Citi Trends Inc. 10-Q Summary
Business Context and Reporting Period
Citi Trends Inc. is a value-priced retailer of urban fashion apparel and accessories. As of October 30, 2010, the company operated 458 stores across 27 states. This filing covers the quarterly period ended October 30, 2010 (the 13th week of fiscal 2010) and the 39-week period ended on the same date.
Key Financial Metrics
| Metric | 39 Weeks Ended Oct 30, 2010 | 13 Weeks Ended Oct 30, 2010 |
|---|---|---|
| Net Sales | $450.5 million | $140.0 million |
| Gross Profit | $172.4 million | $51.7 million |
| Gross Margin | 38.3% | 36.9% |
| Operating Income (Loss) | $17.4 million | ($0.9 million) |
| Net Income (Loss) | $11.5 million | ($0.4 million) |
| Diluted EPS | $0.79 | ($0.03) |
| Cash and Equivalents | $69.6 million (Balance Sheet) | N/A |
| Inventory | $115.3 million (Balance Sheet) | N/A |
| EBITDA | $32.2 million | $4.4 million |
Liquidity and Debt: The company holds $69.6 million in cash and cash equivalents. It maintains a $20 million unsecured revolving credit facility with Bank of America, which had no outstanding borrowings as of the reporting date. Total liabilities were $97.1 million.
Material Changes vs. Prior Period
- 39-Week Performance: Net sales increased 17.9% to $450.5 million, driven by the opening of 68 new stores and a 2.2% increase in comparable store sales. Net income rose 35.7% to $11.5 million. Gross margin declined slightly to 38.3% from 38.6% due to lower core merchandise margins and higher freight costs.
- 13-Week (Q3) Performance: Net sales increased 10.0% to $140.0 million, primarily due to new store openings. However, comparable store sales decreased 4.2%, driven by a lower average ticket. This resulted in a net loss of $0.4 million compared to net income of $0.6 million in the prior year quarter.
- Expense Trends: Selling, general, and administrative (SG&A) expenses increased 15.7% over the 39-week period due to store expansion but improved as a percentage of sales to 31.1% due to labor efficiencies. In the 13-week period, SG&A as a percentage of sales increased to 33.7% due to the decline in comparable sales.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company invested heavily in growth, with purchases of property and equipment totaling $28.6 million for the 39-week period. This includes the acquisition of a new distribution center in Roland, Oklahoma, and the opening of 57 new stores.
- Investment Securities: The company successfully redeemed all remaining auction rate securities (ARS) in June 2010 via a put option, eliminating the associated liquidity risk. Current short-term investments consist of pre-refunded municipal bonds.
- Commitments: The company has a commitment of approximately $7 million for automated material handling systems for its new distribution center.
- Risks: Management highlights risks related to inventory management, shifts in consumer spending, fashion trends, and the seasonal nature of the business. There are no material pending legal proceedings expected to have an adverse effect.
Investor Verification Checklist
- Verify the sustainability of the 2.2% comparable store sales growth over the 39-week period versus the 4.2% decline in the most recent quarter.
- Monitor the impact of the new Roland, Oklahoma distribution center on operating efficiencies and freight costs.
- Assess inventory levels ($115.3 million) relative to the 19% increase in store square footage to ensure no overstocking occurs in a difficult sales environment.
- Review the $7 million commitment for the new distribution center equipment and its impact on future cash flows.
- Confirm the company's ability to maintain gross margins given the noted decline in core merchandise margins and rising freight costs.