CITI TRENDS, INC. 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 endedJanuary 29, 2022 compared to the year endedJanuary 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 endedJanuary 29, 2022 , which was filed with theUnited States Securities and Exchange Commission onApril 14, 2022 .
Executive Overview
We are a leading specialty value retailer of apparel, accessories and home trends for way less spend primarily forAfrican American and multicultural families inthe 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 ofJanuary 28, 2023 , we operated 611 stores in urban, suburban and rural markets in 33 states.
Fiscal 2022 Business Highlights
? Elevated our in-store experience with the expansion of queue line and the
introduction of Missy and Tween girl lines
? Continued to expand our assortment reach with enhancements to our multicultural
merchandise offering
? Delivered
streamline the organization and align expenses with revised sales expectations
? Opened 12 new stores, remodeled 35 stores and closed 10 stores; ended the year
with 13% of the fleet upgraded to our CTx store format
? Completed sale-leaseback transactions on our two distribution centers
? Completed capacity upgrades in our distribution centers and made significant
progress on our ERP upgrade
Fiscal 2022 Financial Highlights
? Total sales of
? Operating margin of 9.5%
? Earnings of
? Cash of
? Repurchased
Our Strategy
We believe thatCiti 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 theAfrican 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
InJanuary 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.
The following table provides selected consolidated statement of operations data expressed both in dollars and as a percentage of net sales:
Fiscal Year
2022 2021 2020
(dollars in thousands)
Statement of Operations Data
Net sales $ 795,011 100.0 % $
991,595 100.0 %
Cost of sales (exclusive of depreciation) (484,022) (60.9) % (584,063) (58.9) % (471,618) (60.2) % Selling, general and administrative expenses (279,177) (35.1) % (307,622) (31.0) % (260,198) (33.2) % Depreciation (20,595) (2.6) % (20,393) (2.0) % (19,259) (2.4) % Asset impairment - 0.0 % - 0.0 % (286) (0.0) % Gain on sale-leasebacks 64,088 8.1 % - 0.0 % - 0.0 % Income from operations 75,305 9.5 % 79,517 8.0 % 31,933 4.1 % Interest income 1,034 0.1 % 31 0.0 % 238 0.0 % Interest expense (306) (0.0) % (306) (0.0) % (776) (0.1) % Income before income taxes 76,033 9.6 % 79,242 8.0 % 31,395 4.0 % Income tax expense (17,141) (2.2) % (17,002) (1.7) % (7,417) (1.0) % Net income$ 58,892 7.4 %$ 62,240 6.3 %$ 23,978 3.1 %
The following table provides information about store activity and the change in comparable store sales for each fiscal year:
Fiscal Year
2022 2021 2020
Total stores open, beginning of year 609 585 571
New stores 12 27 18
Closed stores (10) (3) (4)
Total stores open, end of year 611 609 585
Comparable store sales (decrease) increase (1) (22.1) % 25.1 % (2.1) %
Stores included in the comparable store sales calculation for any year are
those stores that were opened prior to the beginning of the preceding fiscal (1) year and were still open at the end of such year. Relocated stores and
expanded stores are included in the comparable store sales results, while
stores that are closed permanently or for an extended period are excluded
from the comparable store sales results.
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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
Gain on Sale-leasebacks. In fiscal 2022, we completed sale-leaseback
transactions for our distribution centers in
Income Tax Expense. Income tax expense increased
Net Income. Net income decreased
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. 27 Table of Contents In addition, inApril 2022 , we completed a sale-leaseback transaction of our distribution center inDarlington, South Carolina , for pretax proceeds of$45.5 million . InSeptember 2022 , we completed a sale-leaseback transaction of our distribution center inRoland, 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
Revolving Credit Facility
We have a revolving credit facility that matures in
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
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 ofJanuary 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. 28 Table of Contents Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance withU.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 ofJanuary 28, 2023 and$4.4 million as ofJanuary 29, 2022 . As a measure of sensitivity, a ten percent change in our estimated shrinkage rates as ofJanuary 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 byU.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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