Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-123028
CITI TRENDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2150697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Fahm Street
Savannah, GA 31401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 912-236-1561
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 |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 30, 2005
- ------------------------------------- --------------------------------------
Common Stock, $.01 par value 12,796,520 shares
- --------------------------------------------------------------------------------
1
CITI TRENDS, INC.
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FORM 10-Q
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TABLE OF CONTENTS
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PAGE
NUMBER
_________
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Condensed Balance Sheets (unaudited)
July 30, 2005 and January 29, 2005 3
Condensed Statements of Operations (unaudited)
Twenty-six weeks ended July 30, 2005 and July 31, 2004 4
Condensed Statements of Operations (unaudited)
Thirteen weeks ended July 30, 2005 and July 31, 2004 5
Condensed Statements of Cash Flows (unaudited)
Twenty-six weeks ended July 30, 2005 and July 31, 2004 6
Notes to the Condensed Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
Item 4 Controls and Procedures 17
PART II OTHER INFORMATION 17
Item 1 Legal Proceedings 17
Item 2 Unregistered Sales of Equity Securities and Use of Initial Public Offering Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submissions of Matter to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits 17
SIGNATURES 19
2
Item 1. Financial Statements.
Citi Trends, Inc.
Condensed Balance Sheets
July 30, 2005 and January 29, 2005
(unaudited)
July 30, January 29,
2005 2005
--------------- ---------
Assets
Current assets:
Cash and cash equivalents....................................................................... $ 30,759,597 $ 11,801,442
Marketable securities........................................................................... 12,012,915 --
Inventory....................................................................................... 50,063,900 36,172,832
Prepaid and other current assets................................................................ 3,324,742 2,600,933
Income tax receivable........................................................................... 1,236,504 --
Deferred tax asset.............................................................................. 1,171,959 1,139,000
------------ --------------
Total current assets........................................................................... 98,569,617 51,714,207
Property and equipment, net....................................................................... 20,128,751 17,573,767
Goodwill.......................................................................................... 1,371,404 1,371,404
Other assets...................................................................................... 175,020 130,182
------------ --------------
Total assets................................................................................... $ 120,244,792 $ 70,789,560
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving lines of credit...................................................... $ -- $ --
Accounts payable................................................................................ 36,248,067 28,132,301
Accrued expenses................................................................................ 4,445,125 3,199,772
Accrued compensation............................................................................ 3,020,153 2,537,643
Current portion of long-term debt............................................................... -- 78,953
Current portion of capital lease obligations.................................................... 769,660 718,425
Income taxes payable............................................................................ -- 2,455,247
Layaway deposits................................................................................ 997,363 252,791
------------ --------------
Total current liabilities...................................................................... 45,480,368 37,375,132
Long-term debt, less current portion.............................................................. -- 1,526,110
Capital lease obligations, less current portion................................................... 735,064 688,473
Preferred shares subject to mandatory redemption.................................................. -- 3,984,763
Deferred tax liability............................................................................ 1,414,635 818,000
Other long-term liabilities....................................................................... 3,496,705 2,632,114
------------ --------------
Total liabilities.............................................................................. 51,126,772 47,024,592
------------ --------------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 20,000,000; 12,865,614 shares issued; 12,699,864 37,688
shares outstanding............................................................................. 3,639
Paid-in-capital................................................................................. 45,770,403 4,120,894
Retained earnings............................................................................... 23,474,479 19,828,628
Treasury stock, at cost; 165,750 shares......................................................... (164,550) (164,550)
Subscription receivable......................................................................... -- (23,643)
------------- --------------
Total stockholders' equity..................................................................... 69,118,020 23,764,968
------------ --------------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity..................................................... $ 120,244,792 $ 70,789,560
============= ==============
See accompanying notes to the condensed financial statements.
3
Citi Trends, Inc.
Condensed Statements of Operations
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
(unaudited)
July 30, July 31,
2005 2004
---------------- ----------------
Net sales........................................................................................ $ 123,065,929 $ 91,079,702
Cost of sales.................................................................................... 76,165,891 57,129,568
---------------- ----------------
Gross profit................................................................................. 46,900,038 33,950,134
Selling, general and administrative expenses..................................................... 41,028,800 30,026,241
---------------- ----------------
Income from operations........................................................................ 5,871,238 3,923,893
Interest income.................................................................................. 187,221 16,734
Interest expense, including redeemable preferred stock dividend.................................. 242,608 366,270
---------------- ----------------
Income before provision for income taxes...................................................... 5,815,851 3,574,357
Provision for income taxes....................................................................... 2,170,000 1,376,128
---------------- ----------------
Net income.................................................................................... $ 3,645,851 $ 2,198,229
================ ================
Basic income per common share.................................................................... $ 0.34 $ 0.24
================= ================
Diluted income per common share.................................................................. $ 0.30 $ 0.20
================ ================
Average number of shares outstanding
Basic.......................................................................................... 10,610,154 9,308,000
================ ================
Diluted........................................................................................ 12,230,180 10,928,216
================ ================
See accompanying notes to the condensed financial statements.
4
Citi Trends, Inc.
Condensed Statements of Operations
Thirteen Weeks Ended July 30, 2005 and July 31, 2004
(unaudited)
July 30, July 31,
2005 2004
---------------- ----------------
Net sales....................................................................................... $ 59,449,429 $ 43,010,956
Cost of sales................................................................................... 37,682,861 28,095,173
---------------- ----------------
Gross profit................................................................................ 21,766,568 14,915,783
Selling, general and administrative expenses.................................................... 21,270,958 14,805,544
---------------- ----------------
Income from operations....................................................................... 495,610 110,239
Interest income................................................................................. 135,782 9,604
Interest expense, including redeemable preferred stock dividend................................. 80,649 185,772
---------------- ----------------
Income before provision for income taxes..................................................... 550,743 (65,929)
Provision (benefit) for income taxes............................................................ 170,000 (25,486)
---------------- -----------------
Net income (loss)............................................................................ $ 380,743 $ (40,443)
================ =================
Basic income (loss) per common share............................................................ $ 0.03 $ (0.00)
================= =================
Diluted income (loss) per common share.......................................................... $ 0.03 $ (0.00)
================= =================
Average number of shares outstanding
Basic......................................................................................... 11,925,307 9,310,600
================ ================
Diluted....................................................................................... 13,587,400 10,952,838
================ ================
See accompanying notes to the condensed financial statements.
5
Citi Trends, Inc.
Condensed Statements of Cash Flows
Twenty-six Weeks Ended July 30, 2005 and July 31, 2004
(unaudited)
July 30, July 31,
2005 2004
------------ --------------
Operating activities:
Net income...................................................................................... $ 3,645,851 $ 2,198,229
Adjustment to reconcile net income to net cash provided by operating activities:
Dividends on preferred shares subject to mandatory redemption.................................. 100,308 162,225
Depreciation and amortization.................................................................. 2,846,538 2,291,400
Deferred income taxes.......................................................................... 563,676 --
Noncash compensation expense................................................................... 50,357 22,314
Tax benefit on stock option exercise........................................................... 412,544 --
Changes in assets and liabilities:
Inventory.................................................................................... (13,891,068) (14,223,676)
Prepaid and other current assets............................................................. (723,809) (1,122,452)
Other assets................................................................................. (59,063) (17,251)
Accounts payable............................................................................. 8,115,766 5,107,855
Accrued expenses and other long-term liabilities............................................. 1,629,826 1,469,568
Accrued compensation......................................................................... 482,510 175,657
Income tax payable/receivable................................................................ (3,691,751) (1,121,119)
Layaway deposits............................................................................. 744,572 515,789
------------ --------------
Net cash provided by (used in) operating activities......................................... 226,256 (4,541,461)
------------ --------------
Investing activities:
Investments in marketable securities............................................................. (12,012,915) --
Purchase of property and equipment............................................................... (4,873,106) (4,279,710)
------------ --------------
Net cash used in investing activities....................................................... (16,886,021) (4,279,710)
------------- --------------
Financing activities:
Gross borrowings under revolving line of credit................................................. -- 13,600,404
Gross repayments under revolving line of credit................................................. -- (7,940,549)
Repayments on long-term debt and capital lease obligations...................................... (2,021,428) (415,656)
Proceeds from payment of shareholder note receivable............................................ 23,691 11,000
Repayment of preferred shares subject to mandatory redemption................................... (3,605,000) (500,000)
Proceeds from sale of stock..................................................................... 41,220,657 6,000
------------ --------------
Net cash provided by financing activities................................................... 35,617,920 4,761,199
------------ --------------
Net increase (decrease) in cash and cash equivalents........................................ 18,958,155 (4,059,972)
Cash and cash equivalents:
Beginning of period............................................................................. 11,801,442 9,954,232
------------ --------------
End of period................................................................................... $ 30,759,597 $ 5,894,260
============ ==============
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................................... $ 421,375 $ 198,131
Cash paid for income taxes................................................................. $ 4,885,531 $ 2,497,248
Purchases of property and equipment financed by entering into capital leases .............. $ 514,191 $ 526,692
See accompanying notes to the condensed financial statements.
6
Citi Trends, Inc
- ----------------
Notes to the Condensed Financial Statements (unaudited)
- -------------------------------------------------------
July 30, 2005
- -------------
1. Basis of Presentation
---------------------
The condensed balance sheet as of July 30, 2005, the condensed statements of
operations for each of the thirteen week and twenty-six week periods ended July
30, 2005 and July 31, 2004, and the condensed statements of cash flows for the
twenty-six week periods ended July 30, 2005 and July 31, 2004 have been prepared
by Citi Trends, Inc. (the "Company"), without audit. The condensed balance sheet
at January 29, 2005 has been derived from the audited financials statements at
that date, but does not include all required year end disclosures. In the
opinion of management, such statements include all adjustments considered
necessary to present fairly the Company's financial position as of July 30, 2005
and January 29, 2005, and its results of operations and cash flows at July 30,
2005 and July 31, 2004 and for all periods presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been omitted from these condensed financial
statements. The Company suggests that you read its condensed financial
statements in conjunction with the financial statements and notes thereto
included in its Rule 424(b) prospectus filed May 18, 2005.
The results of operations for the thirteen and twenty-six weeks ended July 30,
2005 are not necessarily indicative of the operating results that may be
expected for the year ending January 28, 2006.
2. Stock-Based Compensation
------------------------
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations including Financial Accounting
Standards Board ("FASB") interpretation (FIN) No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25, to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current fair value of the
underlying stock exceeds the exercise price. The Company recognizes the fair
value of stock rights granted to non-employees in the accompanying condensed
financial statements. SFAS No. 123, Accounting for Stock-Based Compensation, and
SFAS No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure, an amendment of FASB Statement No. 123, establishes accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and the Company has
adopted only the disclosure requirements of SFAS No. 123, as amended. The
following table illustrates the effect on net income for the twenty-six and
thirteen weeks ended July 30, 2005 and July 31, 2004 if the fair-value-based
method had been applied to all outstanding and unvested awards in the periods.
Pro forma information regarding net income and net income per share is required
in order to disclose the Company's net income as if it had accounted for
employee stock options under the fair value method of SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation--Transition Disclosure. The fair values of options and
shares issued pursuant to its option plan at each grant date were estimated
using the Black-Scholes option pricing model.
Twenty-six Weeks Thirteen Weeks
---------------- --------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (loss), as reported............................................$ 3,645,851 $ 2,198,229 $ 380,743 $ (40,443)
Add stock-based employee compensation expense included in reported net
income, net of tax of $18,784 and $8,595, respectively, for the
twenty-six weeks and $9,392 and $4,298, respectively, in the thirteen
weeks.................................................................... 31,576 13,719 15,788 6,859
Deduct total stock-based employee compensation expense determined under
fair-value-based method for all awards, net of tax of $153,544 and
$26,920, respectively, for the twenty-six weeks and $141,971 and
$12,497, respectively, in the thirteen weeks............................ (258,102) (42,966) (238,648) (19,946)
------------- ------------ ------------ ------------
Pro forma net income (loss)............................................$ 3,419,325 $ 2,168,982 $ 157,883 $ (53,530)
============ ============ ============ ============
As reported basic income (loss) per common share..........................$ 0.34 $ 0.24 $ 0.03 $ (0.00)
============ ============ ============ ============
Pro forma basic income (loss) per common share............................$ 0.32 $ 0.23 $ 0.01 $ (0.01)
============ ============ ============ ============
As reported diluted income (loss) per common share........................$ 0.30 $ 0.20 $ 0.03 $ (0.00)
============ ============ ============ ============
Pro forma diluted income (loss) per common share..........................$ 0.28 $ 0.20 $ 0.01 $ (0.00)
============ ============ ============ ============
7
3. Earnings per Share
------------------
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
The following table provides a reconciliation of the number of average common
shares outstanding used to calculate earnings per share to the number of common
shares and common share equivalents outstanding used in calculating diluted
earnings per share for the twenty-six weeks ended July 30, 2005 and July 31,
2004:
2005 2004
---- ----
Average number of common shares outstanding............................................. 10,610,154 9,308,000
Incremental shares from assumed exercises of stock options.............................. 1,620,026 1,620,216
--------- ---------
Average number of common shares and common stock equivalents outstanding................ 12,230,180 10,928,216
========== ==========
For the twenty-six weeks ended July 30, 2005 and July 31, 2004 there were no
options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because of antidilution.
The following table provides a reconciliation of the number of average common
shares outstanding used to calculate earnings per share to the number of common
shares and common share equivalents outstanding used in calculating diluted
earnings per share for the thirteen weeks ended July 30, 2005 and July 31, 2004:
2005 2004
---- ----
Average number of common shares outstanding............................................. 11,925,307 9,310,600
Incremental shares from assumed exercises of stock options.............................. 1,662,093 1,642,238
--------- ---------
Average number of common shares and common stock equivalents outstanding................ 13,587,400 10,952,838
========== ==========
For the thirteen weeks ended July 30, 2005 and July 31, 2004 there were no
options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because of antidilution.
4. Marketable Securities
---------------------
Marketable securities consist primarily of auction rate municipal securities
which are highly liquid, variable rate debt securities. While the underlying
security has a long-term nominal maturity, the interest rate is periodically
reset through dutch auctions typically every thirty-five days. Since these
auction rate securities are priced and subsequently trade at short-term
intervals they are classified as current assets.
The Company classifies all investments as available-for-sale. Available-for-sale
securities are carried at estimated fair value, based on available market
information, with unrealized gains and losses, if any, reported as a component
of stockholders' equity. As a result of the resetting variable rates, the
carrying value of available-for-sale securities approximates fair market value
due to their short maturities. For these reasons, the Company has no cumulative
gross unrealized or realized gains or losses from these investments. All income
generated from these investments was recorded as interest income. The Company
has no investments considered to be trading securities.
5. Revolving Lines of Credit
-------------------------
The Company has a revolving line of credit secured by substantially all of the
Company's assets pursuant to which the Company pays customary fees. This secured
line of credit expires in April 2007. At July 30, 2005, the line of credit
provided for aggregate cash borrowings and the issuance of letters of credit up
to the lesser of $25,000,000 or the Company's borrowing base (approximately
$25,000,000 at July 30, 2005), as defined in the credit agreement. Borrowings
under this secured line of credit bear interest at either the prime rate or the
Eurodollar rate plus 2.25%, at the Company's election, based on conditions in
the credit agreement. Additionally, there is a letter of credit fee of 1.25% per
annum on the outstanding balance of letters of credit. At July 30, 2005, there
were no outstanding borrowings on the revolving line of credit, nor were there
any outstanding letters of credit. Under the terms of the credit agreement, the
Company is required to maintain a minimum tangible net worth. The Company was in
compliance with this requirement at July 30, 2005.
In September 2003, the Company entered into an annual unsecured revolving line
of credit with Bank of America that expires on June 30, 2006. At July 30, 2005,
the line of credit provided for aggregate cash borrowings up to $3,000,000.
Borrowings under the credit agreement bear interest at the London Interbank
Offered Rate ("LIBOR") plus 2.00%. At July 30, 2005, there were no outstanding
borrowings on the unsecured revolving line of credit.
8
6. Equity Transactions with Majority Shareholder
---------------------------------------------
In August 2003, the Company's board of directors adopted a plan (the
"Anti-Dilution Plan") whereby stock options were to be issued to the Company's
majority stockholder, as well as certain defined members of management, in
amounts necessary to prevent the dilution of their ownership percentage as a
result of the issuance of stock options to other employees of the Company.
Options granted under this Anti-Dilution Plan were to be issued at the estimated
fair market value of the Company's common stock on the date of grant and vest
immediately. On April 28, 2005 the Company terminated the Anti-Dilution Plan.
During the twenty-six week periods ended July 30, 2005 and July 31, 2004, the
Company issued no stock options under this Anti-Dilution Plan.
7. Contingencies
-------------
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business, including claims by customers,
employees or former employees. The Company was recently the subject of two
putative collective action lawsuits commenced by former employees under the Fair
Labor Standards Act. The plaintiffs sought unpaid compensation and benefits,
liquidated damages, attorneys fees, costs and injunctive relief. The suits were
dismissed with prejudice pending enforcement proceedings in District Court of
the United States for the Middle District of Alabama, Northern Division of the
favorable settlement agreements that were entered into between the Company and
the plaintiffs in the twenty-six weeks ended July 30, 2005. The Company has
reviewed the allegations in both of these cases and it believes that its
business practices are, and were during the relevant periods, in compliance with
the law. The settlement costs did not and will not have a material impact on the
Company's results of operations or financial condition.
8. Related Party Transactions - Management Consulting Agreement
------------------------------------------------------------
The Company was a party to an Amended and Restated Management Consulting
Agreement (the "Consulting Agreement"), effective as of February 1, 2004 with
Hampshire Management Company LLC (the "Consultant"), which is an affiliate of
the Company's majority shareholder, pursuant to which the Consultant provided
the Company with certain consulting services related to, but not limited to,
financial affairs, relationships with lenders, stockholders and other
third-party associates or affiliates, and the expansion of the Company's
business. In connection with the Company's initial public offering (see note
10), the parties terminated the Consulting Agreement and the Company paid the
Consultant a one time termination fee of $1.2 million in the second quarter.
Included in operating expenses were management fees of $72,857 and the
termination fee of $1.2 million for the twenty-six weeks ended July 30, 2005 and
management fees of approximately $120,000 for the twenty-six weeks ended July
31, 2004. Included in operating expenses for the thirteen weeks ended July 30,
2005 were management fees of $12,857 and the termination fee of $1.2 million
compared to management fees of $60,000 for the thirteen weeks ended July 31,
2004.
9. Long-Term Incentive Plan
------------------------
On March 8, 2005 the Company adopted the 2005 Long-Term Incentive Plan which
became effective upon the consummation of the initial public offering. Under the
Incentive Plan, the Company may grant up to 1.3 million shares of common stock
that may be issued for the grant of stock options and other equity incentive
awards. In the twenty-six weeks ended July 30, 2005, the Company issued
approximately 168,000 options under this plan.
10. Initial Public Offering
-----------------------
On May 18, 2005, the Company completed the initial public offering, or IPO, of
its common stock as a result of which the Company issued and sold 2,700,000
shares of common stock at $14.00 per share. In addition, the Company received
notice on May 27, 2005, that the underwriters had exercised the over-allotment
option granted in connection with the IPO, pursuant to which the Company issued
and sold an additional 577,500 shares on June 1, 2005. Upon completing the
offering and the over-allotment option, the Company received net proceeds of
approximately $41.2 million and incurred approximately $4.8 million in expenses
in connection with the IPO. In addition, 1,150,000 shares of common stock were
sold in the IPO by certain selling stockholders of the Company, for which the
Company received no proceeds. As a result, upon the closing of the offering,
there were 12,602,154 shares of common stock outstanding. The Company's common
stock is listed on NASDAQ under the symbol "CTRN". A summary of the terms of the
IPO can be found in the Company's Registration Statement on Form S-1 (File No.
333-123028), or the Registration Statement, which was declared effective by the
SEC on May 17, 2005. Copies of the prospectus relating to the offering may be
obtained from CIBC World Markets Corp., 417 Fifth Avenue, New York, New York
10016, by fax at (212) 667-6303 or by e-mail at useprospectus@us.cibc.com.
11. Stock Split
-----------
In connection with the IPO, on May 11, 2005, the Board of Directors approved a
26-for-1 stock split of the Company's common stock. All share and per share
amounts related to common stock and stock options included in the accompanying
condensed financial statements and notes have been restated to reflect the stock
split.
12. Use of IPO Proceeds
-------------------
9
Following the closing of the IPO, each of the Company's 3,605 shares of
mandatory redeemable preferred stock were redeemed and extinguished for
approximately $3.6 million, and the Company repaid in full the mortgage on its
Fahm Street Headquarters and Distribution Center in the amount of approximately
$1.5 million. Subsequent to the IPO the Company has invested approximately $12.0
million of the proceeds in short term investments and has spent approximately
$2.2 million on capital expenditures for new stores and approximately $1.5
million for general corporate purposes.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
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, 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," "will likely result," or "will continue" and similar
expressions generally identify forward-looking statements. 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.
The factors that may result in actual results differing from such
forward-looking information include, but are not limited to: 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; changes in product mix; interruptions in
suppliers' businesses; interest rate fluctuations; a continued rise in insurance
costs; a deterioration in general economic conditions caused by acts of war or
terrorism; 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, expanding or converting
new or existing distribution centers; and other factors.
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.
Overview
The Company is a rapidly growing, value-priced retailer of urban fashion apparel
and accessories for the entire family. The Company's merchandise offerings are
designed to appeal to the preferences of fashion conscious consumers,
particularly African-Americans. Stores are located in the Southeast, the
Mid-Atlantic region and Texas. As of July 30, 2005 there are 221 stores in
operation in both urban and rural markets in twelve states.
The Company measures its performance using key operating statistics. One of the
main performance measures is comparable store sales growth. A comparable store
is defined as a store that has been open 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 its 24th month at the latest. As an example, all
stores opened in fiscal 2003 and fiscal 2004 were not considered comparable
stores in fiscal 2004. Relocated and expanded stores are included in the
comparable store sales results. Other operating statistics, most notably average
sales per store, are utilized in managing the Company. The Company typically
occupies existing footprints in established shopping centers rather than sites
built specifically for its stores, and, therefore, store square footage (and
therefore sales per square foot) varies by store. The Company focuses on the
overall store sales volume as the critical driver of profitability. Average
sales per store have increased from approximately $0.8 million in fiscal 2000 to
approximately $1.1 million in fiscal 2004. Beyond sales, the Company measures
gross margin percentage and store operating expenses, with a particular focus on
labor as a percentage of sales. These results translate into store level
contribution, which is used to evaluate overall performance of each individual
store. Finally, corporate expenses are monitored in absolute amounts.
The Company's cash requirements are primarily for working capital, construction
of new stores, remodeling of existing stores and improvements to its information
systems. Historically, these cash requirements have been met from cash flow from
operations, short-term trade credit and borrowings under the revolving lines of
credit, long-term debt, capital leases and the proceeds from the IPO.
Accounting Periods
The following contains references to years 2005 and 2004, which represent fiscal
years ending or ended on January 28, 2006 and January 29, 2005, respectively,
each of which have a 52-week accounting period. This discussion and analysis
should be read with the condensed financial statements and the notes thereto.
Results of Operations
11
The following discussion of the Company's financial performance is based on the
condensed 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. Furthermore, the seasonal nature of the Company's
business may affect comparisons between periods.
Twenty-Six Weeks Ended July 30, 2005 and July 31, 2004
Net Sales. Net sales increased $32.0 million, or 35.1%, to $123.1 million for
the twenty-six weeks ended July 30, 2005 from $91.1 million in the twenty-six
weeks ended July 31, 2004. The increase in net sales was primarily due to 39 new
stores opened since July 31, 2004 and a comparable store sales increase of 9.0%
for the twenty-six weeks ended July 30, 2005 compared to the twenty-six weeks
ended July 31, 2004. The 39 stores opened since July 31, 2004 accounted for
$20.5 million of the total increase in sales, the 22 stores opened between
February 1, 2004 and July 31, 2004 accounted for $4.5 million and the 158
comparable stores contributed $7.4 million of the increase in sales. The
increase in comparable store sales resulted, primarily from an increase in the
number of customer transactions. Three stores were expanded and/or relocated
since July 31, 2004, all of which, occurred in the twenty-six weeks ended July
30, 2005.
Gross Profit. Gross profit increased $12.9 million, or 37.9%, to $46.9 million
in the twenty-six weeks ended July 30, 2005 from $34.0 million in the twenty-six
weeks ended July 31, 2004. The increase resulted primarily from the operation of
39 new stores opened since July 31, 2004 and the full period impact of 22 stores
opened in the twenty-six weeks ended July 31, 2004. As a percentage of net
sales, gross profit increased to 38.1% in the twenty-six weeks ended July 30,
2005 from 37.3% in the twenty-six weeks ended July 31, 2004. This increase, as a
percentage of net sales, was primarily due to reduced markdown rates as a result
of well balanced inventories and strong sales increases in the twenty-six weeks
ended July 30, 2005 compared to the twenty-six weeks ended July 31, 2004.
Selling, General and Administrative Expense. Selling, general and administrative
expenses increased $11.0 million, or 36.6%, to $41.0 million in the twenty-six
weeks ended July 30, 2005 from $30.0 million in the twenty-six weeks ended July
31, 2004. The increase in these expenses was due primarily to additional store
level, distribution and corporate costs arising from the opening of 39 new
stores since July 31, 2004. Selling, general and administrative costs increased
additionally due to costs associated with "being public" of approximately
$390,000. Selling, general and administrative expense as a percentage of net
sales increased to 33.3% in the twenty-six weeks ended July 30, 2005 from 33.0%
in the twenty-six weeks ended July 31, 2004. The increase as a percentage of net
sales was due in part to the payment of a $1.2 million fee to terminate the
consulting agreement with Hampshire Equity Partners. This increase is offset in
part due to a prior year charge in the twenty-six weeks ended July 31, 2004 of
approximately $300,000 for additional vacation pay accrual pursuant to a change
in the Company's vacation policy.
Interest Income. Interest income increased to approximately $187,000 in the
twenty-six weeks ended July 30, 2005 from approximately $16,700 in the
twenty-six weeks ended July 31, 2004. The increase in interest income was due
primarily to interest income earned on proceeds from the IPO.
Interest Expense. Interest expense decreased 34% to approximately $243,000 in
the twenty-six weeks ended July 30, 2005 from approximately $366,000 in the
twenty-six weeks ended July 31, 2004. The decrease in interest expense was due
primarily to the Company's redemption of the preferred shares subject to
mandatory redemption, the absence of any borrowings under the line of credit and
the Company repaying in full the mortgage on the Fahm Street Distribution
Center.
Provision for Income Taxes. The provision for income taxes increased to
approximately $2.2 million in the twenty-six weeks ended July 30, 2005 from $1.4
million in the twenty-six weeks ended July 31, 2004. The effective income tax
rates for fiscal 2005 and fiscal 2004 were 37.3%, and 38.5%, respectively.
Net Income. Net income increased 65.0% to $3.6 million in the twenty-six weeks
ended July 30, 2005 from $2.2 million in the twenty-six weeks ended July 31,
2004. The increase in net income was due to the factors discussed previously.
Thirteen Weeks Ended July 30, 2005 and July 31, 2004
Net Sales. Net sales increased $16.4 million, or 38.2%, to $59.4 million for the
thirteen weeks ended July 30, 2005 from $43.0 million in the thirteen weeks
ended July 31, 2004. The increase in net sales was primarily due to 39 new
stores opened since July 31, 2004 and a comparable store sales increase of 11.5%
for the thirteen weeks ended July 30, 2005 compared to the thirteen weeks ended
July 31, 2004. The 39 stores opened since July 31, 2004 accounted for $10.6
million of the total increase in sales, the 22 stores opened between February 1,
2004 and July 31, 2004 accounted for $1.5 million and the 158 comparable stores
contributed $4.2 million of the increase in sales. The increase in comparable
store sales resulted primarily from an increase in the number of customer
transactions. Three stores have been expanded and/or relocated since July 31,
2004, one of which occurred in the thirteen weeks ended July 30,
12
2005.
Gross Profit. Gross profit increased $6.9 million, or 46.3%, to $21.8 million in
the thirteen weeks ended July 30, 2005 from $14.9 million in the thirteen weeks
ended July 31, 2004. The increase resulted primarily from the operation of 39
new stores opened since July 31, 2004 and the full period impact of 22 stores
opened in the thirteen weeks ended July 31, 2004. As a percentage of net sales,
gross profit increased to 36.6% in the thirteen weeks ended July 30, 2005 from
34.7% in the thirteen weeks ended July 31, 2004. This increase, as a percentage
of net sales, was primarily due to reduced markdown rates as a result of well
balanced inventories and strong sales increases in the thirteen weeks ended July
30, 2005 compared to the thirteen weeks ended July 31, 2004.
Selling, General and Administrative Expense. Selling, general and administrative
expenses increased $6.5 million, or 43.7%, to $21.3 million in the thirteen
weeks ended July 30, 2005 from $14.8 million in the thirteen weeks ended July
31, 2004. The increase in these expenses was due primarily to additional store
level, distribution and corporate costs arising from the opening of 39 new
stores since July 31, 2004. Selling, general and administrative costs increased
additionally due to costs associated with `being public" of approximately
$390,000. Selling, general and administrative expense as a percentage of net
sales increased to 35.8% in the thirteen weeks ended July 30, 2005 from 34.4% in
the thirteen weeks ended July 31, 2004. The increase as a percentage of net
sales was primarily due to the payment of a $1.2 million fee to terminate the
consulting agreement with Hampshire Equity Partners.
Interest Income. Interest income increased to approximately $136,000 in the
thirteen weeks ended July 30, 2005 from approximately $10,000 in the thirteen
weeks ended July 31, 2004. The increase in interest income was due primarily to
interest income earned on proceeds from the IPO.
Interest Expense. Interest expense decreased 57% to approximately $81,000 in the
twenty-six weeks ended July 30, 2005 from approximately $186,000 in the
twenty-six weeks ended July 31, 2004. The decrease in interest expense was due
primarily to the Company's redemption of the preferred shares subject to
mandatory redemption, the absence of any borrowings under the line of credit and
the Company repaying in full the mortgage on the Fahm Street Distribution
Center.
Provision for Income Taxes. The provision for income taxes increased to
approximately $170,000 in the thirteen weeks ended July 30, 2005 from
approximately ($25,000) in the thirteen weeks ended July 31, 2004. The income
tax rate for the thirteen weeks ended July 30, 2005 was 30.8% which is lower
than the projected annual rate of 37.3% for fiscal 2005. The rate is lower
primarily due to the reduction of the projected annual rate from 38.0% to 37.3%.
This reduction in the tax rate occurred due to the redemption of the preferred
shares subject to mandatory redemption, the interest expense from this
instrument was not deductible for tax purposes and the Company's investing part
of the IPO proceeds in municipal securities. The effective income tax rates for
fiscal 2005 and fiscal 2004 are 37.3%, and 38.5%, respectively.
Net Income (loss). Net income (loss) increased to approximately $381,000 in the
thirteen weeks ended July 30, 2005 from a loss of approximately ($41,000) in the
thirteen weeks ended July 31, 2004. The increase in net income was due to the
factors discussed previously.
Liquidity and Capital Resources
Current financial condition. At July 30, 2005, the Company had total cash and
marketable securities of $42.8 million compared with total cash and marketable
securities of $11.8 million at January 29, 2005. The most significant factors in
the change in the Company's net liquidity position during the first twenty-six
weeks of 2005 were the proceeds from the Company's IPO, positive net income from
operations adjusted for depreciation and other non-cash charges, offset by the
purchase of additional inventory and capital expenditures to open new stores.
Inventory represented approximately 42% of the Company's total assets as of July
30, 2005. Management's ability to manage its inventory can have a significant
impact on the Company's cash flows from operations during a given interim period
or fiscal year. In addition, inventory purchases can be somewhat seasonal in
nature, such as the purchase of warm-weather or Christmas-related merchandise.
Cash flows provided by (used in) operating activities. Net cash provided by
(used in) operating activities was approximately $226,000 in the twenty-six
weeks ended July 30, 2005 compared to ($4.5) million in the twenty-six weeks
ended July 31, 2004. The main sources of cash provided during the twenty-six
weeks ended July 30, 2005 was net income adjusted for depreciation and other
non-cash charges of $7.6 million, increases in accrued expenses of $1.6 million,
deposits taken on layaway transactions of approximately $745,000 and increases
in accrued compensation of approximately $482,000. Uses of cash consisted of the
net increase in net inventory of $5.8 million, a $3.7 million change in the net
income tax liability, and an approximately $723,000 increase in prepaid assets
related to receivables for tenant improvements.
Cash flows used in investing activities. Cash used in investing activities was
$16.9 million in the twenty-six weeks ended July 30,
13
2005 and $4.3 million in the twenty-six weeks ended July 30, 2004. Investment
activities in marketable securities consisted of investing $12.0 million of cash
in municipal auction rate securities. Capital expenditure activities consisted
of $5.4 million used for the purchase of property and equipment for the build
out of 21 new stores, three relocations and remodels, and other general
corporate purposes. Of the $5.4 million in capital expenditures, $4.9 million
related to equipment purchased directly by the Company while approximately
$514,000 was facilitated through capital leases. Approximately $911,000 of the
Company's capital expenditures on new stores in the twenty-six weeks ended July
30, 2005 will be reimbursed to the Company by the landlords of the leased
properties. These tenant improvement dollars will be amortized over the life of
the individual store's lease as a reduction to occupancy expense. Capital
expenditures during fiscal 2005, excluding expenditures for any new distribution
center, are projected to be approximately $10.0 million. The Company anticipates
funding its fiscal 2005 and longer term capital requirements with cash flows
from operations, and the proceeds from the IPO, if necessary.
Cash flows used in financing activities. Cash provided by (used in) financing
activities was $35.6 million in the twenty-six weeks ended July 30, 2005 and
$4.8 million in the twenty-six weeks ended July 31, 2005. Financing activities
in the twenty-six weeks ended July 30, 2005 included the receipt of $41.2
million from the initial public offering and subsequent option exercises by
employees, payment of $3.6 million redeeming the preferred shares subject to
mandatory redemption, the $1.5 million payoff of the mortgage on the Fahm street
distribution center and scheduled repayments of approximately $516,000 on
outstanding capital leases.
IPO Proceeds and Cash Requirements
On May 18, 2005, the Company completed the IPO of its common stock, as a result
of which the Company issued and sold 2,700,000 shares of common stock at $14.00
per share. In addition, the Company received notice on May 27, 2005, that the
underwriters had exercised the over-allotment option, pursuant to which the
Company issued and sold an additional 577,500 shares on June 1, 2005. Upon
completing the offering and the over-allotment option granted in connection with
the IPO, the Company received net proceeds of approximately $41.2 million and
incurred approximately $4.8 million in expenses in connection with the IPO. In
addition, 1,150,000 shares of common stock were sold in the IPO by certain
selling stockholders of the Company, for which the Company received no proceeds.
As a result, upon the closing of the offering, there were 12,602,154 shares of
common stock outstanding.
Following the closing of the IPO on May 23, 2005, each of the Company's 3,605
shares of mandatory redeemable preferred stock were redeemed and extinguished
for approximately $3.6 million, and the Company repaid in full the mortgage on
its Fahm Street Headquarters and Distribution Center in the amount of
approximately $1.5 million.
The Company currently intends to acquire, lease or design and construct a new
distribution center no later than December 31, 2006 using the proceeds from the
IPO and cash flow from operations. The Company is in the process of determining
whether to construct, acquire or lease a new distribution center.
The Company's cash requirements are primarily for working capital, construction
of new stores, remodeling of existing stores and improvements to its information
systems. Historically, the Company has met these cash requirements from cash
flow from operations, short-term trade credit and borrowings under the revolving
lines of credit, long-term debt and capital leases. Due to the IPO on May 18,
2005, the Company expects to be able to meet its cash requirements using cash
flow from operations and the cash proceeds from the IPO.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. The Company
believes the following critical accounting policies describe the more
significant judgments and estimates used in the preparation of its financial
statements:
Revenue Recognition
While the recognition of revenue is predominantly derived from routine retail
transactions and does not involve significant judgment, revenue recognition
represents an important accounting policy of the Company. The Company recognizes
retail sales at the time the customer takes possession of the merchandise and
purchases are paid for less an allowance for returns. The Company allows for
returns up to 10 days after the date of sales and the estimate for returns is
based on actual observed return activity 10 days after the period ends. Revenue
from layaway sales is recognized when the customer has paid for and received the
merchandise. However, revenue from the $2.00 service charge for participating in
the program and from the $5.00 re-stocking fee, if charged as part of the
layaway program, is recognized at the time of payment. All sales are from cash,
check or major credit card company transactions.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market
as determined by the retail inventory method less a provision for inventory
shrinkage. Under the retail inventory method, the cost value of inventory and
gross margins are determined by calculating a cost-to-retail ratio and applying
it to the retail value of inventory. Inherent in the retail inventory
calculation are certain significant management judgments and estimates
including, among others, merchandise markups, markdowns and shrinkage, which
14
impact the ending inventory valuation at cost as well as resulting gross
margins. The Company estimates a shrinkage reserve for the period between the
last physical count and the balance sheet date. The estimate for the shrinkage
reserve can be affected by changes in actual shrinkage trends. The Company
believes the first-in first-out retail inventory method results in an inventory
valuation that is fairly stated. Many retailers have arrangements with vendors
that provide for rebates and allowances under certain conditions, which
ultimately affect the value of the inventory. The Company has not entered into
any such material arrangements with its vendors.
Property and Equipment, net
The Company has a significant investment in property and equipment. Property and
equipment are stated at cost. Equipment under capital leases is stated at the
present value of minimum lease payments. Depreciation and amortization are
computed using the straight-line method over the lesser of the estimated useful
lives (primarily three to five years for computer equipment and furniture,
fixtures and equipment, five years for leasehold improvements, and 15 years for
buildings) of the related assets or the relevant lease term, whichever is
shorter. Any reduction in these estimated useful lives would result in a higher
annual depreciation expense for the related assets.
Impairment of Long-Lived Assets
The Company continually evaluates whether events and changes in circumstances
warrant revised estimates of the useful lives or recognition of an impairment
loss for intangible assets. Future adverse changes in market and legal
conditions or poor operating results of underlying assets could result in losses
or an inability to recover the carrying value of the intangible asset, thereby
possibly requiring an impairment charge in the future. If facts and
circumstances indicate that a long-lived asset, including property and
equipment, may be impaired, the carrying value is reviewed. If this review
indicates that the carrying value of the asset will not be recovered as
determined based on projected undiscounted cash flows related to the asset over
its remaining life, the carrying value of the asset is reduced to its estimated
fair value. Impairment losses in the future are dependent on a number of factors
such as site selection and general economic trends, and thus could be
significantly different from historical results. To the extent the Company's
estimates for net sales, gross profit and store expenses are not realized,
future assessments of recoverability could result in impairment charges.
Stock-Based Compensation
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees , and related interpretations including FASB interpretation (FIN) No.
44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current fair value of the underlying stock exceeds the
exercise price. The Company recognizes the fair value of stock rights granted to
non-employees in the accompanying condensed financial statements. SFAS No. 123,
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123 , establishes accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by existing accounting standards, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123, as
amended. Pro forma information regarding net income and net income per share is
required in order to disclose the Company's net income as if it had accounted
for employee stock options under the fair value method of SFAS No. 123,
Accounting for Stock-Based Compensation , as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-- Transition Disclosure . This information is
contained in Note 2 of the condensed financial statements. The fair values of
options and shares issued pursuant to the Company's option plan at each grant
date were estimated using the Black-Scholes option pricing model.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. The computation of income taxes is subject to
estimation due to the judgment required and the uncertainty related to the
recoverability of deferred tax assets or the outcome of tax audits. The Company
adjusts its income tax provision in the period it is determined that actual
results will differ from its estimates. Tax law and rate changes are reflected
in the income tax provision in which such changes are enacted.
The above listing is not intended to be a comprehensive list of all the
Company's accounting policies. In many cases the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk of the Company's financial instruments as of July 30, 2005 has
not significantly changed since January 29, 2005 with the exception of its
investments in auction rate securities. The Company's risk profile as of January
29, 2005 is disclosed in Quantitative and Qualitative Disclosures About Market
Risk in the Company's Registration Statement on Form S-1 filed May 17, 2005.
In June 2005 the Company began investing excess cash in auction rate securities.
These securities are highly liquid, variable-rate debt securities. While the
underlying security has a long-term nominal maturity, the interest rate is reset
through dutch auctions that are typically held every 35 days, creating a
short-term instrument. Due to the short-term nature of these investments, the
Company believes that it does not have material exposure to changes in the fair
value of its investments as a result of changes in interest rates. Declines in
interest rates, however, will reduce future investment income. The Company does
not enter into investments for trading or speculative purposes.
Item 4. Controls and Procedures.
The Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
July 30, 2005 pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There were no changes in internal controls over
financial reporting during the fiscal quarter ended July 30, 2005 identified in
connection with the Chief Executive Officer's and Chief Financial Officer's
evaluation that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
At the end of fiscal 2006, Section 404 of the Sarbanes-Oxley Act will require
the Company's management to provide an assessment of the effectiveness of the
Company's internal control over financial reporting, and the Company's
independent registered public accountants will be required to audit management's
assessment. The Company is in the process of performing the system and process
documentation, evaluation and testing required for management to make this
assessment and for its independent registered public accountants to provide
their attestation report. The Company has not completed this process or its
assessment, and this process will require significant amounts of management time
and resources. In the course of evaluation and testing, management may identify
deficiencies that will need to be addressed and remediated.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business, including claims by customers,
employees or former employees. The Company was recently the subject of two
putative collective action lawsuits commenced by former employees under the Fair
Labor Standards Act. The plaintiffs sought unpaid compensation and benefits,
liquidated damages, attorneys fees, costs and injunctive relief. The suits were
dismissed with prejudice pending enforcement proceedings in District Court of
the United States for the Middle District of Alabama, Northern Division of the
favorable settlement agreements that were entered into between the Company and
the plaintiffs in the twenty-six weeks ended July 30, 2005. The Company has
reviewed the allegations in both of these cases and it believes that its
business practices are, and were during the relevant periods, in compliance with
the law. The settlement costs did not and will not have a material impact on the
Company's results of operations or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Initial Public
Offering Proceeds.
(a) The Company did not sell any unregistered equity securities during
the thirteen week period ending July 30, 2005.
(b) Use of Initial Public Offering Proceeds.
On May 18, 2005, the Company completed the IPO of its common stock
as a result of which the Company issued and sold 2,700,000 shares
of common stock at $14.00 per share. In addition, the Company
received notice on May 27, 2005, that the underwriters had
exercised the over-allotment option granted in connection with the
IPO, pursuant to which the Company issued and sold an additional
577,500 shares on June 1, 2005. Upon completing the offering and
the over-allotment option, the Company received net proceeds of
approximately $41.2 million and incurred approximately $4.8
million in expenses in connection with the IPO. In addition,
1,150,000 shares of common stock were sold in the IPO by certain
selling stockholders of the Company, for which the Company
received no proceeds. As a result, upon the closing of the
offering, there were 12,602,154 shares of common stock
outstanding. The Company used the proceeds to repay outstanding
debt and intends to use the remaining proceeds, together with cash
flow from operations, to fund new store openings and for working
capital and other general corporate purposes. Following the
closing of the IPO, each of the Company's 3,605 shares of
mandatory redeemable preferred stock were redeemed and
extinguished for approximately $3.6 million, and the Company
repaid in full the mortgage on its Fahm Street Headquarters and
Distribution Center in the amount of approximately $1.5 million.
Subsequent to the IPO the Company has invested approximately $12
million of the proceeds in short term investments and has spent
approximately $2.2 million on capital expenditures for new stores
and approximately $1.5 million for general corporate purposes. The
Company intends to acquire, lease or design and construct a new
distribution center no later than December 31, 2006 using the
proceeds from the IPO and cash flow from operations. The Company
is in the process of determining whether to construct, acquire or
lease a new distribution center. The Company's common stock is
listed on NASDAQ under the symbol "CTRN". A summary of the terms
of the IPO can be found in the Company's Registration Statement on
Form S-1 (File No. 333-123028), which was declared effective by
the SEC on May 17, 2005. Copies of the prospectus relating to this
offering may be obtained from CIBC World Markets Corp., 417 Fifth
Avenue, New York, New York 10016, by fax at (212) 667-6303 or by
e-mail at useprospectus@us.cibc.com.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matter to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
17
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.*+
* Filed herewith.
+ Pursuant to Securities and Exchange Commission Release No.
33-8238, this certification will be treated as
"accompanying" this Quarterly Report on Form 10-Q and not
"filed" as part of such report for purposes of Section 18
of the Securities Exchange Act of 1934, or otherwise
subject to the liability of Section 18 of the Securities
Exchange Act of 1934 and this certification will not be
deemed to be incorporated by reference into any filing
under the Securities Act of 1933 or the Securities
Exchange Act 1934, except to the extent that the
registrant specifically incorporates it by reference.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly authorized, and the
undersigned also has signed this Quarterly Report in his capacity as the
Registrant's Secretary and Chief Financial Officer (Principal Financial
Officer).
CITI TRENDS, INC.
Date: August 30, 2005
By: /s/ Thomas W. Stoltz
--------------------
Name: Thomas W. Stoltz
Title: Secretary and Chief Financial Officer
19
EX-31.1
Exhibit 31.1
CERTIFICATION
I, R. Edward Anderson, Chief Executive Officer of Citi Trends, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citi Trends, Inc. for
the period ended July 30, 2005;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 30, 2005
/s/ R. Edward Anderson
- ---------------------------------------------
R. Edward Anderson
Chief Executive Officer
(Principal Executive Officer)
EX-31.2
Exhibit 31.2
CERTIFICATION
I, Thomas Stoltz, Chief Financial Officer of Citi Trends, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Citi Trends, Inc. for
the period ended July 30, 2005;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 30, 2005
/s/ Thomas Stoltz
- ---------------------------------------------
Thomas Stoltz
Chief Financial Officer
(Principal Financial Officer)
EX-32.1
Exhibit 32.1
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. ss. 1350, as adopted).
I, R. Edward Anderson, Chief Executive Officer of Citi Trends, Inc.,
and
I, Thomas Stoltz, Chief Financial Officer of Citi Trends, Inc., certify that:
1. We have reviewed this quarterly report on Form 10-Q of Citi Trends, Inc. for
the period ended July 30, 2005;
2. Based on our knowledge, this quarterly report fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended; and
3. Based on our knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this quarterly report.
Date: August 30, 2005
/s/ R. Edward Anderson
---------------------------------------------
R. Edward Anderson
Chief Executive Officer
(Principal Executive Officer)
Date: August 30, 2005
/s/ Thomas Stoltz
---------------------------------------------
Thomas Stoltz
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been
provided to Citi Trends, Inc. and will be retained by Citi Trends, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.