Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 
| **(Mark  One)**                                      |
|------------------------------------------------------|
| ** **                                           |
| **x**                                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934** |
|                                                 |   |   |
| **For  the quarterly period ended May 2, 2009** |
|                                                 |   |   |
| **OR**                                               |
|                                                 |   |   |
| **o**                                                | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934** |

 

**CommissionFile Number  000-51315**

 

**CITITRENDS, INC.**

(Exact name of registrantas specified in its charter)

 

| **DELAWARE**                              | ** ** | **52-2150697**      |
|-------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or  organization)           |       | Identification No.) |
|                                      |       |                |
| **104  Coleman Boulevard**                |       |                |
| **Savannah,  Georgia**                    | ** ** | **31408**           |
| (Address of principal  executive offices) |       | (Zip Code)          |

 

Registrant’stelephone number, including area code (**912)236-1561**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes   x No   o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  o Yes o No

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large Accelerated Filer  o                                             |   | Accelerated Filer x          |
|------------------------------------------------------------------------|--------|------------------------------|
|                                                                   |   |                         |
| Non-Accelerated Filer o  (Do not check if a smaller reporting company) |   | Smaller Reporting  Company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes   o  No  x

 

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date.

 
| **Class**                     | ** ** | **Outstanding at May 15, 2009** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| Common Stock, $.01 par  value |       | 14,679,929  shares                   |       |

 

 

 

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**CITITRENDS, INC.**

**FORM 10-Q**

**TABLEOF CONTENTS**

 
| ** **   | ** **                                                                                                  | **PAGE  NUMBER** |
|--------------|-------------------------------------------------------------------------------------------------------------|------------------|
| PART I  | FINANCIAL INFORMATION                                                                                       |             |
|         |                                                                                                        |             |
| Item 1       | Financial  Statements                                                                                       |             |
|         |                                                                                                        |             |
|         | Condensed  Balance Sheets (unaudited) May 2, 2009 and January 31, 2009                            | 3                |
|         |                                                                                                        |             |
|         | Condensed  Statements of Income (unaudited) Thirteen weeks ended May 2, 2009 and  May 3, 2008     | 4                |
|         |                                                                                                        |             |
|         | Condensed  Statements of Cash Flows (unaudited) Thirteen weeks ended May 2, 2009  and May 3, 2008 | 5                |
|         |                                                                                                        |             |
|         | Notes to  the Condensed Financial Statements (unaudited)                                                    | 6                |
|         |                                                                                                        |             |
| Item 2       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 | 10               |
|         |                                                                                                        |             |
| Item 3       | Quantitative  and Qualitative Disclosures About Market Risk                                                 | 13               |
|         |                                                                                                        |             |
| Item 4       | Controls and  Procedures                                                                                    | 13               |
|         |                                                                                                        |             |
| PART II | OTHER INFORMATION                                                                                           |             |
|         |                                                                                                        |             |
| Item 1       | Legal Proceedings                                                                                           | 14               |
|         |                                                                                                        |             |
| Item 1A      | Risk Factors                                                                                                | 14               |
|         |                                                                                                        |             |
| Item 2       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                | 14               |
|         |                                                                                                        |             |
| Item 3       | Defaults  Upon Senior Securities                                                                            | 14               |
|         |                                                                                                        |             |
| Item 4       | Submission  of Matters to a Vote of Security Holders                                                        | 14               |
|         |                                                                                                        |             |
| Item 5       | Other Information                                                                                           | 14               |
|         |                                                                                                        |             |
| Item  6      | Exhibits                                                                                                    | 15               |
|         |                                                                                                        |             |
|         | SIGNATURES                                                                                                  | 16               |

 

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**Item 1. Financial Statements.**

 

**CitiTrends, Inc.**

 

**CondensedBalance Sheets**

**May 2,2009 and January 31, 2009**

**(Unaudited)**

 

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                            | ** ** | **May 2,  2009** | ** ** | **January 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                            |       |                  |       |                       |       |
| Current assets:                                                                                                                                                                                                                                                                       |       |                  |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                             |       | $                     | 44,672     |                       | $          | 33,516 |   |
| Inventory                                                                                                                                                                                                                                                                             |       | 84,613                |       | 86,259                     |       |
| Prepaid and other current assets                                                                                                                                                                                                                                                      |       | 8,598                 |       | 10,625                     |       |
| Deferred tax asset                                                                                                                                                                                                                                                                    |       | 3,629                 |       | 3,447                      |       |
| Total current assets                                                                                                                                                                                                                                                                  |       | 141,512               |       | 133,847                    |       |
| Property and equipment, net                                                                                                                                                                                                                                                           |       | 58,413                |       | 58,861                     |       |
| Investment securities                                                                                                                                                                                                                                                                 |       | 43,097                |       | 43,825                     |       |
| Goodwill                                                                                                                                                                                                                                                                              |       | 1,371                 |       | 1,371                      |       |
| Deferred tax asset                                                                                                                                                                                                                                                                    |       | 2,947                 |       | 2,480                      |       |
| Other assets                                                                                                                                                                                                                                                                          |       | 450                   |       | 405                        |       |
| Total assets                                                                                                                                                                                                                                                                          |       | $                     | 247,790    |                       | $          | 240,789 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                                        |       |                  |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                                                                  |       |                  |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                                                      |       | $                     | 47,899     |                       | $          | 52,295 |   |
| Accrued expenses                                                                                                                                                                                                                                                                      |       | 12,012                |       | 11,478                     |       |
| Accrued compensation                                                                                                                                                                                                                                                                  |       | 5,327                 |       | 7,514                      |       |
| Current portion of capital lease obligations                                                                                                                                                                                                                                          |       | 988                   |       | 1,403                      |       |
| Income tax payable                                                                                                                                                                                                                                                                    |       | 3,977                 |       | 682                        |       |
| Layaway deposits                                                                                                                                                                                                                                                                      |       | 1,603                 |       | 564                        |       |
| Total current liabilities                                                                                                                                                                                                                                                             |       | 71,806                |       | 73,936                     |       |
| Other long-term liabilities                                                                                                                                                                                                                                                           |       | 9,049                 |       | 8,646                      |       |
| Total liabilities                                                                                                                                                                                                                                                                     |       | 80,855                |       | 82,582                     |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                            |       |                  |       |                       |       |
| Common stock, $0.01 par value. Authorized 32,000,000 shares;  14,845,679 shares issued as of May 2, 2009 and 14,698,852 shares issued  as of January 31, 2009; 14,679,929 shares outstanding as of May 2,  2009 and 14,533,102 outstanding as of January 31, 2009 |       | 145                   |       | 145                        |       |
| Paid-in-capital                                                                                                                                                                                                                                                                       |       | 71,749                |       | 70,950                     |       |
| Retained earnings                                                                                                                                                                                                                                                                     |       | 95,206                |       | 87,277                     |       |
| Treasury stock, at cost; 165,750 shares as of May 2, 2009 and  January 31, 2009                                                                                                                                                                                             |       | (165                  | )          | (165                       | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                       |       | 166,935               |       | 158,207                    |       |
| Commitments and contingencies (note 8)                                                                                                                                                                                                                                                |       |                  |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                       |       | $                     | 247,790    |                       | $          | 240,789 |   |

 

See accompanying notes to the condensed financialstatements (unaudited).

 

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**CitiTrends, Inc.**

 

**CondensedStatements of Income**

**ThirteenWeeks Ended May 2, 2009 and May 3, 2008**

**(Unaudited)**

 

**(inthousands, except per share data)**

 
| ** **                                    | ** ** | **May 2,  2009** | ** ** | **May 3,  2008** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Net sales                                     |       | $                     | 143,097    |                  | $          | 120,996 |   |
| Cost of sales                                 |       | 85,909                |       | 74,233                |       |
| Gross profit                                  |       | 57,188                |       | 46,763                |       |
| Selling, general and administrative expenses  |       | 40,133                |       | 36,241                |       |
| Depreciation and amortization                 |       | 4,373                 |       | 3,703                 |       |
| Income from operations                        |       | 12,682                |       | 6,819                 |       |
| Interest income                               |       | 139                   |       | 868                   |       |
| Interest expense                              |       | (41                   | )          | (87                   | )          |
| Unrealized loss on auction rate securities    |       | (728                  | )          | —                |       |
| Income before income tax expense              |       | 12,052                |       | 7,600                 |       |
| Income tax expense                            |       | 4,123                 |       | 2,432                 |       |
| Net income                                    |       | $                     | 7,929      |                  | $          | 5,168 |   |
| Basic net income per common share             |       | $                     | 0.54       |                  | $          | 0.36 |   |
| Diluted net income per common share           |       | $                     | 0.54       |                  | $          | 0.36 |   |
|                                          |       |                  |       |                  |       |
| Net income attributable to common shares      |       |                  |       |                  |       |
| Basic                                         |       | $                     | 7,780      |                  | $          | 5,127 |   |
| Diluted                                       |       | $                     | 7,780      |                  | $          | 5,127 |   |
| Weighted average number of shares outstanding |       |                  |       |                  |       |
| Basic                                         |       | 14,318                |       | 14,048                |       |
| Diluted                                       |       | 14,339                |       | 14,217                |       |

 

See accompanyingnotes to the condensed financial statements (unaudited).

 

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**CitiTrends, Inc.**

 

**CondensedStatements of Cash Flows**

**ThirteenWeeks Ended May 2, 2009 and May 3, 2008**

**(Unaudited)**

 

**(inthousands)**

 
| ** **                                                                             | ** ** | **May 2,  2009** | ** ** | **May 3,  2008** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Operating activities:                                                                  |       |                  |       |                  |       |
| Net income                                                                             |       | $                     | 7,929      |                  | $          | 5,168 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:     |       |                  |       |                  |       |
| Depreciation and amortization                                                          |       | 4,373                 |       | 3,703                 |       |
| Loss on disposal of property and equipment                                             |       | —                |       | 7                     |       |
| Deferred income taxes                                                                  |       | (649                  | )          | (917                  | )          |
| Noncash stock-based compensation expense                                               |       | 355                   |       | 445                   |       |
| Excess tax benefits from stock-based payment arrangements                              |       | (622                  | )          | (209                  | )          |
| Unrealized loss on auction rate securities                                             |       | 728                   |       | —                |       |
| Changes in assets and liabilities:                                                     |       |                  |       |                  |       |
| Inventory                                                                              |       | 1,646                 |       | (838                  | )          |
| Prepaid and other current assets                                                       |       | 2,027                 |       | (429                  | )          |
| Other assets                                                                           |       | (45                   | )          | (24                   | )          |
| Accounts payable                                                                       |       | (4,396                | )          | (1,345                | )          |
| Accrued expenses and other long-term liabilities                                       |       | 937                   |       | (987                  | )          |
| Accrued compensation                                                                   |       | (2,187                | )          | (1,287                | )          |
| Income tax payable                                                                     |       | 3,917                 |       | 2,282                 |       |
| Layaway deposits                                                                       |       | 1,039                 |       | 825                   |       |
| Net cash provided by operating activities                                              |       | 15,052                |       | 6,394                 |       |
| Investing activities:                                                                  |       |                  |       |                  |       |
| Purchases of investment securities                                                     |       | —                |       | (4,222                | )          |
| Sales/redemptions of investment securities                                             |       | —                |       | 3,516                 |       |
| Purchases of property and equipment                                                    |       | (3,925                | )          | (7,058                | )          |
| Net cash used in investing activities                                                  |       | (3,925                | )          | (7,764                | )          |
| Financing activities:                                                                  |       |                  |       |                  |       |
| Repayments on capital lease obligations                                                |       | (415                  | )          | (404                  | )          |
| Excess tax benefits from stock-based payment arrangements                              |       | 622                   |       | 209                   |       |
| Proceeds from the exercise of stock options                                            |       | 153                   |       | 127                   |       |
| Cash used to settle equity instruments granted under stock-based  payment arrangements |       | (331                  | )          | (68                   | )          |
| Net cash provided by (used in) financing activities                                    |       | 29                    |       | (136                  | )          |
| Net increase (decrease) in cash and cash equivalents                                   |       | 11,156                |       | (1,506                | )          |
| Cash and cash equivalents:                                                             |       |                  |       |                  |       |
| Beginning of period                                                                    |       | 33,516                |       | 6,203                 |       |
| End of period                                                                          |       | $                     | 44,672     |                  | $          | 4,697 |   |
|                                                                                   |       |                  |       |                  |       |
| Supplemental disclosures of cash flow information:                                     |       |                  |       |                  |       |
| Cash paid for interest                                                                 |       | $                     | 35         |                  | $          | 82 |   |
| Cash paid for income taxes                                                             |       | $                     | 855        |                  | $          | 1,303 |   |

 

See accompanying notes to the condensed financialstatements (unaudited).

 

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**CitiTrends, Inc.****Notes to the Condensed Financial Statements (unaudited)**

**May 2,2009**

 

1. Basis ofPresentation

 

Citi Trends, Inc. (the “Company”) is a rapidlygrowing, value-priced retailer of urban fashion apparel and accessories for theentire family.  As of May 2, 2009,the Company operated 365 stores in 22 states.

 

The condensed balance sheet as of May 2, 2009 andthe condensed statements of income and cash flows for the thirteen-weeks ended May 2,2009 and May 3, 2008 have been prepared by the Company without audit. Thecondensed balance sheet as of January 31, 2009 has been derived from theaudited financial statements as of that date, but does not include all requiredyear end disclosures.  In the opinion of management, such statementsinclude all adjustments considered necessary to present fairly the Company’sfinancial position as of May 2, 2009 and January 31, 2009, and itsresults of operations and cash flows for all periods presented.  It is suggested that these condensedfinancial statements be read in conjunction with the financial statements andthe notes thereto included in the Company’s latest Annual Report on Form 10-Kfor the year ended January 31, 2009.

 

The accompanying unaudited condensed financialstatements are prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X.  Accordingly, they do not includeall information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.  Operating results for thethirteen weeks ended May 2, 2009 are not necessarily indicative of theresults that may be expected for the fiscal year ending January 30, 2010.

 

The following contains references to years 2009 and2008, which represent fiscal years ending or ended on January 30, 2010(fiscal 2009) and January 31, 2009 (fiscal 2008), respectively. Fiscal2009 and fiscal 2008 both have 52-week accounting periods.

 

2. Use ofEstimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and use assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

The most significant estimates made by managementinclude those made in the valuation of inventory, investment securities,stock-based compensation, property and equipment, and income taxes. Managementperiodically evaluates estimates used in the preparation of the financialstatements for continued reasonableness. Appropriate adjustments, if any, tothe estimates used are made prospectively based on such periodic evaluations.

 

3. Earnings per Share

 

Basic earnings per common share amounts are calculatedusing the weighted average number of common shares outstanding for the period.Diluted earnings per common share amounts are calculated using the weightedaverage number of common shares outstanding plus the additional dilution forall potentially dilutive securities, such as stock options and nonvestedrestricted stock.  During loss periods,diluted earnings per share amounts are based on the weighted average number ofcommon shares outstanding.

 

In accordance with the Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128,*Earnings per Share*, the Companycalculates the dilutive effect of stock-based compensation arrangements usingthe treasury stock method.  This method assumes that the proceeds theCompany receives from the exercise of stock options are used to repurchasecommon shares in the market.  In accordance with SFAS No. 123R, *Share-Based Payment,* the Company includes as assumedproceeds the amount of compensation cost attributed to future services and notyet recognized, and the amount of tax benefits, if any, that would be creditedto additional paid-in capital assuming exercise of outstanding options andvesting of nonvested restricted stock.  For the thirteen weeks ended May 2,2009 and May 3, 2008, there were 69,000 and 81,000 options outstanding, respectively,to purchase shares of common stock excluded from the calculation of dilutedearnings per share because of antidilution.

 

On February 1, 2009, the Company adopted FASBStaff Position Emerging Issues Task Force (EITF) 03-6-1, “*DeterminingWhether Instruments Granted in Share-Based Payment Transactions areParticipating Securities*” (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 addresses determinations asto whether instruments granted in share-based payment transactions areparticipating securities prior to vesting and, therefore, need to be includedin the earnings allocation in computing earnings per share (“EPS”) under thetwo-class method described in paragraphs 60 and 61 of SFAS No. 128.  Nonvested restricted stock awards granted toemployees and non-employee directors contain nonforfeitable dividend rightsand, therefore, are now considered participating securities in accordance withFSP EITF 03-6-1.  We have prepared ourcurrent and prior period EPS computations to exclude net income allocated tononvested share awards.

 

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The following table sets forth the computation ofbasic and diluted net income per share (in thousands, except per shareamounts):

 
| ** **                                                       | ** ** | **May 2, 2009** | ** ** | **May 3, 2008** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                             |       |                 |       |                 |       |
| Basic:                                                           |       |                 |       |                 |       |
| Numerator                                                        |       |                 |       |                 |       |
| Net Income                                                       |       | $                    | 7,929      |                 | $          | 5,168 |   |
| Net income allocated to participating securities                 |       | (149                 | )          | (41                  | )          |
| Net income attributable to common stockholders-basic             |       | $                    | 7,780      |                 | $          | 5,127 |   |
|                                                             |       |                 |       |                 |       |
| Denominator                                                      |       |                 |       |                 |       |
| Weighted average common shares                                   |       | 14,318               |       | 14,048               |       |
|                                                             |       |                 |       |                 |       |
| Net income attributable to common stockholders per share-basic   |       | $                    | 0.54       |                 | $          | 0.36 |   |
|                                                             |       |                 |       |                 |       |
| Diluted:                                                         |       |                 |       |                 |       |
| Numerator                                                        |       |                 |       |                 |       |
| Net Income                                                       |       | $                    | 7,929      |                 | $          | 5,168 |   |
| Net income allocated to participating securities                 |       | (149                 | )          | (41                  | )          |
| Net income attributable to common stockholders-basic             |       | $                    | 7,780      |                 | $          | 5,127 |   |
|                                                             |       |                 |       |                 |       |
| Denominator                                                      |       |                 |       |                 |       |
| Denominator for basic calculation                                |       | 14,318               |       | 14,048               |       |
| Effect of dilutive securities – stock options               |       | 21                   |       | 169                  |       |
| Denominator for diluted calculation                              |       | 14,339               |       | 14,217               |       |
|                                                             |       |                 |       |                 |       |
| Net income attributable to common stockholders per share-diluted |       | $                    | 0.54       |                 | $          | 0.36 |   |

 

4. Fair Value Measurement

 

Effective February 3, 2008, the Company adoptedthe methods of fair value as described in SFAS No. 157, *Fair Value Measurements,* to value its financial assets andliabilities. SFAS No. 157 defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the principal or most advantageousmarket at the measurement date. This statement also establishes a fair valuehierarchy that prioritizes observable and unobservable inputs used to measurefair value into three broad levels, which are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at themeasurement date for assets or liabilities. The fair value hierarchy gives thehighest priority to Level 1 inputs.

 

Level 2:  Observable prices that are based on inputsnot quoted on active markets, but corroborated by market data.

 

Level 3:  Unobservable inputs are used when little orno market data is available. Level 3 inputs are given the lowest priority inthe fair value hierarchy.

 

As of May 2, 2009, the Company had $38.3 million($43.8 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. The ARS areclassified as trading securities in noncurrent assets and are reflected atestimated fair value. These securities are high-grade (at least AA-rated withone or more rating agencies) and approximately 79% are either guaranteed  by the Department of Education under theFederal Family Education Loan Program (37%) or backed by insurance companies,AMBAC Assurance Corporation (31%) or MBIA Insurance Corporation (11%).Historically, liquidity for investors in ARS was provided via an auctionprocess that reset the interest rate every 35 days, allowing investors toeither roll over their investments or sell them at par value. Beginning in February 2008,there was insufficient demand for these types of investments during theauctions and, as a result, these securities became illiquid. Although theauctions for the securities have failed, the Company has not experienced anydefaults and continues to earn and receive interest on all of the investmentsstill owned by the Company.

 

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There was insufficient observable market informationavailable as of May 2, 2009 to determine the fair value of the Company’sARS. Accordingly, the Company estimated Level 3 fair values for thesesecurities based on assumptions that market participants would use in theirestimates of fair value. These assumptions included, among other things,discounted cash flow projections, the timing of expected future successfulauctions or redemptions, collateralization of the underlying securities and thecreditworthiness of the issuers and insurance companies.  Based on this Level 3 valuation, the ARSinvestments were valued at $38.3 million as of May 2, 2009, representing a$5.5 million decline from par value.

 

In November 2008, the Company accepted an offer(the “Right”) from UBS AG (“UBS”) allowing the Company to sell at par value theremaining ARS to UBS at anytime during a two-year period from June 30,2010 through July 2, 2012.  Inaccepting the Right, the Company granted UBS the authority to sell or auctionthe ARS at par value at any time up until the expiration date of the Right andreleased UBS from any claims relating to the marketing and sale of ARS.  The ARS will continue to earn interest untilthey are liquidated.  The obligations ofUBS under the Right are not secured by its assets and do not require UBS toobtain any financing to purchase the ARS. UBS has disclaimed any assurance that it will have sufficient financialresources to satisfy its obligations under the Right.  If UBS does not have sufficient funding tobuy back the ARS and no alternative buyers are located either through theauction process, issuer redemptions or other means, then the Company may not beable to access cash by selling these securities without incurring a loss ofprincipal.

 

TheRight represents a put option and is recognized as an instrument separate fromthe ARS.  The Company elected to accountfor this Right at fair value under SFAS No. 159.  The Right wasvalued at $4.8 million as of May 2, 2009 using a discounted cash flowapproach that includes estimates of interest rates and the credit riskassociated with UBS.  This valuation isbased on unobservable inputs, therefore, represents a Level 3 fair value.  Prior to the acceptance of the Right, the ARSwere classified as available-for-sale. Upon acceptance of the Right, the ARS were reclassified to tradingsecurities.  The ARS and the Rightincluded in the May 2, 2009 balance sheet are classified as noncurrentassets due to the expectation that liquidity will not occur during the nexttwelve months.

 

The following table provides a summary of activity forthe Company’s assets measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for the thirteen weeks ended May 2,2009 (in thousands):     

 
| ** **                                                 | ** ** | **Put Option Related to ARS** | ** ** | **Auction Rate Securities** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Balance as of January 31, 2009                        |       | $                             | 4,901      |                        | $          | 38,924 |   |
| Unrealized loss on trading securities included in earnings |       | (149                          | )          | (579                        | )          |
| Balance as of May 2, 2009                             |       | $                             | 4,752      |                        | $          | 38,345 |   |

 

5. Comprehensive Income

 

The components of comprehensive income for all periodspresented are as follows (in thousands):

 
| ** **                                                                                                           | ** ** | **Thirteen Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                           | ** ** | **May 2, 2009**               | ** ** | **May 3, 2008** | ** ** |
| Net income, as reported                                                                                              |       | $                                  | 7,929      |   | $ | 5,168 |   |
| Other comprehensive loss:                                                                                            |       |                               |       |   |   |
| Unrealized loss on available-for-sale securities, net of tax benefit  of $884 in the 13 weeks ended May 3, 2008 |       | —                             |       | (1,371 | ) |
| Comprehensive income                                                                                                 |       | $                                  | 7,929      |   | $ | 3,797 |   |

 

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6. Revolving Line ofCredit

 

On March 25, 2009, the Company’s $35 million unsecuredrevolving credit facility with Bank ofAmerica was amended to extend the expiration date to March 24, 2010 and tolower the commitment to $20 million, reflecting the Company’s cash position andthe fact that there have been no borrowings under the facility.  In addition, changes were made to the pricingof the facility, including an increase in the unused commitment fee from 0.15%to 0.25% and an amendment of  theinterest rates. Loans under the facility now bear interest at either (a) arate equal to the highest of (i) the Federal Funds Rate plus 0.50%, (ii) LIBORplus 1.0% and (iii) Bank of America’s prime rate, plus an applicable margin;or (b) a rate equal to LIBOR plus an applicable margin. The applicablemargin, which increased 0.75% under the amendment, is dependent on the Company’sconsolidated leverage ratio and ranges from 0.75% to 1.25% for loans bearinginterest at the rate described under (a) above and from 1.75% to 2.25% forloans bearing interest at the rate described under (b) above.

 

7. Income Taxes

 

The Company’s effective income tax rate increased to34.2% in the first quarter of fiscal 2009 from 32.0% in the first quarter offiscal 2008 due to a declining interest rate environment which resulted in adecrease in tax-free interest income on investments.

 

8. Commitments and Contingencies

 

The Company from time to time is involved in variouslegal proceedings incidental to the conduct of its business, including claimsby customers, employees or former employees.  While litigation is subjectto uncertainties and the outcome of any litigated matter is not predictable,the Company is not aware of any legal proceedings pending or threatened againstit that it expects to have a material adverse effect on its financialcondition, results of operations or liquidity.

 

9. Recent Accounting Pronouncements

 

Effective February 3, 2008, the Company adoptedSFAS No. 157, *Fair Value Measurements.*  SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and requires additionaldisclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2,*Effective Date of Statement No. 157,*whichprovided a one year deferral of the effective date of SFAS No. 157 fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually. Therefore, the Company adopted the provisions of SFAS No. 157with respect to its financial assets and financial liabilities only in fiscal2008. The adoption of this statement did not have a material impact on theCompany’s financial statements. Effective February 1, 2009, the Company adopted SFAS No. 157for non-financial assets and non-financial liabilities, and such adoption didnot have a material impact on the Company’s financial statements.

 

As discussed in Note 3, the Company adopted FSP EITF03-6-1 on February 1, 2009. Implementation of FSP EITF 03-6-1 will change the way the Companycalculates earnings per share and is expected to reduce basic and dilutedearnings per share for the fiscal year ending January 30, 2010 byapproximately $0.03.  All prior period earningsper share information must be adjusted retrospectively.  Previously reported basic and dilutedearnings per share for the year ended January 31, 2009 will decrease by$0.02.

 

In April 2009, the FASB issued FSP FAS 107-1 andAPB 28-1, *Interim Disclosures about Fair Value of FinancialInstruments,*which amends SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments,* to require an entity toprovide interim disclosures about the fair value of all financial instrumentswithin the scope of SFAS No. 107 and to include disclosures related to themethods and significant assumptions used in estimating those instruments.  This FSP is effective for interim and annualperiods ending after June 15, 2009. The adoption of this FSP is not expected to have a material impact onthe Company’s financial statements and related disclosures.

 

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

**Forward-Looking Statements**

 

Except for specific historical information, many ofthe matters discussed in this Form 10-Q may express or imply projectionsof revenues or expenditures, statements of plans and objectives for futureoperations, growth or initiatives, statements of future economic performance,or statements regarding the outcome or impact of pending or threatenedlitigation. These, and similar statements, are forward-looking statementsconcerning matters that involve risks, uncertainties and other factors that maycause the actual performance of the Company to differ materially from thoseexpressed or implied by these statements. All forward-looking informationshould be evaluated in the context of these risks, uncertainties and otherfactors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,”“objective,” “forecast,” “goal,” “intend,” “will likely result,” or “willcontinue” and similar words and expressions generally identify forward-lookingstatements. The Company believes the assumptions underlying theseforward-looking statements are reasonable; however, any of the assumptionscould be inaccurate, and therefore, actual results may differ materially fromthose projected in the forward-looking statements.

 

The factors that may result in actual resultsdiffering from such forward-looking information include, but are not limitedto: transportation and distribution delays or interruptions; changes in freightrates; the Company’s ability to negotiate effectively the cost and purchase ofmerchandise; inventory risks due to shifts in market demand; the Company’sability to gauge fashion trends and changing consumer preferences; changes inconsumer spending on apparel; changes in product mix; interruptions insuppliers’ businesses; interest rate fluctuations; a deterioration in generaleconomic conditions caused by acts of war or terrorism or other factors;temporary changes in demand due to weather patterns; seasonality of the Company’sbusiness; delays associated with building, opening and operating new stores;delays associated with building, opening, expanding or converting new orexisting distribution centers; the future liquidity of auction rate securities;and other factors described in the section titled “Item 1A. Risk Factors” andelsewhere in the Company’s Annual Report on Form 10-K for the fiscal yearended January 31, 2009 and in Part II, “Item 1A. Risk Factors,” andelsewhere in the Company’s Quarterly Reports on Form 10-Q  and any amendments thereto and in the otherdocuments the Company files with the Securities and Exchange Commission (“SEC”),including reports on Form 8-K.

 

Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date of this Form 10-Q.Except as may be required by law, the Company undertakes no obligation to updateor revise publicly any forward-looking statements contained herein to reflectevents or circumstances occurring after the date of this Form 10-Q or toreflect the occurrence of unanticipated events. Readers are advised, however,to read any further disclosures the Company may make on related subjects in itspublic disclosures or documents filed with the SEC.

 

**Overview**

 

We are a rapidly growing, value-priced retailer ofurban fashion apparel and accessories for the entire family. Our merchandiseofferings are designed to appeal to the preferences of fashion consciousconsumers, particularly African-Americans. Originally our stores were locatedin the Southeast, and in recent years we expanded into the Mid-Atlantic andMidwest regions and Texas. We operated 365 stores in both urban and ruralmarkets in 22 states as of May 2, 2009.

 

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 opened for an entirefiscal year. Therefore, a store will not be considered a comparable store untilits 13th month of operation at the earliest or until its 24th month at thelatest. As an example, stores opened in fiscal 2008 and fiscal 2009 are notconsidered comparable stores in fiscal 2009. Relocated and expanded stores areincluded in the comparable store sales results. We also use other operatingstatistics, most notably average sales per store, to measure our performance.As we typically occupy existing space in established shopping centers ratherthan sites built specifically for our stores, store square footage (andtherefore sales per square foot) varies by store. We focus on overall storesales volume as the critical driver of profitability. The average sales perstore has increased over the years, as we have increased comparable store salesand opened new stores that are generally larger than our historical store base.Average sales per store increased from $0.8 million in fiscal 2000 to $1.4million in fiscal 2008. In addition to sales, we measure gross profit as apercentage of sales and store operating expenses, with a particular focus onlabor, as a percentage of sales. These results translate into store levelcontribution, which we use to evaluate overall performance of each individualstore. Finally, we monitor corporate expenses against budgeted amounts.

 

**Accounting Periods**

 

The following discussion contains references to fiscalyears 2009 and 2008, which represent fiscal years ending or ended on January 30,2010 (fiscal 2009) and January 31, 2009 (fiscal 2008), respectively.Fiscal 2009 and fiscal 2008 both have 52-week accounting periods. Thisdiscussion and analysis should be read with the condensed financial statementsand the notes thereto.

 

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**Results of Operations**

 

The following discussion of the Company’s financialperformance is based on the condensed financial statements set forth herein.The nature of the Company’s business is seasonal. Historically, sales in thefirst and fourth quarters have been higher than sales achieved in the secondand third quarters of the fiscal year. Expenses and, to a greater extent,operating income, vary by quarter. Results of a period shorter than a full yearmay not be indicative of results expected for the entire year. Furthermore, theseasonal nature of the Company’s business may affect comparisons betweenperiods.

 

**Thirteen Weeks Ended May 2, 2009and May 3, 2008**

 

*Net Sales. * Net sales increased $22.1 million, or18.3%, to $143.1 million in the thirteen weeks ended May 2, 2009 from$121.0 million in the thirteen weeks ended May 3, 2008.  The increasein net sales was due primarily to 35 new stores opened since last year’s firstquarter, together with a 7.4% increase in comparable store sales, partiallyoffset by the effect of closing one store. Comparable stores include locationsthat have been relocated or expanded. There were four stores relocated orexpanded in the first quarter of 2009 and nine stores relocated or expanded infiscal 2008, all of which impacted comparable store sales. Sales in comparablerelocated and expanded stores increased 25.1% in the first quarter of 2009,while sales in all other comparable stores increased 6.6%. Approximatelytwo-thirds of the 7.4% overall increase in comparable store sales was due to ahigher average unit retail, with the other one-third being the result of anincrease in the number of customer transactions. Comparable store sales changesby major merchandise class were as follows in the first quarter of 2009:  Home +14%; Children’s +13%; Accessories +8%;Men’s +7%; Women’s +4%.

 

The new stores opened in 2008 and 2009, net of theclosed store, accounted for a $13.5 million increase in total sales, while the7.4% sales increase in the 318 comparable stores totaled $8.6 million.

 

*Gross Profit. * Gross profit increased $10.4 million, or22.3%, to $57.2 million in the first quarter of 2009 from $46.8 million in lastyear’s first quarter.  The increase in gross profit is a result of theincrease in sales, together with an improvement in the gross margin from 38.6%in last year’s first quarter to 40.0% this year.  Approximately 50 basispoints of the gross margin improvement was related to lower freight costs as apercentage of sales that resulted from a reduction in fuel surcharges due tolower gasoline prices.  Another 40 basispoints of improvement was a result of the steps taken to better controlinventory shrinkage, including a greater focus on problem stores by the storeoperations and loss prevention departments, the addition of sophisticatedsurveillance systems in high shrinkage stores, and lower inventory levels.  The initial markup on merchandise was 30basis points higher in this year’s first quarter, and markdowns as a percentageof sales were lower by 20 basis points due to our continued efforts to closelymanage inventory, combined with the strong comparable store sales results.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $3.9 million, or 10.7%, to $40.1 million in the firstquarter of 2009 from $36.2 million in last year’s first quarter.  The increasein these expenses was due primarily to additional store level, distribution andcorporate costs arising from the opening of 35 new stores since last year’sfirst quarter.  As a percentage of sales,selling, general and administrative expenses improved to 28.0% in the firstquarter of fiscal 2009 from 30.0% in the first quarter of fiscal 2008, dueprimarily to the leveraging effect that occurs on expenses as a percentage ofsales when comparable store sales increase at a rate that is higher than the rateof inflation on expenses.  In addition,store and distribution payroll costs were managed closely, resulting in a 70basis point improvement in total payroll expense as a percentage of sales.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased$670,000, or 18.1%, to $4.4 million in the first quarter of 2009 from $3.7million in the first quarter of 2008, as the result of capital expendituresincurred for new and relocated/expanded stores and the expansion of theDarlington distribution center.

 

*Interest Income. * Interest income decreased to $139,000 inthe first quarter of 2009 from $868,000 in the first quarter of 2008 due to adeclining interest rate environment which affected our returns on auction ratesecurities as well as cash and cash equivalents.

 

*Interest Expense. * Interest expense decreased to $41,000 inthe first quarter of 2009 from $87,000 in the first quarter of 2008 due to thenormal decline in the interest portion of payments on our capital leaseobligations as the principal portion of such obligations is reduced.

 

*Unrealized Loss on Auction RateSecurities. *An impairmentloss of $728,000 on our investments in auction rate securities and a relatedput option is reflected in the first quarter of fiscal 2009 due primarily tothe declining interest rates on such securities.

 

*Income Tax Expense. * Income tax expense increased 69.5% to$4.1 million in this year’s first quarter from $2.4 million in the firstquarter of 2008 due to an increase in pretax income, together with an increasein the effective income tax rate to 34.2% versus 32.0% last year as a result ofthe reduction in tax-exempt interest income, as discussed above.

 

*Net Income. * Net income increased 53.4% to $7.9million in the first quarter of 2009 from $5.2 million in the first quarter of2008 due to the factors discussed above.

 

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**Liquidityand Capital Resources**

 

Our cash requirements are primarily for workingcapital, expansion of our distribution infrastructure, construction of newstores, remodeling of our existing stores and the improvement of ourinformation systems. Historically, we have met these cash requirements fromcash flow from operations, short-term trade credit, borrowings under ourrevolving lines of credit, long-term debt, capital leases, and cash proceedsfrom our initial public offering.  We expect to be able to meet futurecash requirements with cash flow from operations, short-term trade credit,existing cash balances and, if necessary, borrowings under our revolving creditfacility.

 

*Current Financial Condition.*As of May 2, 2009, we had total cash and cash equivalents of $44.7million compared with total cash and cash equivalents of $33.5 million asof January 31, 2009. Inventory represented 34.1% of our total assets as ofMay 2, 2009. Management’s ability to manage our inventory can have asignificant impact on our cash flows from operations during a given interimperiod or fiscal year. In addition, inventory purchases can be seasonal innature, such as the purchase of warm-weather or Christmas-relatedmerchandise.  Total inventories at theend of the first quarter of 2009 were up $1.4 million, or 1.6%, compared to thefirst quarter of fiscal 2008, despite an increase in store selling squarefootage of 13%.  Inventory in comparablestores was 7.6% lower than the first quarter of fiscal 2008, due to our effortsto conservatively control our investment in inventory.

 

*Cash Flows From Operating Activities*. Net cash provided by operatingactivities was $15.1 million in the first quarter of fiscal 2009 comparedto $6.4 million in the first quarter of fiscal 2008.  The main source of cash provided during thefirst quarter of this year was net income adjusted for noncash expenses such asdepreciation and amortization, deferred income taxes, stock-based compensationexpense, and the unrealized loss on auction rate securities, totaling$12.7 million (compared to $8.4 million in last year’s firstquarter).  Other significant sources ofcash in the first quarter of fiscal 2009 were (1) a $3.9 million increasein income tax payable (compared to $2.3 million in the first quarter of fiscal2008), resulting from an increase in pretax income, (2) a $2.0 milliondecrease in prepaid and other current assets (compared to a $0.4 millionincrease in the first quarter of fiscal 2008) due primarily to the timing ofcollecting credit card receivables and receivables from landlords for tenantimprovement reimbursements, and (3) a $1.6 million decrease in inventory(compared to a $0.8 million increase in the first quarter of fiscal 2008) as aresult of efforts to conservatively manage inventory.  Significant uses of cash included a $4.4million decrease in accounts payable (compared to $1.3 million in last year’sfirst quarter) due to the timing of payments made for spring merchandisepurchases.

 

*Cash Flows From InvestingActivities.* Cashused in investing activities was $3.9 million in the first quarter of fiscal2009 compared to $7.8 million in the first quarter of fiscal 2008.Purchases of property and equipment included in cash flows from investingactivities totaled $3.9 million and $7.1 million in the first quarter of fiscal2009 and 2008, respectively, with the decrease being a result of capitalexpenditures in the first quarter last year related to the expansion of theDarlington distribution center. Such capital expenditures in both yearsincluded routine amounts for new stores, relocated and expanded stores andother general corporate purposes. Purchases of municipal auction ratesecurities, net of sales, used cash of $0.7 million in the first quarter offiscal 2008.

 

*Cash Flows From FinancingActivities.* Cashflows from financing activities were insignificant in the first quarter offiscal 2009 and 2008.

 

**Cash Requirements**

 

Our principal sources of liquidity consist of: (i) cashand cash equivalents (which equaled $44.7 million as of May 2, 2009);(ii) short-term trade credit; (iii) cash generated from operations onan ongoing basis as we sell our merchandise inventory; and (iv) a $20million revolving credit facility. Trade credit represents a significant sourceof financing for inventory purchases and arises from customary payment termsand trade practices with our vendors.  Historically, our principalliquidity requirements have been for working capital and capital expenditureneeds.

 

As of May 2, 2009, we had $38.3 million ($43.8million at par value) of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(at least AA-rated with one or more rating agencies) and approximately 79% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (37%) or backed by insurance companies, AMBAC AssuranceCorporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidityfor investors in ARS was provided via an auction process that reset the interestrate every 35 days, allowing investors to either roll over their investments orsell them at par value. Beginning in February 2008, there was insufficientdemand for these types of investments during the auctions and, as a result,these securities became illiquid. Although the auctions for the securities havefailed, we have not experienced any defaults and continue to earn and receiveinterest on all of the investments that we still own.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  In accepting the Right, we grantedUBS the authority to sell or auction the ARS at par value at any time up until theexpiration date of the Right and released UBS from any claims relating to themarketing and sale of ARS.  We willcontinue to earn interest on the ARS until they are liquidated.  The obligations of UBS under the Right arenot secured by its assets and do not require UBS to obtain any financing topurchase the ARS.  UBS has disclaimed anyassurance that it will have sufficient financial resources to satisfy itsobligations under the Right.  If UBS doesnot have sufficient funding to buy back the ARS and no alternative buyers arelocated either through the auction process, issuer redemptions or other means,then we may not be able to access cash by selling these securities withoutincurring a loss of principal.  The Rightwas valued at $4.8 million as of May 2, 2009.

 

We believe that our existing sources of liquidity willbe sufficient to fund our operations and anticipated capital expenditures forat least the next 12 months.

 

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** **

**CriticalAccounting Policies**

 

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. There have been no material changes to theCritical Accounting Policies outlined in the Company’s Annual Report on Form 10-Kfor fiscal 2008.

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to financial market risks related tochanges in interest rates connected with our revolving line of credit, whichbears interest at variable rates. We cannot predict market fluctuations ininterest rates. As a result, future results may differ materially fromestimated results due to adverse changes in interest rates or debtavailability. A hypothetical 100 basis point increase in prevailing marketinterest rates would not have materially impacted our financial position,results of operations or cash flows for the thirteen weeks ended May 2,2009, because we did not borrow during this period of time.  We do notengage in financial transactions for trading or speculative purposes and havenot entered into any interest rate hedging contracts.

 

We source all of our product from apparel markets inthe United States in U.S. Dollars and, therefore, are not directly subject tofluctuations in foreign currency exchange rates. However, fluctuations inforeign currency exchange rates could affect our purchasing power with vendorsthat import merchandise to sell to us. We have not entered into forwardcontracts to hedge against fluctuations in foreign currency prices.

 

As of May 2, 2009, we had $38.3 million ($43.8million at par value) of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(at least AA-rated with one or more rating agencies) and approximately 79% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (37%) or backed by insurance companies, AMBAC AssuranceCorporation (31%) or MBIA Insurance Corporation (11%). Historically, liquidityfor investors in ARS was provided via an auction process that reset theinterest rate every 35 days, allowing investors to either roll over theirinvestments or sell them at par value. Beginning in February 2008, therewas insufficient demand for these types of investments during the auctions and,as a result, these securities became illiquid. Although the auctions for thesecurities have failed, we have not experienced any defaults and continue toearn and receive interest on all of the investments that we still own.  However, interest rates have declined tolevels that are much lower than in most of fiscal 2008.  As a result, interest income is expected tobe significantly lower in fiscal 2009 than in fiscal 2008.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  In accepting the Right, we grantedUBS the authority to sell or auction the ARS at par value at any time up untilthe expiration date of the Right and released UBS from any claims relating tothe marketing and sale of ARS.  We willcontinue to earn interest on the ARS until they are liquidated.  The obligations of UBS under the Right arenot secured by its assets and do not require UBS to obtain any financing topurchase the ARS.  UBS has disclaimed anyassurance that it will have sufficient financial resources to satisfy itsobligations under the Right.  If UBS doesnot have sufficient funding to buy back the ARS and no alternative buyers arelocated either through the auction process, issuer redemptions or other means,then we may not be able to access cash by selling these securities withoutincurring a loss of principal.  The Rightwas valued at $4.8 million as of May 2, 2009.

 

**Item4. Controls and Procedures.**

 

We have carried out an evaluation, under thesupervision and with the participation of management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of May 2,2009 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based onthat evaluation, the Chief Executive Officer and the Chief Financial Officereach concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information has been accumulated and communicated to ourmanagement, including the officers who certify our financial reports, asappropriate, to allow timely decisions regarding the required disclosures.

 

There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended May 2,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

We are from time to time involved in various legalproceedings incidental to the conduct of our business, including claims bycustomers, employees or former employees. While litigation is subject touncertainties and the outcome of any litigated matter is not predictable, weare not aware of any legal proceedings pending or threatened against us that weexpect to have a material adverse effect on our financial condition, results ofoperations or liquidity.

 

**Item 1A. Risk Factors.**

 

There are no material changes to the Risk Factorsdescribed under the section “ITEM 1A. RISK FACTORS” in the Company’s AnnualReport on Form 10-K for the fiscal year ended January 31, 2009.

 

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

Not applicable.

 

**Item 3. Defaults Upon SeniorSecurities.**

 

Not applicable.

 

**Item 4. Submission of Matters to aVote of Security Holders.**

 

Not applicable.

 

**Item 5. Other Information.**

 

Not applicable.

 

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**Item  6. Exhibits.**

 
|   | 10.1   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and R. Edward Anderson dated  March 25, 2009*                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.2   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and R. David  Alexander, Jr. dated March 25, 2009*                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.3   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and Elizabeth R. Feher dated  March 25, 2009*                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.4   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and Bruce D. Smith dated  March 25, 2009*                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.5   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and Ivy D. Council dated  March 25, 2009*                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.6   | Employment Non-Compete, Non-Solicit and  Confidentiality Agreement between the Company and James A. Dunn dated  March 25, 2009*                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.7   | Severance Agreement between the Company and R.  Edward Anderson dated March 25, 2009*                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.8   | Severance Agreement between the Company and R. David  Alexander, Jr. dated March 25, 2009*                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.9   | Severance Agreement between the Company and  Elizabeth R. Feher dated March 25, 2009*                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.10  | Severance Agreement between the Company and Bruce D.  Smith dated March 25, 2009*                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.11  | Severance Agreement between the Company and Ivy D.  Council dated March 25, 2009*                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.12  | Severance Agreement between the Company and James A.  Dunn dated March 25, 2009*                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 10.13  | First Amendment to Credit Agreement, dated as of  March 25, 2009, by and between the Company and Bank of America, N.A.  (incorporated by reference to Exhibit 10.28 to the Company’s Annual  Report on Form 10-K for the year ended January 31, 2009) |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 31.1   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                               |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 31.2   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                               |
|   |   |                                                                                                                                                                                                                                                                           |
|   | 32.1   | Certification Pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* †                                                                                                                                     |

 

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*                    Filed herewith.

 

†     Pursuant to Securities and Exchange CommissionRelease No. 33-8238, this certification will be treated as “accompanying”this Quarterly Report on Form 10-Q and not “filed” as part of such reportfor purposes of Section 18 of the Securities Exchange Act of 1934, orotherwise subject to the liability of Section 18 of the SecuritiesExchange Act of 1934 and this certification will not be deemed to be incorporatedby reference into any filing under the Securities Act of 1933 or the SecuritiesExchange Act 1934, except to the extent that the registrant specificallyincorporates it by reference.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, and the undersigned also has signed this report in hiscapacity as the Registrant’s Chief Financial Officer (Principal FinancialOfficer).

 
|                     | CITI TRENDS,  INC. |
|--------------------------|--------------------|
|                     |               |
| Date:  May 29, 2009 |               |
|                     |               |
|                     | By:                | /s/ Bruce D.  Smith |
|                     | Name:              | Bruce D. Smith |
|                     | Title:             | Senior Vice  President, Chief Financial Officer and Secretary |

 

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