Citi Trends Inc. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Citi Trends Inc., a value-priced retailer of urban fashion apparel and accessories. The report covers the thirteen-week period ended May 1, 2010. As of the period end, the company operated 420 stores across 24 states.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $181.4 million | $143.1 million |
| Gross Profit | $72.4 million | $57.2 million |
| Gross Margin | 39.9% | 40.0% |
| Operating Income | $19.2 million | $12.7 million |
| Net Income | $12.4 million | $7.9 million |
| Diluted EPS | $0.86 | $0.54 |
| Cash and Equivalents | $83.4 million | $44.7 million |
| Operating Cash Flow | $22.2 million | $15.1 million |
| Total Debt | $0 (No borrowings) | $0 |
The company maintains a $20 million unsecured revolving credit facility with Bank of America, which was amended in March 2010 to extend the expiration to 2012. There were no borrowings under this facility during the period.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 26.8% year-over-year, driven by the opening of 60 new stores and a 9.6% increase in comparable store sales.
- Profitability: Net income rose 57.0% to $12.4 million. Operating expenses as a percentage of sales improved to 26.7% from 28.0% due to leverage from higher sales volumes.
- Cash Position: Cash and cash equivalents increased by $20.4 million to $83.4 million, supported by strong operating cash flows.
- Inventory: Total inventory decreased by $5.2 million compared to the prior year's first quarter, reflecting conservative inventory management despite a 17.2% increase in store square footage.
Outlook, Risks, and Contingencies
Liquidity and Auction Rate Securities (ARS): The company holds $26.8 million (fair value) of municipal auction rate securities, which are illiquid. In November 2008, the company accepted a "Right" from UBS AG to sell these securities at par value between June 30, 2010, and July 2, 2012. While the securities continue to earn interest, there is a risk that UBS may not have sufficient resources to honor the buyback, potentially forcing the company to sell at a loss.
Management Commentary: Management attributes the sales increase to a strong spring merchandise assortment and a shift in consumer spending due to delayed tax refunds. Comparable store sales were driven by a 2/3 increase in customer transactions and a 1/3 increase in average ticket size.
Risks: Key risks include the future liquidity of ARS, transportation delays, changes in consumer spending, and the ability to gauge fashion trends. There are no material legal proceedings expected to have an adverse effect.
Investor Verification Checklist
- Verify the status and creditworthiness of UBS AG regarding the $26.8 million ARS put option expiring in 2012.
- Monitor the sustainability of the 9.6% comparable store sales growth rate in subsequent quarters.
- Review the impact of the 60 new store openings on long-term profitability and operating leverage.
- Confirm the company's ability to maintain inventory levels without compromising cash flow as expansion continues.