Citi Trends Inc. 10-Q Summary
Business Context and Reporting Period
Citi Trends Inc. is a rapidly growing, value-priced retailer of urban fashion apparel and accessories for the entire family. As of October 31, 2009, the Company operated 392 stores across 24 states. This report covers the quarterly period ended October 31, 2009 (the 13th week of fiscal 2009) and the thirty-nine weeks ended October 31, 2009.
Key Financial Metrics
For the 13 Weeks Ended October 31, 2009:
- Net Sales: $127.4 million (up 21.4% year-over-year)
- Gross Profit: $47.6 million (Gross Margin: 37.4%)
- Net Income: $0.6 million (vs. Net Loss of $0.7 million in prior year)
- Diluted EPS: $0.04
For the 39 Weeks Ended October 31, 2009:
- Net Sales: $382.1 million (up 11.8% year-over-year)
- Gross Profit: $147.4 million (Gross Margin: 38.6%)
- Net Income: $8.5 million (up 15.5% year-over-year)
- Diluted EPS: $0.58
- Operating Cash Flow: $15.5 million
- Cash and Cash Equivalents: $32.5 million
- Inventory: $105.3 million
- Total Debt: No borrowings under the $20 million revolving credit facility; capital lease obligations of $123,000 (current) and $9,719,000 (long-term).
Material Changes vs. Prior Period
Revenue Growth: Sales growth was driven by the opening of 54 new stores since the prior year's third quarter and a 6.3% increase in comparable store sales for the quarter. Comparable store sales were bolstered by a strong back-to-school season and a favorable comparison to the prior year, which was impacted by high gasoline and food prices.
Margin Expansion: Gross margin improved to 37.4% in the quarter (from 36.9% last year) and 38.6% for the 39-week period (from 38.2%). This improvement was primarily due to a 50 basis point reduction in inventory shrinkage and better markdown management, partially offset by slightly higher freight costs.
Expense Management: Selling, general, and administrative (SG&A) expenses increased 15.1% for the quarter but decreased as a percentage of sales to 33.0% (from 34.8%) due to the leveraging effect of higher sales volume.
Investment Portfolio: Interest income decreased significantly due to a declining interest rate environment affecting returns on auction rate securities (ARS) and cash equivalents.
Outlook, Risks, and Contingencies
Liquidity and Capital Resources: The Company maintains a $20 million unsecured revolving credit facility with Bank of America, which expires March 24, 2010. There have been no borrowings under this facility. Management believes existing cash balances and operating cash flows are sufficient to fund operations and capital expenditures for the next 12 months.
Auction Rate Securities (ARS) Risk: The Company holds $37.8 million (fair value) of municipal ARS, which became illiquid in February 2008. 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 and no defaults have occurred, there is a risk that UBS may not have sufficient financial resources to honor the obligation, potentially forcing the Company to sell at a loss if no alternative buyers are found.
Forward-Looking Statements: The Company cautions that actual results may differ from projections due to factors including transportation delays, changes in consumer spending, fashion trends, and the future liquidity of ARS.
Investor Verification Checklist
- ARS Liquidity: Verify the status of the $37.8 million investment in illiquid auction rate securities and the enforceability of the UBS "Right" to sell at par.
- Comparable Store Sales: Confirm the sustainability of the 6.3% comparable store sales growth in the third quarter, noting the favorable comparison to a difficult prior-year period.
- Inventory Levels: Monitor inventory levels ($105.3 million), which increased 17.2% year-over-year, to ensure they align with sales velocity and do not lead to future markdowns.
- Store Expansion Costs: Review capital expenditures ($17.5 million for 39 weeks) against the profitability of the 54 new stores opened recently.
- Shrinkage Control: Validate the reported 50 basis point reduction in inventory shrinkage as a key driver of margin improvement.