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 operating 370 stores across 23 states as of August 1, 2009. This filing covers the quarterly period ended August 1, 2009 (the second quarter of fiscal 2009), and the twenty-six weeks ended on that date.
Key Financial Metrics
| Metric | 26 Weeks Ended Aug 1, 2009 | 13 Weeks Ended Aug 1, 2009 | 26 Weeks Ended Aug 2, 2008 | 13 Weeks Ended Aug 2, 2008 |
|---|---|---|---|---|
| Net Sales | $254.7 million | $111.6 million | $236.7 million | $115.7 million |
| Gross Profit | $99.8 million | $42.6 million | $91.7 million | $44.9 million |
| Gross Margin | 39.2% | 38.2% | 38.7% | 38.8% |
| Operating Income (Loss) | $11.8 million | ($0.9 million) | $10.8 million | $4.0 million |
| Net Income (Loss) | $7.9 million | ($0.1 million) | $8.0 million | $2.8 million |
| Diluted EPS | $0.54 | ($0.00) | $0.56 | $0.20 |
| Cash & Equivalents | $36.4 million (as of Aug 1, 2009) | |||
| Operating Cash Flow (26 wks) | $11.7 million |
Liquidity and Debt: The company holds $36.4 million in cash and cash equivalents. It maintains a $20 million unsecured revolving credit facility with Bank of America, which has no outstanding borrowings. Total liabilities were $77.7 million, with current liabilities at $68.8 million.
Material Changes vs. Prior Period
- Revenue: Net sales increased 7.6% year-over-year for the 26-week period, driven by 39 new stores opened since the prior year. However, the 13-week period saw a 3.5% sales decline due to a 12.4% drop in comparable store sales.
- Comparable Store Sales: Comparable store sales decreased 2.2% for the 26-week period and 12.4% for the 13-week period. Management attributed this to a lack of government stimulus checks in the current period (which boosted prior year sales) and a shift of approximately $1 million in sales to the third quarter due to later back-to-school tax holidays.
- Profitability: While the 26-week net income remained relatively flat (down 1.9%), the 13-week period resulted in a net loss of $69,000 compared to $2.8 million in net income the prior year. This was due to the sharp decline in comparable store sales and increased markdowns (up 130 basis points in the quarter).
- Expenses: Selling, general, and administrative (SG&A) expenses increased 8.2% for the 26-week period, primarily due to costs associated with new store openings. SG&A as a percentage of sales increased to 31.1% (26 weeks) and 34.9% (13 weeks) due to the deleveraging effect of lower sales volumes.
Outlook, Risks, and Unusual Items
- Auction Rate Securities (ARS): The company holds $38.1 million (fair value) of municipal ARS, which became illiquid in February 2008. These securities are currently valued at a $4.4 million discount from par. In November 2008, the company secured a "Right" from UBS AG to sell these securities at par value between June 30, 2010, and July 2, 2012. However, UBS has disclaimed assurance of sufficient funding to honor this obligation, creating a liquidity risk if no alternative buyers are found.
- Investment Gains/Losses: The 13-week period included a $671,000 unrealized gain on investment securities, reversing a portion of the first-quarter impairment loss, attributed to improved credit spreads in the ARS market.
- Guidance: The filing contains no specific forward-looking financial guidance. Management states that operating results for interim periods are not necessarily indicative of full-year results due to seasonality.
- Risks: Key risks include the liquidity of ARS, the ability to gauge fashion trends, changes in consumer spending, and the impact of economic conditions on the company's target demographic.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify the sustainability of the 12.4% comparable store sales decline in the second quarter and whether it reflects a permanent shift in consumer behavior or temporary factors (stimulus checks, tax holidays).
- ARS Liquidity Risk: Assess the creditworthiness of UBS AG and the likelihood of the company being able to liquidate its $38.1 million ARS portfolio at par value without incurring a loss.
- Inventory Management: Monitor inventory levels relative to sales, as inventory increased 4.1% year-over-year despite a decline in comparable store sales, potentially indicating future markdown pressure.
- Expense Leverage: Watch SG&A expenses as a percentage of sales, which rose significantly in the quarter due to fixed costs associated with new store openings not yet offset by sales volume.