Citi Trends Inc (CTRN)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussions of our results of operations for the year ended February 3, 2024 compared to the year ended January 28, 2023 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended February 3, 2024, which was filed with the United States Securities and Exchange Commission on April 18, 2024.

Executive Overview

We are a leading off-price value retailer of apparel, accessories and home trends primarily for African American families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of February 1, 2025, we operated 591 stores in urban, suburban and rural markets in 33 states.

Fiscal 2024 Business Highlights

Fiscal 2024 Financial Highlights

Our Strategy

We believe that Citi Trends is in a unique position to serve our loyal customer base, with a long runway for store growth and a motivated leadership team supported by a healthy balance sheet. As described in more detail in “Item 1 – Business,” we have identified five strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Offer Compelling Value Proposition. We believe that we can drive increases in traffic and basket by focusing on our three-tiered product strategy of opening prices, core value product and familiar brands at incredible values, all focused on the wants and needs of our African American customers. We believe that delivering newness and freshness results in high customer frequency. Our expanded offering of “treasures”, or extreme value product offerings, further strengthens this strategy and deepens our relationship with our customers.

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Focus on the African American Customer. We believe that a sharpened focus on our African American customers will drive improved sales through a more focused product assortment designed to address their fashion needs and wants, supporting their ability to express themselves through the creation of their own style. We believe that our refined understanding of our customer will drive increased traffic and conversion in our stores.

Consistent Operational Excellence. We believe that the work we are doing to develop fundamental retail practices and to ensure consistent execution will produce strong, sustainable financial results while positioning us for future, accelerated growth.

Growth. We believe that we can maximize the productivity of our existing 591 stores located in the heart of African American neighborhoods by executing on the three areas of focus stated above and by continued refinement of our store format. While we believe that maximizing the productivity of our existing fleet provides significant opportunity for sales and earnings growth, we continue to believe that Citi Trends has the potential to grow, and we expect to accelerate square footage expansion in the range of 6% to 10% annually over time.

People. We believe that our teams across the organization, led by Ken Seipel, our Chief Executive Officer, and their ability to consistently execute while staying focused on our African American customer, providing great product and a welcoming in-store environment, are a key differentiator for our business and are key to the continued transformation of our company.

We strongly believe that our business strategy centered around these five areas will accelerate our long-term sales and earnings growth.

Uncertainties and Challenges

General Economic Conditions

We expect that our operations in the short-term will continue to be influenced by general economic conditions, including on-going inflationary pressures, new tariff programs and changes in consumer sentiment. We continue to monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions.

Seasonality and Weather Conditions

The nature of our 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have expanded our product offerings to balance discretionary with non-discretionary products, traffic to our stores is still influenced by weather patterns to some extent.

Basis of Presentation

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs. The years ended February 1, 2025, February 3, 2024 and January 28, 2023 are referred to herein as fiscal 2024, fiscal 2023 and fiscal 2022, respectively. Fiscal years 2024 and 2022 are each comprised of 52 weeks, while fiscal 2023 is comprised of 53 weeks.

Results of Operations

The following discussion of our financial performance is based on the consolidated financial statements set forth in Item 8 of this Report. The nature of our business is seasonal. Results may fluctuate due to changes in our business, consumer spending patterns, and the macroeconomic environment. Furthermore, the seasonal nature of our business may affect comparisons between periods.

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Net Sales and Additional Operating Data

The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:

​

The following table provides information about store activity and the change in comparable store sales for each fiscal year:

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Key Operating Statistics

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been open for at least 14 full consecutive months without closure for more than seven days within the same fiscal month. Remodeled and relocated stores are included in the comparable store sales results if the selling square footage is not changed significantly, the store is not closed for more than five days in any fiscal month and the store remains in the same trade area. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability. In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate and distribution center expenses against budgeted amounts.

Fiscal 2024 Compared to Fiscal 2023

Net Sales. Net sales increased $5.1 million, or 0.7%, to $753.1 million in fiscal 2024 from $747.9 million in fiscal 2023. The increase in sales was due to a 3.4% increase in comparable store sales, as well as a decrease of $9.1 million from net store opening and closing activity. The increase in comparable store sales was the result of increased traffic, basket and conversion, particularly in the second half of the year with the implementation of our refined strategies.

Cost of Sales (exclusive of depreciation). Cost of sales increased $8.2 million, or 1.8%, to $471.0 million in fiscal 2024 from $462.8 million in fiscal 2023. As a percentage of net sales, cost of sales deleveraged 60 basis points to 62.5% in fiscal 2024 from 61.9% in fiscal 2023 driven by higher markdowns from our large, strategic inventory reset in the second quarter and higher shrink expense, partially offset by lower freight costs as a result of reduced rates from a new carrier relationship.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $15.7 million, or 5.5%, to $300.2 million in fiscal 2024 from $284.5 million in fiscal 2023. The increase was primarily due to (1) $4.1 million of merit increases for store, DC and corporate roles; (2) $3.9 million of expenses related to CEO transition and shareholder defense; (3) $3.1 million of one-time investments, such as consulting fees and store and DC labor to process off-price deals to fuel our strategic initiatives and (4) $1.8 million of store repair and maintenance costs. As a percentage of sales, SG&A expenses deleveraged 190 basis points to 39.9% in fiscal 2024 from 38.0% in fiscal 2023, due to the aforementioned expense increases.

Depreciation. Depreciation expense decreased $0.2 million to $18.8 million in fiscal 2024 from $19.0 million in fiscal 2023.

Asset Impairment. Impairment charges for fiscal 2024 related to underperforming stores totaled $2.5 million, comprised of $1.2 million for leasehold improvements and fixtures and equipment, and $1.3 million for an operating lease right-of-use asset. Impairment charges for fiscal 2023 related to underperforming stores totaled $1.0 million, comprised of $0.9 million for leasehold improvements and fixtures and equipment, and $0.1 million for an operating right of use asset.

​Income Tax (Expense) Benefit. Income tax expense was $5.8 million in fiscal 2024 compared to income tax benefit of $3.9 million in fiscal 2023. The difference is attributable to the $16.5 million valuation allowance related to deferred tax assets, primarily associated with net operating loss carryforward generated in fiscal years 2023 and 2024. The cumulative losses during recent years represents sufficient negative evidence to require a valuation allowance, which will be maintained until sufficient positive evidence exists to support its reversal.

Net Loss. Net loss was $43.2 million in fiscal 2024 compared to net loss of $12.0 million in fiscal 2023, due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to maintain adequate liquidity to support current operations while investing in opportunities to profitably grow our business, then to return excess cash to shareholders through our share repurchase programs. Our year-end cash and cash equivalents balance was $61.1 million compared to $79.7 million at the end of last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our principal sources of liquidity consist of (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment.

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Inventory

Our year-end inventory balance was $122.6 million, compared with $130.4 million at the end of fiscal 2023. The decrease was the result of our large, strategic inventory reset which led to the markdown of aged product in the second quarter plus the impact of a faster supply chain and a focus on improved inventory productivity.

Capital Expenditures

Capital expenditures in fiscal 2024 were $12.1 million, a decrease of $2.8 million from the prior year, primarily due to opening fewer stores in fiscal 2024. We anticipate capital expenditures in fiscal 2025 in the range of $18 million to $22 million, primarily for opening up to 5 new stores and remodeling approximately 50 stores, combined with continued investments in our systems and distribution centers.

Share Repurchases

In fiscal 2024 we returned $3.8 million to shareholders through share repurchases. See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2030 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of fiscal 2024, we had no borrowings under the credit facility and $2.2 million in letters of credit outstanding.

Cash Flows

Cash Flows From Operating Activities. Cash used in operating activities was $3.8 million in fiscal 2024 compared with cash used of $9.6 million in fiscal 2023. For fiscal 2024, significant sources of cash included $7.8 million reduction in inventory and a $0.1 million increase in accounts payable. Significant uses of cash include a $49.5 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities.

For fiscal 2023, significant sources of cash included $3.5 million from insurance proceeds related to operating activities and a $17.9 million increase in accounts payable. Significant uses of cash included (1) a $58.3 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) a $24.6 million increase in inventory due primarily to depleted inventory levels at the end of the prior year; and (3) a $3.5 million increase in income tax receivable.

Cash Flows From Investing Activities. Cash used in investing activities was $10.1 million in fiscal 2024 compared to cash used of $13.4 million in fiscal 2023. Cash used in fiscal 2024 consisted entirely of purchases of property and equipment. Cash used in fiscal 2023 consisted of $14.9 million of purchases of property and equipment, partially offset by $1.5 million from insurance proceeds related to investing activities.

Cash Flows From Financing Activities. Cash used in financing activities was $4.7 million in fiscal 2024 compared with $0.9 million in fiscal 2023. Cash used in fiscal 2024 was $3.8 million for share repurchases and $0.9 million to settle withholding taxes on the vesting of restricted stock. Cash used in fiscal 2023 was to settle withholding taxes on the vesting of restricted stock.

Cash Requirements and Commitments

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our growth initiatives; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We have also historically used cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of February 1, 2025, our contractual commitments for operating leases totaled $289.3 million (with $60.7 million due within 12 months) and our purchase obligations for open merchandise orders totaled $138.0 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. Actual results could differ from those estimates. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is 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 management judgments and estimates, including, among others, merchandise markups, markdowns and shrink, which impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores. We estimate and record an allowance for shrink for the period between the last physical count and the balance sheet date. The estimate of shrink can be affected by changes in actual shrink trends. Inventory shrink as a percentage of sales in fiscal 2024, fiscal 2023 and fiscal 2022 was 1.7%, 1.0% and 0.7%, respectively. The allowance for inventory shrink was $5.2 million as of February 1, 2025 and $3.9 million as of February 3, 2024. As a measure of sensitivity, a ten percent change in our estimated shrink as of February 1, 2025, would not have materially impacted our cost of goods sold in fiscal 2024. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2024.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, “Improvement to Income Tax Disclosures (Topic 740)”, which requires additional disclosures for income tax rate reconciliations, income taxes paid, and certain other tax disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Adoption is required for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03, “Expense Disaggregation Disclosures (Topic 220): Disaggregation of Income Statement Expenses” (“ASU 2024-03”), which requires public entities to disclose additional information that disaggregates certain expense captions into specified categories in the Notes to the consolidated financial statements. The new standard is effective for fiscal years beginning after December 15, 2026, and interim periods after December 15, 2027, with early adoption permitted. The disclosure updates are required to be applied prospectively with the option for retrospective application. The Company is currently evaluating the impact the amended guidance will have on its disclosures.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussions of our results of operations for the year ended January 28, 2023 compared to the year ended January 29, 2022 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended January 28, 2023, which was filed with the United States Securities and Exchange Commission on April 13, 2023.

Executive Overview

We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and multicultural families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of February 3, 2024, we operated 602 stores in urban, suburban and rural markets in 33 states.

Fiscal 2023 Business Highlights

Fiscal 2023 Financial Highlights

Our Strategy

We believe that Citi Trends is in a unique position to serve our loyal customer base, with a long runway for store growth and a motivated leadership team supported by a healthy balance sheet. As described in more detail in “Item 1 – Business,” we have identified four strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Driving Comparable Store Productivity. We believe that we can drive sales productivity improvements by sharpening our focus on trend development and actively refining our assortment strategies, broadening the appeal of the brand and continuing to roll out the CTx store format. We believe that we have the potential to grow our fleet to approximately 1,000 locations over time, giving us the opportunity to increase our presence in African-American and multicultural geographies through both densification and new market entries.

Managing Inventory and Maximizing Margin. We believe that our sourcing methodology further differentiates our model through a combination of products made exclusively for our core customers and highly recognized brands grounded in everyday value. We are known for delivering newness and freshness, resulting in a high-repeat shopping rate, and our ample monthly liquidity will enable us to chase trends to excite our customer base. In addition, we leverage consumer insights and analytics to add incremental assortments, and we employ pricing studies to expand margin while ensuring a balanced “good, better, best” assortment.

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Investing in Our Infrastructure. We believe that we have an opportunity to make strategic investments in our business that will improve our efficiencies and our capabilities to “buy,” “move” and “sell” our assortments to effectively engage current and new customers.

Making a Difference. Our team is dedicated to our neighborhoods and committed to positively impacting the African American and multicultural neighborhoods that we serve. We’ll leverage our “CITIcares” Council to continue making an impact.

We strongly believe that our business strategy centered around these four areas will accelerate our long-term sales and earnings growth.

Uncertainties and Challenges

General Economic Conditions

We expect that our operations in the short-term will continue to be influenced by general economic conditions, including on-going inflationary pressures, which are particularly impactful to the communities we serve. Given the macro-economic environment, we expect low-income families to remain under pressure and to tightly manage their discretionary spend through the majority of fiscal 2024. In addition, we continue to monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions.

Seasonality and Weather Conditions

The nature of our 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have expanded our product offerings to become a one-stop shop, traffic to our stores is still influenced by weather patterns to some extent.

Cyber Disruption

As previously disclosed, in January 2023, we experienced a disruption of our back office and distribution center IT systems, (the “January 2023 cyber disruption”). In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident. We do not retain sensitive customer data on our systems. The impact of the January 2023 cyber disruption was not material to our fiscal 2023 financial results.

In the third quarter of fiscal 2023, we received insurance proceeds (reflected on our Statement of Cash Flows) related to the January 2023 cyber disruption. This resulted in a gain of $1.2 million that is recorded in Selling, general and administrative expenses on our Statement of Operations. In fiscal 2023, we recognized $1.7 million of costs related to the cyber disruption in Selling, general and administrative expenses on our Statement of Operations. We expect to incur ongoing costs to enhance data security and take further steps to prevent unauthorized access to, or manipulation of, our systems and data. Several putative class action lawsuits have been filed against the Company and several inquiries have been made to the Company with respect to the January 2023 cyber disruption. At February 3, 2024, we had an accrual of $0.8 million for estimated losses in connection with these matters recorded in Accrued expenses on our Balance Sheet. See Note 7 to the Financial Statements for more information. For additional information on cybersecurity and cybersecurity threats, see Item 1C. Cybersecurity.

Basis of Presentation

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs. The years ended February 3, 2024, January 28, 2023 and January 29, 2022 are referred to herein as fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Fiscal 2023 is comprised of 53 weeks, while fiscal years 2022 and 2021 are each comprised of 52 weeks.

Results of Operations

The following discussion of our financial performance is based on the consolidated financial statements set forth in the financial pages of this Report. The nature of our business is seasonal. Results may fluctuate due to changes in our business, consumer spending patterns, and the macroeconomic environment. Furthermore, the seasonal nature of our business may affect comparisons between periods.

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Net Sales and Additional Operating Data

The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:

​

The following table provides information about store activity and the change in comparable store sales for each fiscal year:

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Key Operating Statistics

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store 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 until its 24th month at the latest. As an example, stores opened in fiscal 2022 and fiscal 2023 were not considered comparable stores in fiscal 2023. Relocated and expanded stores are included in the comparable store sales results. Stores that are closed permanently or for an extended period are excluded from the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established outdoor community shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.

Fiscal 2023 Compared to Fiscal 2022

Net Sales. Net sales decreased $47.1 million, or 5.9%, to $747.9 million in fiscal 2023 from $795.0 million in fiscal 2022. The decrease in sales was due to a 6.8% decrease in comparable store sales, as well as a decrease of $6.1 million from net store opening and closing activity. The decrease in comparable store sales was the result of continued inflationary pressures in fiscal 2023 that were particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation). Cost of sales decreased $21.2 million, or 4.4%, to $462.8 million in fiscal 2023 from $484.0 million in fiscal 2022. As a percentage of net sales, cost of sales deleveraged 100 basis points to 61.9% in fiscal 2023 from 60.9% in fiscal 2022 driven by higher freight costs due to rebuilding inventory in certain categories, as well as an increase in shrinkage costs.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $5.3 million, or 1.9%, to $284.5 million in fiscal 2023 from $279.2 million in fiscal 2022. The increase was primarily due to (1) $2.7 million of rent related to our two distribution center sale-leaseback transactions completed in fiscal 2022; (2) $1.9 million of store rent and occupancy costs; (3) $1.9 million of distribution center payroll; (4) $0.9 million for traffic driving marketing tests; and (5) $0.6 million for cloud based technology subscriptions. These increases were partially offset by $2.7 million lower insurance costs. As a percentage of sales, SG&A expenses deleveraged 290 basis points to 38.0% in fiscal 2023 from 35.1% in fiscal 2022, primarily due to the deleveraging effect of lower sales.

Depreciation. Depreciation expense decreased $1.6 million to $19.0 million in fiscal 2023 from $20.6 million in fiscal 2022.

Asset Impairment. Impairment charges for fiscal 2023 related to underperforming stores totaled $1.0 million, comprised of $0.9 million for leasehold improvements and fixtures and equipment, and $0.1 million for an operating lease right-of-use asset. There was no impairment expense in fiscal 2022.

​Gain on Sale-leasebacks. In fiscal 2022, we completed sale-leaseback transactions for our distribution centers in Darlington, South Carolina and Roland, Oklahoma that resulted in a combined gain of $64.1 million.

Income Tax Benefit (Expense). Income tax benefit was $3.9 million in fiscal 2023 compared to income tax expense of $17.0 million in fiscal 2022. The difference is attributable to a pretax loss this year compared to pretax income last year that included the gain on sale-leasebacks.

Net (Loss) Income. Net loss was $12.0 million in fiscal 2023 compared to net income of $59.0 million in fiscal 2022, due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to maintain adequate liquidity to maintain current operations while investing in opportunities to profitably grow our business, then to return excess cash to shareholders through our share repurchase programs. Our year-end cash and cash equivalents balance was $79.7 million compared to $103.5 million at the end of last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our principal sources of liquidity consist of (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment.

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In fiscal 2022, we completed sale-leaseback transactions of our distribution centers in Darlington, South Carolina and Roland, Oklahoma that resulted in combined pretax proceeds of $81.1 million.

Inventory

Our year-end inventory balance was $130.4 million, compared with $105.8 million at the end of fiscal 2022. The increase was the result of targeted inventory rebuilds versus 2022 inventory levels that were too light and an earlier set of the fresh spring assortment in advance of two important selling moments – tax refund season and the earlier 2024 Easter holiday.

Capital Expenditures

Capital expenditures in fiscal 2023 were $14.9 million, a decrease of $7.4 million from the prior year, primarily due to opening fewer stores in fiscal 2023. We anticipate capital expenditures in fiscal 2024 of approximately $20 million, primarily for opening up to 5 new stores and remodeling approximately 40 stores, combined with continued investments in our systems and distribution centers.

Share Repurchases

We did not repurchase any shares of our common stock during fiscal 2023. In fiscal 2022, we returned $10.0 million to shareholders through share repurchases. See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2026 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of fiscal 2023, we had no borrowings under the credit facility and $1.4 million in letters of credit outstanding.

Cash Flows

Cash Flows From Operating Activities. Cash used in operating activities was $9.6 million in fiscal 2023 compared with cash provided of $5.8 million in fiscal 2022. For fiscal 2023, significant sources of cash included $3.5 million from insurance proceeds related to operating activities and a $17.9 million increase in accounts payable. Significant uses of cash included (1) a $58.3 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) a $24.6 million increase in inventory due primarily to depleted inventory levels at the end of the prior year; and (3) a $3.5 million increase in income tax receivable.

For fiscal 2022, significant sources of cash included (1) $72.0 million from net income adjusted for non-cash expenses, insurance proceeds and gain on sale-leasebacks;(2) a $16.8 million decrease in inventory; and (3) a $3.4 million decrease in income tax receivable. Significant uses of cash included (1) a $54.8 million decrease in accrued expenses and other long-term liabilities due primarily to payments of operating lease liabilities; (2) an $18.3 million decrease in accounts payable due primarily to the decrease in inventory; and (3) an $15.1 million decrease in accrued compensation due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.

Cash Flows From Investing Activities. Cash used in investing activities was $13.4 million in fiscal 2023 compared to cash provided of $60.2 million in fiscal 2022. Cash used in fiscal 2023 consisted of $14.9 million for purchases of property and equipment, partially offset by $1.5 million from insurance proceeds related to investing activities. Cash provided in fiscal 2022 consisted of $81.1 million net proceeds from the sale of the buildings in the sale-leaseback transactions, partially offset by $22.3 million for purchases of property and equipment.

Cash Flows From Financing Activities. Cash used in financing activities was $0.9 million in fiscal 2023 compared with $12.2 million in fiscal 2022. Cash used in fiscal 2023 was to settle withholding taxes on the vesting of restricted stock. Cash used in fiscal 2022 was primarily for repurchases of our common stock.

Cash Requirements and Commitments

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We have also historically used cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of February 3, 2024, our contractual commitments for operating leases totaled $307.3 million (with $57.0 million due within 12 months) and our purchase obligations for open merchandise orders totaled $132.8 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. Actual results could differ from those estimates. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is 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 management judgments and estimates, including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores. As a result, we believe the retail inventory method results in a more conservative inventory valuation than other accounting methods. We estimate and record an allowance for shrinkage for the period between the last physical count and the balance sheet date. The estimate of shrinkage can be affected by changes in actual shrinkage trends. Inventory shrinkage as a percentage of sales in fiscal 2023, fiscal 2022 and fiscal 2021 was 1.0%, 0.7% and 0.4%, respectively. The allowance for inventory shrinkage was $3.9 million as of February 3, 2024 and $5.8 million as of January 28, 2023. As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as of February 3, 2024, would not have materially impacted our cost of goods sold in fiscal 2023. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2023.

Operating Leases

We lease all of our retail store locations, our distribution centers and certain office space and equipment. All leases are classified as operating leases. We record right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term. In determining the present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. Our lessors do not provide an implicit rate, nor is one readily available, therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. We record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. In addition, certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, 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.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, “Improvement to Income Tax Disclosures (Topic 740)”, which requires additional disclosures for income tax rate reconciliations, income taxes paid, and certain other tax disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Adoption is required for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

​

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussions of our results of operations for the year ended January 29, 2022 compared to the year ended January 30, 2021 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended January 29, 2022, which was filed with the United States Securities and Exchange Commission on April 14, 2022.

Executive Overview

We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and multicultural families in the United States. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of January 28, 2023, we operated 611 stores in urban, suburban and rural markets in 33 states.

Fiscal 2022 Business Highlights

Fiscal 2022 Financial Highlights

Our Strategy

We believe that Citi Trends is in a unique position to serve our loyal customer base, with a long runway for store growth and a motivated leadership team supported by a healthy balance sheet. As described in more detail in “Item 1 – Business,” we have identified four strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Driving Comparable Store Productivity. We believe that we can drive sales productivity improvements by sharpening our focus on trend development and actively refining our assortment strategies, broadening the appeal of the brand and continuing to roll out the CTx store format. We continue to believe that we have the potential to grow to approximately 1,000 stores over time through both densification and new market entries.

Managing Inventory and Maximizing Margin. We believe that our sourcing methodology further differentiates our model through a combination of products made exclusively for our core customers and highly recognized brands grounded in everyday value. We are known for delivering newness and freshness, resulting in a high-repeat shopping rate, and our ample monthly liquidity will enable us to chase trends to excite our customer base. In addition, we leverage consumer insights and analytics to

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add incremental assortments, and we employ pricing studies to expand margin while ensuring a balanced “good, better, best” assortment.

Investing in Our Infrastructure. We believe that we have an opportunity to make strategic investments in our business that will improve our efficiencies and our capabilities to “buy,” “move” and “sell” our assortments to effectively engage current and new customers.

Making a Difference. Our team is dedicated to our neighborhoods and committed to positively impacting the African American and multicultural communities that we serve.

We strongly believe that our business strategy centered around these four areas will accelerate our long-term sales and earnings growth.

Uncertainties and Challenges

COVID-19

The COVID-19 pandemic caused significant volatility and disruptions in our business during fiscal 2020 and 2021. We remain focused on providing a safe store environment for our customers and associates while delivering an engaging shopping experience. Despite the recent improvement in trends, we cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

General Economic Conditions

We expect that our operations in the short-term will continue to be influenced by general economic conditions, including the recent inflationary pressures, which are particularly impactful to the communities we serve. Given the macro-economic environment, we expect low-income families to remain under pressure through the majority of fiscal 2023. In addition, we monitor the impacts of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions and costs to source our merchandise.

Supply Chain Disruptions

While the supply chain disruptions that began in the second half of fiscal 2021 have largely mitigated as of the date of this report, these disruptions resulted in decreased capacity and increased costs. These pressures persisted through the majority of fiscal 2022. In response, we took various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the vendor direct-to-store shipping program that we initiated in fiscal 2020.

Seasonality and Weather Conditions

The nature of our 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have greatly expanded our product offerings to become a one-stop shop, traffic to our stores is still influenced by weather conditions to some extent.

Cyber Disruption

In January 2023, we experienced a disruption of our back office and distribution center IT systems, which was due to what is known as Hive ransomware. In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident. The Company can confirm that sensitive customer data is not retained on its systems. The impact of this disruption was not material to our fourth quarter fiscal 2022 financial results and, while our investigation and remediation efforts remain ongoing, it is not expected to be material to the Company’s full year fiscal 2023 financial results.

In fiscal 2022, cyber disruption related costs incurred totaled $0.1 million, primarily comprised of third-party consulting services and legal counsel. We do have cyber insurance, and we are working diligently with our insurance carriers on claims to recover costs incurred. We anticipate that our financial costs related to the cyber disruption will ultimately be covered by insurance, subject to a retention. We expect to incur ongoing costs related to the cyber disruption, including costs to enhance data security, and plan to take further steps to prevent unauthorized access to, or manipulation of, our systems and data. We are unable to estimate the ultimate direct and indirect financial impacts of this cyber disruption.

Basis of Presentation

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line

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item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs. We operate on a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. Each of our fiscal quarters consists of four 13-week periods, with an extra week added to the fourth quarter every five to six years. The years ended January 28, 2023, January 29, 2022 and January 30, 2021 are referred to herein as fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

Results of Operations

The following discussion of our financial performance is based on the consolidated financial statements set forth in the financial pages of this Report. The nature of our business is seasonal. Results may fluctuate due to changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the COVID-19 pandemic. Furthermore, the seasonal nature of our business may affect comparisons between periods.

Net Sales and Additional Operating Data

The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:

​

The following table provides information about store activity and the change in comparable store sales for each fiscal year:

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Key Operating Statistics

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store 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 until its 24th month at the latest. As an example, stores opened in fiscal 2021 and fiscal 2022 were not considered comparable stores in fiscal 2022. Relocated and expanded stores are included in the comparable store sales results. Stores that are closed permanently or for an extended period are excluded from the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established outdoor community shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.

Fiscal 2022 Compared to Fiscal 2021

Net Sales. Net sales decreased $196.6 million, or 19.8%, to $795.0 million in fiscal 2022 from $991.6 million in fiscal 2021. The decrease in sales was due to a 22.1% decrease in comparable store sales, partially offset by a $16.9 million increase from net store opening and closing activity. The decrease in comparable store sales was due to unprecedented demand last year driven by government stimulus payments, combined with inflationary pressures in fiscal 2022 that were particularly impactful to our core customers.

Cost of Sales (exclusive of depreciation). Cost of sales decreased $100.1 million, or 17.1%, to $484.0 million in fiscal 2022 from $584.1 million in fiscal 2021. As a percentage of net sales, cost of sales deleveraged 200 basis points to 60.9% in fiscal 2022 from 58.9% in fiscal 2021 due to a decrease of 145 basis points in the core merchandise margin (initial mark-up, net of markdowns) primarily driven by unusually low markdowns last year during outsized stimulus-driven demand, along with an increase of 35 basis points in shrinkage and an increase of 20 basis points in freight costs in the current year.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses decreased $28.4 million, or 9.2%, to $279.2 million in fiscal 2022 from $307.6 million in fiscal 2021. The decrease was due to (1) a $21.4 million decrease in incentive-based compensation as a result of unfavorable operating results in relation to budget in fiscal 2022 (compared to overperformance last year) and an adjustment to compensation costs for certain performance-based awards that are no longer probable to vest, as well as higher costs last year related to the recognition of incremental compensation costs for the conversion of nonvested cash-settled units to nonvested shares; (2) a decrease of $6.3 million in payroll expenses related to reduced headcount (3) $2.9 million of one-time items consisting of an insurance gain, adjustments to accrued vacation expense and the capitalization of payroll related to a technology upgrade; and (4) decreases in fees for credit card processing, professional services and insurance. These decreases were partially offset by a $4.8 million increase in rent related to the sale-leasebacks of our distribution centers, higher utility costs and the general impact to expenses from higher inflation. As a percentage of sales, SG&A expenses deleveraged 410 basis points to 35.1% in fiscal 2022 from 31.0% in fiscal 2021, primarily due to the deleveraging effect of lower sales.

Depreciation. Depreciation expense increased $0.2 million to $20.6 million in fiscal 2022 from $20.4 million in fiscal 2021.

​Gain on Sale-leasebacks. In fiscal 2022, we completed sale-leaseback transactions for our distribution centers in Darlington, South Carolina and Roland, Oklahoma that resulted in a combined gain of $64.1 million.

Income Tax Expense. Income tax expense increased $0.1 million to $17.1 million in fiscal 2022 from $17.0 million in fiscal 2021, due to a slightly higher effective tax rate after the prior year had a favorable tax impact from restricted stock vestings.

Net Income. Net income decreased $3.3 million to $58.9 million in fiscal 2022 compared to $62.2 million in fiscal 2021, due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to maintain adequate liquidity to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs. Our year-end cash and cash equivalents balance was $103.5 million compared to $49.8 million at the end of last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our principal sources of liquidity consist of (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment.

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In addition, in April 2022, we completed a sale-leaseback transaction of our distribution center in Darlington, South Carolina, for pretax proceeds of $45.5 million. In September 2022, we completed a sale-leaseback transaction of our distribution center in Roland, Oklahoma, for pretax proceeds of $35.6 million.

Inventory

Our year-end inventory balance was $105.8 million, compared with $123.8 million at the end of fiscal 2021. The decrease was the result of disciplined inventory management and the deployment of packaway inventory that was opportunistically acquired at the end of fiscal 2021.

Capital Expenditures

Capital expenditures in fiscal 2022 were $22.3 million, a decrease of $7.4 million over the prior year, primarily due to opening fewer stores in fiscal 2022. We anticipate capital expenditures in fiscal 2023 of $20 million to $25 million, primarily for opening approximately 8 new stores and remodeling approximately 28 stores, combined with continued investments in our systems and distribution centers.

Share Repurchases

During fiscal 2022 and 2021, we returned $10.0 million and $115.3 million, respectively, to shareholders through share repurchases. See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2026 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of fiscal 2022, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

Cash Flows

Cash Flows From Operating Activities. Cash provided by operating activities was $5.8 million in fiscal 2022 compared with $74.3 million in fiscal 2021. For fiscal 2022, significant sources of cash included (1) $72.0 million from net income adjusted for non-cash expenses, insurance proceeds and gain on sale-leasebacks; (2) a $16.8 million decrease in inventory; and (3) a $3.4 million decrease in income tax receivable. Significant uses of cash included (1) a $54.8 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) an $18.3 million decrease in accounts payable due primarily to the decrease in inventory; and (3) a $15.1 million decrease in accrued compensation due to payment in the first quarter of incentive compensation accrued in the preceding fiscal year.

For fiscal 2021, significant sources of cash included (1) $142.1 million from net income adjusted for non-cash expenses and insurance proceeds; and (2) a $12.8 million increase in accounts payable. Significant uses of cash included (1) a $53.2 million decrease in accrued expenses and other long-term liabilities due primarily to payments of operating lease liabilities; (2) a $20.4 million increase in inventory due primarily to depleted inventory levels at the end of the prior year; and (3) an $8.6 million change in income tax receivable/payable.

Cash Flows From Investing Activities. Cash provided by investing activities was $60.2 million in fiscal 2022 compared to cash used of $29.5 million in fiscal 2021. Cash provided in fiscal 2022 consisted of $81.1 million net proceeds from the sale of buildings in the sale-leaseback transactions, partially offset by $22.3 million for purchases of property and equipment. Cash used in fiscal 2021 was primarily for capital expenditures in new and remodeled stores, along with investments in system upgrades and distribution center enhancements.

Cash Flows From Financing Activities. Cash used in financing activities was $12.2 million in fiscal 2022 compared with $118.2 million in fiscal 2021. Cash used in each year was primarily for repurchases of our common stock.

Cash Requirements and Commitments

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We also use cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of January 28, 2023, our contractual commitments for operating leases totaled $347.1 million (with $63.9 million due within 12 months) and our purchase obligations for open merchandise orders totaled $123.1 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. Actual results could differ from those estimates. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is 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 management judgments and estimates, including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores. As a result, we believe the retail inventory method results in a more conservative inventory valuation than other accounting methods. We estimate and record an allowance for shrinkage for the period between the last physical count and the balance sheet date. The estimate of shrinkage can be affected by changes in actual shrinkage trends. Inventory shrinkage as a percentage of sales in fiscal 2022, fiscal 2021 and fiscal 2020 was 0.7%, 0.4% and 0.8%, respectively. The allowance for inventory shrinkage was $5.8 million as of January 28, 2023 and $4.4 million as of January 29, 2022. As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as of January 28, 2023, would not have materially impacted our cost of goods sold in fiscal 2022. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2022.

Operating Leases

We lease all of our retail store locations and certain office space and equipment. All leases are classified as operating leases. We record right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term. In determining the present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. Our lessors do not provide an implicit rate, nor is one readily available, therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. We record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. In addition, certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, 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.

Recent Accounting Pronouncements

We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.

​

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Discussions of our results of operations for the year ended January 30, 2021 compared to the year ended February 1, 2020 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year ended January 30, 2021, which was filed with the United States Securities and Exchange Commission on April 14, 2021.

Executive Overview

We are a growing specialty value retailer of apparel, accessories and home trends for way less spend primarily for African American and Latinx families in the United States. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of January 29, 2022, we operated 609 stores in urban, suburban and rural markets in 33 states.

Fiscal 2021 Business Highlights

Fiscal 2021 Financial Highlights

For a further discussion of trends, uncertainties and other factors that could affect our future operating results related to the effects of the COVID-19 pandemic, see Item 1A. Risk Factors in this Report.

Our Strategy

We believe that Citi Trends is in a unique position for growth. We have a loyal customer base, a long runway for store growth and a motivated leadership team, supported by a healthy balance sheet. As described in more detail in “Item 1 – Business,” we have identified four strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Growing Our Fleet. We believe that we have the potential to grow to more than 1,000 stores over time through both densification and new market entries. By the end of fiscal 2024, we expect about 50% of our stores will be in our compelling new CTx format.

Optimizing the Assortment. We believe that our unique ability to curate assortments for our customers further differentiates our model. In addition, we leverage consumer insights and analytics to add incremental assortments, and we employ pricing studies to expand margin.

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Investing in Our Infrastructure. We believe that we have an opportunity to make strategic investments in our business that will improve our efficiencies and our capabilities to “buy,” “move” and “sell” our assortments to effectively engage current and new customers.

Making a Difference. Our team is dedicated to our neighborhoods and committed to positively impacting the African American and Latinx communities that we serve.

We strongly believe that our growth strategy centered around these four areas will accelerate our sales and earnings growth.

Uncertainties and Challenges

COVID-19

The COVID-19 pandemic continues to evolve and has caused significant volatility and disruptions in our business during fiscal 2021 and 2020. We remain focused on providing a safe store environment for our customers and associates while delivering an engaging shopping experience. We also prioritize the wellness and safety of our associates in our corporate offices and distribution centers. The communities we serve were severely impacted by the omicron variant at the end of fiscal 2021. Despite the recent improvement in trends, we cannot reasonably predict the extent to which our future business will be impacted by the pandemic.

Inflation

In addition to COVID-19, we expect that our operations will continue to be influenced by general economic conditions, including the recent surge in prices for food, fuel and energy due to inflationary pressures, which are particularly impactful to the communities we serve. In addition, we are closely monitoring the impacts of higher unemployment, wage inflation and costs to source our merchandise.

Supply Chain Disruptions

We have encountered increasing supply chain disruptions that began in the second half of fiscal 2021 and have continued through the date of this Report. In particular, our vendors have faced production delays and we have been impacted by industry-wide U.S. port and ground transportation delays. In response, we have taken various actions, including ordering merchandise earlier, leveraging our packaway merchandise stock and expanding the drop shipping program that we initiated in fiscal 2020. These supply chain disruptions have resulted in increased costs, and we expect supply chain pressures will persist through at least the first half of fiscal 2022.

Seasonality and Weather Patterns

The nature of our 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. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have greatly expanded our product offerings to become a one-stop-shop, traffic to our stores is still influenced by weather patterns to some extent.

Basis of Presentation

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertising costs. We operate on a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. Each of our fiscal quarters consists of four 13-week periods, with an extra week added to the fourth quarter every five to six years. The years ended January 29, 2022, January 30, 2021 and February 1, 2020 are referred to herein as fiscal 2021, 2020 and 2019, respectively.

Results of Operations

The following discussion of our financial performance is based on the consolidated financial statements set forth in the financial pages of this Report. The nature of our business is seasonal. Results of a period shorter than a full year may not be indicative of results expected for the entire year due to changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from the COVID-19 pandemic. Furthermore, the seasonal nature of our business may affect comparisons between periods.

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Net Sales and Additional Operating Data

The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:

​

The following table provides information about store activity and the change in comparable store sales for each fiscal year:

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Key Operating Statistics

We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store 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 until its 24th month at the latest. As an example, stores opened in fiscal 2020 and fiscal 2021 were not considered comparable stores in fiscal 2021. Relocated and expanded stores are included in the comparable store sales results. Stores that are closed permanently or for an extended period are excluded from the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established outdoor community shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.

Fiscal 2021 Compared to Fiscal 2020

Net Sales. Net sales increased $208.3 million, or 26.6%, to $991.6 million in fiscal 2021 from $783.3 million in fiscal 2020, primarily due to temporary store closures in fiscal 2020 related to the COVID-19 pandemic. The increase in net sales was also driven by government stimulus payments and the lifting of COVID-19 restrictions that created a surge in demand, particularly in the first quarter of 2021.

Cost of Sales (exclusive of depreciation). Cost of sales increased $112.5 million, or 23.8%, to $584.1 million in fiscal 2021 from $471.6 million in fiscal 2020. As a percentage of net sales, cost of sales leveraged 130 basis points to 58.9% in fiscal 2021 from 60.2% in fiscal 2020 due to an increase of 195 basis points in the core merchandise margin (initial mark-up, net of markdowns) primarily driven by fewer markdowns, along with an improvement of 40 basis points in shrinkage, partially offset by 105 basis points deleverage in freight costs.

Selling, General and Administrative Expenses (“SG&A”). SG&A expenses increased $47.4 million, or 18.2% to $307.6 million in fiscal 2021 from $260.2 million in fiscal 2020 driven primarily by reduced payroll and occupancy expenses in 2020 related to COVID-19 temporary store closures. Also contributing to the increase in SG&A expenses was $8.0 million higher incentive-based compensation expense resulting from improved operating results in relation to budget, as well as the impact on expenses of opening 27 new stores in fiscal 2021 and 18 new stores in fiscal 2020. As a percentage of net sales, SG&A expenses leveraged 220 basis points to 31.0% from 33.2%.

Depreciation. Depreciation expense increased $1.1 million to $20.4 million in fiscal 2021 from $19.3 million in fiscal 2020.

Asset Impairment. There were no impairment charges related to underperforming stores in fiscal 2021. In fiscal 2020, impairment charges related to an underperforming store totaled $0.3 million, comprised of $0.1 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset.

Income Tax Expense. Income tax expense increased $9.6 million to $17.0 million in fiscal 2021 from $7.4 million in fiscal 2020 due primarily to an increase of $47.8 million in pretax income. Our effective tax rate for fiscal 2021 was 21.5% compared to 23.6% in fiscal 2020. The decrease in the effective tax rate was primarily due to excess tax benefits from stock-based payment arrangements.

Net Income. Net income increased $38.2 million to $62.2 million in fiscal 2021 compared to $24.0 million in fiscal 2020, due to the factors discussed above.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to prioritize investments in opportunities to profitably grow our business and maintain current operations, then to return excess cash to shareholders through our repurchase programs. Our year-end cash and cash equivalents balance was $49.8 million compared to $123.2 million at the end of last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our principal sources of liquidity consist of: (i) cash and cash equivalents on hand; (ii) short-term trade credit arising from customary payment terms and trade practices with our vendors; (iii) cash generated from operations on an ongoing basis; and (iv) a revolving credit facility with a $75 million credit commitment.

In addition, on March 14, 2022, we entered into an agreement to consummate a sale and leaseback transaction of our distribution center in Darlington, South Carolina, and at our discretion, our distribution center in Roland, Oklahoma. The sale of the Darlington property is expected to provide net proceeds (after tax and transaction-related costs) of approximately $37 million. The sale of the Roland property, if elected by the Company, is expected to provide net proceeds of approximately $32 million. The sale of the Roland property is subject to due diligence and other customary closing conditions.

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Inventory

Our year-end inventory balance was $123.8 million, compared with $103.8 million at the end of last year. The increase was primarily due to depleted inventory levels at the end of last year driven by outsized sales, combined with opportunistic purchases of packaway inventory at the end of fiscal 2021.

Capital Expenditures

Capital expenditures in fiscal 2021 were $29.7 million, an increase of $12.7 million over the prior year as we invested in our strategic initiatives, including opening 27 new stores, remodeling 25 stores and investing in system upgrades and distribution center enhancements. We anticipate capital expenditures in fiscal 2022 of $40 million to $45 million, primarily for opening approximately 35 new stores and remodeling approximately 50 stores, combined with continued investments in our systems and distribution centers.

Share Repurchases

During fiscal 2021 and 2020, we returned $115.3 million and $32.9 million, respectively, to shareholders through share repurchases. See Part II, Item 5 of this Report and Note 6 to the Financial Statements for more information.

Revolving Credit Facility

We have a revolving credit facility that matures in April 2026 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of fiscal 2021, we had no borrowings under the credit facility and $0.6 million in letters of credit outstanding.

Cash Flows

Cash Flows From Operating Activities. Cash provided by operating activities was $74.3 million in fiscal 2021 compared with $110.9 million in fiscal 2020. For fiscal 2021, significant sources of cash included: (1) $142.1 million from net income adjusted for non-cash expenses and insurance proceeds; and (2) a $12.8 million increase in accounts payable. Significant uses of cash included: (1) a $53.2 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) a $20.4 million increase in inventory due primarily to depleted inventory levels at the end of last year driven by outsized sales; and (3) an $8.6 million change in income tax receivable/payable.

For fiscal 2020, significant sources of cash included: (1) $96.2 million from net income adjusted for non-cash expenses and insurance proceeds; (2) a $33.6 million decrease in inventory due to efforts to reduce inventory levels combined with outsized sales in the fourth quarter; (3) a $16.3 million increase in accrued compensation due primarily to higher incentive compensation earned relative to 2019; (4) a $5.8 million change in income tax payable; and (5) a $5.1 million increase in accounts payable. Significant uses of cash included: (1) a $38.4 million decrease in accrued expenses and other long-term liabilities due primarily to payments of operating lease liabilities; and (2) a $7.7 million increase in prepaid and other current assets due to a credit under the CARES Act and increases in tenant improvement allowances and charge card receivables.

Cash Flows From Investing Activities. Cash used in investing activities was $29.5 million in fiscal 2021 compared to cash provided of $26.7 million in fiscal 2020. Cash used in fiscal 2021 was primarily for capital expenditures in new and remodeled stores, along with investments in system upgrades and distribution center enhancements. Cash provided in fiscal 2020 was the result of $43.3 million of net proceeds from the sale of investment securities, partially offset by $17.0 million of capital expenditures.

Cash Flows From Financing Activities. Cash used in financing activities was $118.2 million in fiscal 2021 compared with $34.3 million in fiscal 2020. Repurchases of common stock totaled $115.3 million in fiscal 2021, while repurchases of common stock and dividend payments totaled $33.7 million in fiscal 2020.

Cash Requirements and Commitments

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We also use cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of January 29, 2022, our contractual commitments for operating leases totaled $234.0 million (with $53.3 million due within 12 months) and our purchase obligations for open merchandise orders totaled $249.8 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. Actual results could differ from those estimates. We believe the following critical

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accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is 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 management judgments and estimates, including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores. As a result, we believe the retail inventory method results in a more conservative inventory valuation than other accounting methods. We estimate and record an allowance for shrinkage for the period between the last physical count and the balance sheet date. The estimate of shrinkage can be affected by changes in actual shrinkage trends. Inventory shrinkage as a percentage of sales in fiscal 2021, 2020 and 2019 was 0.4%, 0.8% and 1.2%, respectively. The allowance for inventory shrinkage was $4.4 million as of January 29, 2022 and $5.2 million as of January 30, 2021. As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as of January 29, 2022, would not have materially impacted our cost of goods sold in fiscal 2021. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2021.

Operating Leases

We lease all of our retail store locations and certain office space and equipment. All leases are classified as operating leases. We record right-of-use assets and lease liabilities based on the present value of future minimum lease payments over the lease term. In determining the present value of lease payments, we use an incremental borrowing rate that approximates the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term. Our lessors do not provide an implicit rate, nor is one readily available, therefore we determine an incremental borrowing rate based on a buildup approach which utilizes rates and terms from the Company’s existing borrowing facility with adjustments to bridge for impacts to the rate due to differences in collateral, terms and payments. We record operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. In addition, certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, 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.

Recent Accounting Pronouncements

We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.

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