (ii) short-term trade credit; (iii) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (iv) a revolving credit facility with a $75.0 million credit commitment (with no borrowings as of May 1, 2021). Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors.

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Cash Flows From Operating Activities. Net cash provided by operating activities was $61.7 million in the thirteen weeks ended May 1, 2021 compared to $12.8 million in the same period of 2020. Sources of cash in the first quarter of 2021 included net income (adjusted for insurance proceeds and non-cash expenses) totaling $50.4 million (compared to a net loss in the first quarter of 2020). Other significant sources of cash in the first quarter of 2021 included (1) a $24.5 million increase in accounts payable (compared to a $14.0 million increase in the first quarter of 2020) due to a high volume of merchandise receipts during the final two months of the third quarter of 2020, with nearly all of such purchases still in accounts payable at

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the end of the quarter; and (2) a $7.0 million increase in income tax payable (compared to a $1.1 million decrease in income tax receivable in the first quarter of 2020).

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Significant uses of cash during the first quarter of 2021 included (1) an $11.2 million decrease in accrued compensation (compared to a $5.5 million decrease in the first quarter of 2020) due to payment in the first quarter of 2021 of incentive compensation accrued in fiscal 2020; and (2) an $8.6 million decrease in accrued expenses and other long-term liabilities (compared with a $6.8 million decrease in the first quarter of 2020) due primarily to payments of operating lease liabilities.

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Cash Flows From Investing Activities. Cash used in investing activities was $5.7 million in the first quarter of 2021 compared to cash provided of $39.3 million in the first quarter of 2020. Cash used in the first quarter of 2021 consisted primarily of purchases of property and equipment. Cash provided in the first quarter of 2020 was primarily from the sales of investment securities due to the pandemic, partially offset by $4.0 million used for purchases of property and equipment.

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Cash Flows From Financing Activities. Cash used in financing activities was $47.9 million in the first quarter of 2021 compared to cash provided from financing activities of $36.1 million in the first quarter of 2020. The principal use of cash in the first quarter of 2021 was share repurchases of $45.5 million. Cash provided in the first quarter of 2020 was the result of a drawdown of $43.7 million on our revolving credit facility due to the pandemic, partially offset by $7.1 million of combined share repurchases and dividend payments.

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Cash Requirements

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Our cash requirements are primarily for working capital and capital expenditures for stores, distribution infrastructure and information systems. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. We have also used cash to repurchase stock under our stock repurchase program. In the first quarter of 2021, pursuant to our stock repurchase program, we repurchased 287,496 shares of our common stock at an aggregate cost of $23.6 million. In addition, we repurchased in a block trade 250,000 shares of our common stock at an aggregate cost of $21.9 million.

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We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months as well as the foreseeable future. However, any significant reduction in customer willingness to visit shopping centers or levels of customer spending at our stores, or any future temporary closures of our stores or distribution centers, or any disruptions in the supply chains related to our merchandise could require us to take actions that could include material changes in our operations and seeking additional debt or equity capital. We will continue to monitor the situation and take action as necessary to reduce our expenses and preserve our financial flexibility.

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Recent Accounting Pronouncements

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See discussion of Recent Accounting Pronouncements in Note 1 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

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Critical Accounting Policies

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The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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There have been no material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended January 30, 2021.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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There have been no material changes in our market risk during the thirteen weeks ended May 1, 2021 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 30, 2021.

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Item 4. Controls and Procedures.

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We have carried out an evaluation under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of May 1, 2021 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.

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Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended May 1, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

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Item 1. Legal Proceedings.

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We are from time to time involved in various legal proceedings incidental to the conduct of our business, including claims by customers, landlords, employees or former employees. Once it becomes probable that we will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, we establish appropriate reserves. While legal proceedings are subject to uncertainties and the outcome of any such matter is not predictable, we are not aware of any legal proceedings pending or threatened against us that we expect to have a material adverse effect on our financial condition, results of operations or liquidity.

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Item 1A. Risk Factors.

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There have been no material changes to the Risk Factors described under the section “ITEM 1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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Information on Share Repurchases

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The number of shares of common stock repurchased by the Company during the first quarter of fiscal 2021 and the average price paid per share are as follows: