**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 3, 2008** |
|                                                |
| **OR**                                              |
|                                                |   |
| **o**                                               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number  000-51315**

 

**CITITRENDS, INC.**

(Exactname of registrant as 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x   No  o

 

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

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o   No  x

 

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

 

| **Class**                    | ** ** | **Outstanding at May 16, 2008** |
|------------------------------|------------|--------------------------------------|
| Common Stock, $.01 par value |       | 14,268,700 shares                    |

 

 

----

 

**CITI TRENDS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| ** **   | ** ** | ** **                                                                                                  | **PAGE  NUMBER** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------|------------------|
| PART I  |       | FINANCIAL INFORMATION                                                                                       |             |
|         |       |                                                                                                        |             |
| Item 1       |       | Financial Statements                                                                                        |             |
|         |       |                                                                                                        |             |
|         |       | Condensed  Balance Sheets (unaudited) May 3, 2008 and February 2, 2008                            | 3                |
|         |       |                                                                                                        |             |
|         |       | Condensed  Statements of Income (unaudited) Thirteen weeks ended May 3, 2008 and  May 5, 2007     | 4                |
|         |       |                                                                                                        |             |
|         |       | Condensed  Statements of Cash Flows (unaudited) Thirteen weeks ended May 3, 2008  and May 5, 2007 | 5                |
|         |       |                                                                                                        |             |
|         |       | Notes  to the Condensed Financial Statements (unaudited)                                                    | 6                |
|         |       |                                                                                                        |             |
| Item 2       |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                 | 9                |
|         |       |                                                                                                        |             |
| Item 3       |       | Quantitative and Qualitative  Disclosures about Market Risk                                                 | 11               |
|         |       |                                                                                                        |             |
| Item 4       |       | Controls and Procedures                                                                                     | 12               |
|         |       |                                                                                                        |             |
| PART II |       | OTHER INFORMATION                                                                                           |             |
|         |       |                                                                                                        |             |
| Item 1       |       | Legal Proceedings                                                                                           | 13               |
|         |       |                                                                                                        |             |
| Item 1A      |       | Risk Factors                                                                                                | 13               |
|         |       |                                                                                                        |             |
| Item 2       |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                | 13               |
|         |       |                                                                                                        |             |
| Item 3       |       | Defaults Upon Senior  Securities                                                                            | 13               |
|         |       |                                                                                                        |             |
| Item 4       |       | Submission of Matters to a  Vote of Security Holders                                                        | 13               |
|         |       |                                                                                                        |             |
| Item 5       |       | Other Information                                                                                           | 13               |
|         |       |                                                                                                        |             |
| Item 6       |       | Exhibits                                                                                                    | 13               |
|         |       |                                                                                                        |             |
|         |       | SIGNATURES                                                                                                  | 14               |

 

2

----

 

**Item 1.Financial Statements.**

 

**Citi Trends, Inc.**

 

**Condensed Balance Sheets**

**May 3, 2008 and February 2, 2008**

**(Unaudited)**

 

**(in thousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                                       | ** ** | **May 3,  2008** | ** ** | **February 2,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                                       |       |                  |       |                       |       |
| Current assets:                                                                                                                                                                                                                                                                                  |       |                  |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                        |       | $                     | 4,697      |                       | $          | 6,203 |   |
| Investment securities                                                                                                                                                                                                                                                                            |       | —                |       | 56,165                     |       |
| Inventory                                                                                                                                                                                                                                                                                        |       | 83,258                |       | 82,420                     |       |
| Prepaid and other current assets                                                                                                                                                                                                                                                                 |       | 7,213                 |       | 5,888                      |       |
| Deferred tax asset                                                                                                                                                                                                                                                                               |       | 3,221                 |       | 2,838                      |       |
| Total current assets                                                                                                                                                                                                                                                                             |       | 98,389                |       | 153,514                    |       |
| Property and equipment, net                                                                                                                                                                                                                                                                      |       | 55,555                |       | 52,207                     |       |
| Investment securities                                                                                                                                                                                                                                                                            |       | 53,720                |       | —                     |       |
| Goodwill                                                                                                                                                                                                                                                                                         |       | 1,371                 |       | 1,371                      |       |
| Deferred tax asset                                                                                                                                                                                                                                                                               |       | 4,174                 |       | 2,756                      |       |
| Other assets                                                                                                                                                                                                                                                                                     |       | 353                   |       | 329                        |       |
| Total assets                                                                                                                                                                                                                                                                                     |       | $                     | 213,562    |                       | $          | 210,177 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                   |       |                  |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                                                                             |       |                  |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                                                                 |       | $                     | 42,221     |                       | $          | 43,566 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                 |       | 10,311                |       | 11,864                     |       |
| Accrued compensation                                                                                                                                                                                                                                                                             |       | 3,938                 |       | 5,225                      |       |
| Current portion of capital lease  obligations                                                                                                                                                                                                                                                    |       | 1,591                 |       | 1,580                      |       |
| Income tax payable                                                                                                                                                                                                                                                                               |       | 3,228                 |       | 1,155                      |       |
| Layaway deposits                                                                                                                                                                                                                                                                                 |       | 1,460                 |       | 635                        |       |
| Total current liabilities                                                                                                                                                                                                                                                                        |       | 62,749                |       | 64,025                     |       |
| Capital lease obligations, less current  portion                                                                                                                                                                                                                                                 |       | 988                   |       | 1,403                      |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                      |       | 7,168                 |       | 6,602                      |       |
| Total liabilities                                                                                                                                                                                                                                                                                |       | 70,905                |       | 72,030                     |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                       |       |                  |       |                       |       |
| Common stock, $0.01 par value. Authorized  32,000,000 shares; 14,434,330 shares issued as of May 3, 2008 and  14,265,471 shares issued as of February 2, 2008; 14,268,580 shares  outstanding as of May 3, 2008 and 14,099,721 outstanding as of  February 2, 2008 |       | 142                   |       | 142                        |       |
| Paid-in-capital                                                                                                                                                                                                                                                                                  |       | 68,989                |       | 68,276                     |       |
| Retained earnings                                                                                                                                                                                                                                                                                |       | 75,062                |       | 69,894                     |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                             |       | (1,371                | )          | —                     |       |
| Treasury stock, at cost; 165,750 shares as  of May 3, 2008 and February 2, 2008                                                                                                                                                                                                        |       | (165                  | )          | (165                       | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                  |       | 142,657               |       | 138,147                    |       |
| Commitments and contingencies (note 7)                                                                                                                                                                                                                                                           |       |                  |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                  |       | $                     | 213,562    |                       | $          | 210,177 |   |

 

See accompanying notes tothe condensed financial statements (unaudited).

 

3

----

 

**Citi Trends, Inc.**

 

**Condensed Statements of Income**

**Thirteen Weeks Ended May 3, 2008 and May 5, 2007**

**(Unaudited)**

 

**(in thousands, except per share data)**

 
| ** **                                     | ** ** | **May 3,  2008** | ** ** | **May 5,  2007** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Net sales                                      |       | $                     | 120,996    |                  | $          | 106,576 |   |
| Cost of sales                                  |       | 74,233                |       | 64,878                |       |
| Gross profit                                   |       | 46,763                |       | 41,698                |       |
| Selling, general and administrative  expenses  |       | 36,241                |       | 30,575                |       |
| Depreciation and amortization                  |       | 3,703                 |       | 2,821                 |       |
| Income from operations                         |       | 6,819                 |       | 8,302                 |       |
| Interest income                                |       | 868                   |       | 645                   |       |
| Interest expense                               |       | (87                   | )          | (144                  | )          |
| Income before income tax expense               |       | 7,600                 |       | 8,803                 |       |
| Income tax expense                             |       | 2,432                 |       | 3,081                 |       |
| Net income                                     |       | $                     | 5,168      |                  | $          | 5,722 |   |
| Basic net income per common share              |       | $                     | 0.37       |                  | $          | 0.41 |   |
| Diluted net income per common share            |       | $                     | 0.36       |                  | $          | 0.40 |   |
| Weighted average number of shares  outstanding |       |                  |       |                  |       |
| Basic                                          |       | 14,048                |       | 13,807                |       |
| Diluted                                        |       | 14,217                |       | 14,219                |       |

 

See accompanying notes tothe condensed financial statements (unaudited).

 

4

----

 

**Citi Trends, Inc.**

 

**Condensed Statements of Cash Flows**

**Thirteen Weeks Ended May 3, 2008 and May 5, 2007**

**(Unaudited)**

 

**(in thousands)**

 
| ** **                                                                                   | ** ** | **May 3,  2008** | ** ** | **May 5,  2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Operating activities:                                                                        |       |                  |       |                  |       |
| Net income                                                                                   |       | $                     | 5,168      |                  | $          | 5,722 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                  |       |                  |       |
| Depreciation and amortization                                                                |       | 3,703                 |       | 2,821                 |       |
| Loss on disposal of property and equipment                                                   |       | 7                     |       | 7                     |       |
| Deferred income taxes                                                                        |       | (917                  | )          | (440                  | )          |
| Noncash stock-based compensation expense                                                     |       | 445                   |       | 310                   |       |
| Excess tax benefits from stock-based  payment arrangements                                   |       | (209                  | )          | (332                  | )          |
| Changes in assets and liabilities:                                                           |       |                  |       |                  |       |
| Inventory                                                                                    |       | (838                  | )          | (12,037               | )          |
| Prepaid and other current assets                                                             |       | (429                  | )          | (86                   | )          |
| Other assets                                                                                 |       | (24                   | )          | (12                   | )          |
| Accounts payable                                                                             |       | (1,345                | )          | (675                  | )          |
| Accrued expenses and other long-term  liabilities                                            |       | (987                  | )          | (27                   | )          |
| Accrued compensation                                                                         |       | (1,287                | )          | (2,745                | )          |
| Income tax payable                                                                           |       | 2,282                 |       | 2,777                 |       |
| Layaway deposits                                                                             |       | 825                   |       | 619                   |       |
| Net cash provided by (used in) operating  activities                                         |       | 6,394                 |       | (4,098                | )          |
| Investing activities:                                                                        |       |                  |       |                  |       |
| Purchases of investment securities                                                           |       | (4,222                | )          | (2,617                | )          |
| Sales of investment securities                                                               |       | 3,516                 |       | 6,974                 |       |
| Purchases of property and equipment                                                          |       | (7,058                | )          | (4,112                | )          |
| Net cash (used in) provided by investing  activities                                         |       | (7,764                | )          | 245                   |       |
| Financing activities:                                                                        |       |                  |       |                  |       |
| Repayments on long-term debt and capital  lease obligations                                  |       | (404                  | )          | (511                  | )          |
| Excess tax benefits from stock-based  payment arrangements                                   |       | 209                   |       | 332                   |       |
| Proceeds from the exercise of stock options                                                  |       | 127                   |       | 49                    |       |
| Cash used to settle equity instruments  granted under stock-based payment arrangements       |       | (68                   | )          | —                |       |
| Net cash used in financing activities                                                        |       | (136                  | )          | (130                  | )          |
| Net decrease in cash and cash equivalents                                                    |       | (1,506                | )          | (3,983                | )          |
| Cash and cash equivalents:                                                                   |       |                  |       |                  |       |
| Beginning of period                                                                          |       | 6,203                 |       | 7,707                 |       |
| End of period                                                                                |       | $                     | 4,697      |                  | $          | 3,724 |   |
|                                                                                         |       |                  |       |                  |       |
| Supplemental disclosures of cash flow  information:                                          |       |                  |       |                  |       |
| Cash paid for interest                                                                       |       | $                     | 82         |                  | $          | 176 |   |
| Cash paid for income taxes                                                                   |       | $                     | 1,303      |                  | $          | 852 |   |
| Supplemental disclosures of noncash  financing and investing activities:                     |       |                  |       |                  |       |
| Cumulative effect of adoption of FIN 48                                                      |       | $                     | —     |                  | $          | 301 |   |

 

See accompanying notes tothe condensed financial statements (unaudited).

 

5

----

 

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

**May 3,2008**

 

1.Basis of Presentation

 

The condensed balance sheetas of May 3, 2008 and the condensed statements of income and cash flowsfor the thirteen-week periods ended May 3, 2008 and May 5, 2007 havebeen prepared by Citi Trends, Inc. (the “Company”), without audit. Thecondensed balance sheet as of February 2, 2008 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 3, 2008 and February 2, 2008, and itsresults of operations and cash flows for all periods presented. It is suggestedthat these condensed financial statements be read in conjunction with thefinancial statements and the notes thereto included in the Company’s latestAnnual Report on Form 10-K for the year ended February 2, 2008.

 

The accompanying unauditedcondensed financial statements are also prepared in accordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S.generally accepted accounting principles for complete financialstatements.  In the opinion of management, all adjustments considerednecessary for a fair presentation have been included.  Operating resultsfor the interim period ended May 3, 2008 are not necessarily indicative ofthe results that may be expected for the fiscal year ending January 31,2009.

 

The following containsreferences to years 2008 and 2007, which represent fiscal years ending or endedon January 31, 2009 (fiscal 2008) and February 2, 2008 (fiscal 2007),respectively. Fiscal 2008 and fiscal 2007 both have 52-week accounting periods.

 

2.Use of Estimates

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

3. Earnings per Share

 

Basic earnings per commonshare amounts are calculated using the weighted average number of common sharesoutstanding for the period. Diluted earnings per common share amounts arecalculated using the weighted average number of common shares outstanding plusthe potential common shares that would have been outstanding upon the assumedexercise of all dilutive stock options and vesting of nonvested restrictedstock. During loss periods, diluted earnings per share amounts are based on theweighted average number of common shares outstanding.

 

The following table providesa reconciliation of the average number of common shares outstanding used tocalculate basic earnings per share to the number of common shares and commonstock equivalents outstanding used in calculating diluted earnings per sharefor the thirteen weeks ended May 3, 2008 and May 5, 2007:

 
| ** **                                                                | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                | ** ** | **May 3, 2008**          | ** ** | **May 5, 2007** | ** ** |
| Average number of common shares outstanding                               |       | 14,047,841                         |       | 13,807,134 |   |
| Incremental shares from assumed exercises  of stock options               |       | 168,739                            |       | 411,500 |   |
| Average number of common shares and common  stock equivalents outstanding |       | 14,216,580                         |       | 14,218,634 |   |

 

In accordance with theFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 128, *Earningsper Share*, the Company calculates the dilutive effect of stock-basedcompensation arrangements using the treasury stock method.  This methodassumes that the proceeds the Company receives from the exercise of stockoptions are used to repurchase common shares in the market.  In accordancewith SFAS No. 123R, *Share-Based Payment,*the Company includes as assumed proceeds the amount of compensation costattributed to future services and not yet recognized, and the amount of taxbenefits, if any, that would be credited to additional paid-in capital assumingexercise of outstanding options and vesting of nonvested restrictedstock.  For the thirteen weeks ended May 3, 2008 and May 5,2007, there were 81,000 and 2,000 options outstanding, respectively, topurchase shares of common stock excluded from the calculation of dilutedearnings per share because of antidilution.  For the thirteen weeks ended May 3,2008 and May 5, 2007, there were no shares of nonvested restricted stockincluded in the calculation of diluted earnings per share because of antidilution.

 

6

----

 

4. Fair Value Measurement

 

Effective February 3,2008, the Company adopted the methods of fair value as described in SFAS No. 157,*Fair Value Measurements,* to valueits financial assets and liabilities. SFAS No. 157 defines fair value asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants in theprincipal or most advantageous market at the measurement date. This statementalso establishes a fair value hierarchy that prioritizes observable andunobservable inputs used to measure fair value into three broad levels, whichare described below:

 

Level 1:  Unadjusted quoted prices in active marketsthat are accessible at the measurement date for assets or liabilities. The fairvalue hierarchy gives the highest priority to Level 1 inputs.

 

Level2:  Observable prices that are based oninputs not quoted on active markets, but corroborated by market data.

 

Level3:  Unobservable inputs are used whenlittle or no market data is available. Level 3 inputs are given the lowestpriority in the fair value hierarchy.

 

The Company’s assets carriedat fair value on a recurring basis are as follows at May 3, 2008 (inthousands):

 
| ** **              | ** ** | **Level 3** | ** ** |
|-------------------------|------------|------------------|------------|
|                    |       |             |       |
| Auction rate securities |       | $                | 53,720     |   |
|                         |            |                  |            |  |

 

Investment securities on thecondensed balance sheets consist exclusively of municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. Thesesecurities are high-grade (AAA rated with at least one rating agency) andapproximately 84% of them are either guaranteed by the Department of Educationunder the Federal Family Education Loan Program (40%) or backed by insurancecompanies, AMBAC Assurance Corporation (35%) and MBIA Insurance Corporation(9%). Historically, the ARS provided liquidity via an auction process thatreset the interest rate every 35 days, allowing investors to either roll overtheir investments or sell them at par. Beginning in February 2008, therewas insufficient demand for these types of investments during the auctions and,as a result, these securities are not currently liquid. The Company may not beable to access cash by selling these securities without incurring a loss ofprincipal until either, liquidity returns to the auction process, a secondarymarket emerges, they are redeemed by the issuer, or they mature in yearsranging from 2010 to 2040.

 

The Company classifies itsARS as available-for-sale and, therefore, they are carried at estimated fairvalue. As of May 3, 2008, there was insufficient observable marketinformation available to determine the fair value of the Company’s ARS.Accordingly, the Company estimated Level 3 fair values for these securitiesbased on assumptions that market participants would use in their estimates offair value. These assumptions included, among other things, discounted cashflow projections, the timing of expected future successful auctions,collateralization of the underlying securities and the credit worthiness of theissuer.  Through February 2, 2008,the ARS were valued at par value due to the frequent resets that historicallyoccurred through the auction process.

 

As a result of the temporarydeclines in fair value for the Company’s ARS, which the Company attributes to currentliquidity issues rather than credit issues, it has recorded an unrealized lossof $1,371,000 (net of tax) to accumulated other comprehensive loss in thecondensed balance sheet as of May 3, 2008. The Company believes thecurrent illiquid conditions are temporary in nature and that it has the abilityto hold the ARS until liquidity returns to the market. If it is laterdetermined that the fair value of these securities is other-than-temporarilyimpaired, the Company will record a loss in the statement of income. Due to theCompany’s belief that the market for these investments may take in excess oftwelve months to fully recover, the Company has classified them as noncurrentassets on the accompanying condensed balance sheet as of May 3, 2008.

 

5. Comprehensive Income

 

The components ofcomprehensive income for the thirteen weeks ended May 3, 2008 are asfollows (in thousands):

 
| Net income, as reported reported                                      |   | $      | 5,168  |   |
|-----------------------------------------------------------------------|--------|--------|--------|--------|
| Other comprehensive loss: loss:                                       |   |   |   |
| Unrealized loss on available-for-sale  securities, net of tax of $884 |   | (1,371 | )      |
| Comprehensive income                                                  |   | $      | 3,797  |   |

 

7

----

 

6. Revolving Line ofCredit

 

In March 2008, theCompany obtained a $35 million unsecured revolving credit facility with Bank ofAmerica, replacing a $3 million facility that had been scheduled to expire on June 30,2008.  The $35 million facility has aterm of 364 days, has an unused commitment fee equal to 0.15%, and has onerestrictive financial covenant (adjusted leverage ratio).  Loans under the facility bear interest ateither (a) a rate equal to the higher of (i) the Federal Funds Rateplus 0.50% and (ii) Bank of America’s prime rate, plus an applicablemargin; or (b) a rate equal to LIBOR plus an applicable margin. Theapplicable margin is dependent on the Company’s adjusted leverage ratio andranges from 1.00% to 1.50% for LIBOR-based loans, and from 0.00% to 0.50% forprime rate-based loans. The Company has had no borrowings under this facility.

 

7. Commitments andContingencies

 

The Company from time totime is involved in various legal proceedings incidental to the conduct of itsbusiness, including claims by customers, employees or former employees. While litigation is subject to uncertainties and the outcome of any litigatedmatter is not predictable, the Company is not aware of any legal proceedingspending or threatened against it that it expects to have a material adverseeffect on its financial condition, results of operations or liquidity.

 

8. Recent AccountingPronouncements

 

Effective February 3,2008, the Company adopted SFAS No. 157, *FairValue Measurements.*  SFAS No. 157defines fair value, establishes a framework for measuring fair value, andrequires additional disclosures about fair value measurements. SFAS No. 157applies to fair value measurements that are already required or permitted byother accounting standards, except for measurements of share-based payments andmeasurements that are similar to, but not intended to be, fair value and doesnot change existing guidance as to whether or not an instrument is carried atfair value. In February 2008, the FASB issued FASB Staff Position No. 157-2,*Partial Deferral of the Effective Date of StatementNo. 157,*which provides a one year deferral of the effectivedate of SFAS No. 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. Therefore, the Company has adoptedthe provisions of SFAS No. 157 with respect to its financial assets andfinancial liabilities only. The adoption of this statement did not have amaterial impact on the Company’s financial statements. See related disclosuresin Note 4.

 

Effective February 3,2008, the Company adopted SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities*.   SFAS No. 159 permits entities to chooseto measure specified financial assets and financial liabilities at fairvalue. Election of the fair value option is irrevocable and is applied ona contract-by-contract basis. The Company has elected not to apply the fairvalue option to the specified financial assets and financial liabilities, andaccordingly, the adoption of SFAS No. 159 had no financial statementimpact.

 

9. Reclassifications

 

Certain prior year amountshave been reclassified to conform to current year presentation.  The decrease of cash and accounts payablethrough a reclassification of outstanding checks for all prior periods causednet cash used in operating activities shown in the statements of cash flows toincrease by $1,012,000 from that previously reported for the thirteen weeksended May 5, 2007.

 

8

----

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

**Forward-LookingStatements**

 

Except for specifichistorical information, many of the matters discussed in this Form 10-Qmay express or imply projections of revenues or expenditures, statements ofplans and objectives for future operations, growth or initiatives, statementsof future economic performance, or statements regarding the outcome or impactof pending or threatened litigation. These, and similar statements, areforward-looking statements concerning matters that involve risks, uncertaintiesand other factors that may cause the actual performance of the Company todiffer materially from those expressed or implied by these statements. Allforward-looking information should be evaluated in the context of these risks,uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,”“expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “will likelyresult,” or “will continue” and similar words and expressions generallyidentify forward-looking statements. The Company believes the assumptionsunderlying these forward-looking statements are reasonable; however, any of theassumptions could be inaccurate, and therefore, actual results may differmaterially from those projected in the forward-looking statements.

 

The factors that may resultin actual results differing from such forward-looking information include, butare not limited to: transportation and distribution delays or interruptions;changes in freight rates; the Company’s ability to negotiate effectively thecost and purchase of merchandise; inventory risks due to shifts in marketdemand; the Company’s ability to gauge fashion trends and changing consumerpreferences; changes in consumer spending on apparel; changes in product mix;interruptions in suppliers’ businesses; interest rate fluctuations; adeterioration in general economic conditions caused by acts of war or terrorismor other factors; temporary changes in demand due to weather patterns;seasonality of the Company’s business; delays associated with building, openingand operating new stores; delays associated with building, opening, expandingor converting new or existing distribution centers; and other factors describedin the section titled “Item 1A. Risk Factors” and elsewhere in the Company’sAnnual Report on Form 10-K for the fiscal year ended February 2, 2008and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’sQuarterly Reports on Form 10-Q and in the other documents the Companyfiles with the Securities and Exchange Commission (“SEC”), including otherreports on Form 8-K and 10-Q, and any amendments thereto.

 

Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this Form 10-Q. Except as may be required by law, theCompany undertakes no obligation to update or revise publicly anyforward-looking statements contained herein to reflect events or circumstancesoccurring after the date of this Form 10-Q or to reflect the occurrence ofunanticipated events. Readers are advised, however, to read any furtherdisclosures the Company may make on related subjects in its public disclosuresor documents filed with the SEC.

 

**Overview**

 

We are a rapidly growing,value-priced retailer of urban fashion apparel and accessories for the entirefamily. Our merchandise offerings are designed to appeal to the preferences offashion conscious consumers, particularly African-Americans. Originally ourstores were located in the Southeast, and in recent years we expanded into the Mid-Atlanticand Midwest regions and Texas. We operate 331 stores in both urban and ruralmarkets in 20 states.

 

We measure performance usingkey operating statistics. One of the main performance measures we use iscomparable store sales growth. We define a comparable store as a store that hasbeen opened for an entire fiscal year. Therefore, a store will not beconsidered a comparable store until its 13th month of operation at the earliestor until its 24th month at the latest. As an example, stores opened in fiscal2007 and fiscal 2008 are not considered comparable stores in fiscal 2008.Relocated and expanded stores are included in the comparable store salesresults. We also use other operating statistics, most notably average sales perstore, to measure our performance. As we typically occupy existing space inestablished shopping centers rather than sites built specifically for ourstores, store square footage (and therefore sales per square foot) varies bystore. We focus on overall store sales volume as the critical driver ofprofitability. The average sales per store has increased over the years, as wehave increased comparable store sales and opened new stores that are generallylarger than our historical store base. Average sales per store increased from$0.8 million in fiscal 2000 to $1.5 million in fiscal 2007. In addition tosales, we measure gross profit as a percentage of sales and store operatingexpenses, with a particular focus on labor, as a percentage of sales. Theseresults translate into store level contribution, which we use to evaluateoverall performance of each individual store. Finally, we monitor corporateexpenses against budgeted amounts.

 

**AccountingPeriods**

 

The following discussioncontains references to fiscal years 2008 and 2007, which represent fiscal yearsending or ended on January 31, 2009 (fiscal 2008) and February 2,2008 (fiscal 2007), respectively. Fiscal 2008 and fiscal 2007 both have 52-weekaccounting periods. This discussion and analysis should be read with thecondensed financial statements and the notes thereto.

 

**Results ofOperations**

 

The following discussion ofthe Company’s financial performance is based on the condensed financialstatements set forth herein. The nature of the Company’s business is seasonal.Historically, sales in the first and fourth quarters have been higher thansales achieved in the second and

 

9

----

 

third quarters of the fiscalyear. Expenses and, to a greater extent, operating income vary by quarter.Results of a period shorter than a full year may not be indicative of resultsexpected for the entire year. Furthermore, the seasonal nature of the Company’sbusiness may affect comparisons between periods.

 

**ThirteenWeeks Ended May 3, 2008 and May 5, 2007**

 

*NetSales. * Netsales increased $14.4 million, or 13.5%, to $121.0 million for the thirteenweeks ended May 3, 2008 from $106.6 million in the thirteen weeks ended May 5,2007.  The increase in net sales was due primarily to 36 new stores openedsince last year’s first quarter, together with a 0.3% increase in comparablestore sales. Comparable stores include locations that have been relocated orexpanded. There were 4 stores relocated or expanded in the first quarter of2008 and 12 stores relocated or expanded in fiscal 2007, all of which impactedcomparable store sales. Sales in comparable relocated and expanded storesincreased 14.8% in the first quarter of 2008, while sales in all othercomparable stores decreased 0.8%. The 0.3% increase in comparable store salesconsisted of a 0.9% increase in the average customer purchase, partially offsetby a 0.6% decrease in the number of customer transactions. Comparable storesales changes by major merchandise class were as follows in the first quarterof 2008:  Children’s +5%; Women’s 0%;Home 0%; Men’s -3%; Accessories -4%.

 

The new stores opened in2007 and 2008, which are not yet included in comparable store sales, accountedfor $14.1 million of the total increase in sales, while the 0.3% sales increasein the 277 comparable stores contributed $0.3 million.

 

*GrossProfit. * Grossprofit increased $5.1 million, or 12.1%, to $46.8 million in the first quarterof 2008 from $41.7 million last year.  The increase in gross profit is aresult of the increase in sales, partially offset by a reduction in the grossmargin from 39.1% in last year’s first quarter to 38.6% this year.  Thisdecrease in gross margin resulted from higher merchandise markdowns as apercentage of sales caused by the sluggish sales environment in the firstquarter.

 

*Selling,General and Administrative Expenses. *Selling, general and administrative expensesincreased $5.6 million, or 18.5%, to $36.2 million in the first quarter of 2008from $30.6 million in last year’s first quarter.  The increase in theseexpenses was due primarily to additional store level, distribution andcorporate costs arising from the opening of 36 new stores since May 5,2007.  As a percentage of sales, selling, general and administrativeexpenses increased in the first quarter to 30.0% from 28.7% last year, dueprimarily to the deleveraging effect that occurs on expenses as a percentage ofsales when comparable store sales increase at a rate, 0.3%, that is lower thanthe rate of inflation on expenses. In particular, payroll as a percentage ofsales was up 60 basis points and occupancy expenses were 40 basis pointshigher.

 

*Depreciation andAmortization. *Depreciation and amortization expenseincreased $0.9 million, or 31.3%, to $3.7 million in the first quarter of 2008from $2.8 million in the first quarter of 2007, as the result of capitalexpenditures incurred for new and relocated/expanded stores.

 

*InterestIncome. *Interest income increased to $868,000 from $645,000 in the first quarter of2007 due primarily to higher contractual interest rates being earned on ourinvestments in auction rate securities once the auctions of such securitiesbegan to fail after February 2, 2008. See the discussion of auction ratesecurities below under “Cash Requirements” for more information.

 

*InterestExpense. *Interest expense decreased to $87,000 in the first quarter of 2008 from$144,000 last year due to the normal decline in the interest portion ofpayments on our capital lease obligations as the principal portion of suchobligations is reduced.

 

*Income TaxExpense. * Theprovision for income taxes decreased 21.1% to $2.4 million in this year’s firstquarter from $3.1 million in the first quarter of 2007.  The income taxrate in the first quarter of 2008 was 32.0% compared to 35.0% last year. Taxable income in 2008 is expected to be taxed at a rate closer to the actualfull year 2007 rate (31.0%) than the 35% rate estimated in the first quarter of2007.  The effective income tax ratereflects the benefit of tax-exempt interest income and various income taxcredits.

 

*NetIncome. * Netincome decreased 9.7% to $5.2 million in the first quarter of 2008 from $5.7million in last year’s first quarter due to the factors discussed above.

 

**Liquidityand Capital Resources**

 

Our cash requirements areprimarily for working capital, expansion of our distribution infrastructure,construction of new stores, remodeling of our existing stores and theimprovement of our information systems. Historically, we have met these cashrequirements from cash flow from operations, short-term trade credit,borrowings under our revolving lines of credit, long-term debt and capitalleases, and cash proceeds from our initial public offering.  We expect tobe able to meet future cash requirements with cash flow from operations,short-term trade credit, existing cash balances and borrowings under our  revolving credit facility.

 

10

----

 

*Current Financial Condition.*As of May 3, 2008, we had total cash andcash equivalents of $4.7 million compared with total cash and cash equivalentsof $6.2 million as of February 2, 2008. Inventory represented 39.0%of our total assets as of May 3, 2008. Management’s ability to manage ourinventory can have a significant impact on our cash flows from operationsduring a given interim period or fiscal year. In addition, inventory purchasescan be seasonal in nature, such as the purchase of warm-weather orChristmas-related merchandise.  Totalinventories at the end of the first quarter of 2008 were down $2.1 million, or2.5%, compared to the first quarter of fiscal 2007, while inventory incomparable stores was 13% lower, due to our efforts to conservatively controlinventory in light of the slow sales environment.

 

*Cash FlowsFrom Operating Activities*. Net cash provided by operating activities was $6.4 million inthe first quarter of fiscal 2008 compared to cash used in operating activitiesof $4.1 million in the first quarter of fiscal 2007. The main sources of cashprovided during the first quarter of this year were net income adjusted fordepreciation and amortization, deferred income taxes and noncash stock-basedcompensation expense, totaling $8.4 million, and an increase in income taxpayable of $2.3 million. Significant uses of cash consisted of a $1.3million decrease in accounts payable, a $1.3 million decrease in accruedcompensation, a $1.0 million decrease in accrued expenses and other long-termliabilities and a $0.8 million increase in inventory.

 

*Cash FlowsFrom Investing Activities.* Cash used in investing activities was $7.8 million in the firstquarter of this year compared to cash provided by investing activities of$0.2 million in last year’s first quarter. Purchases of property andequipment included in cash flows from investing activities totaled $7.1 millionand $4.1 million in the first quarter of fiscal 2008 and 2007, respectively.The increase during the first quarter of fiscal 2008 was due primarily toconstruction work related to the expansion of the Darlington, South Carolinadistribution center. Capital expenditures in the first quarter of both yearsalso included routine amounts for new stores, relocated and expanded stores andother general corporate purposes. Net purchases of municipal auction ratesecurities used cash of $0.7 million in the first quarter of fiscal 2008 andnet sales of such securities provided cash of $4.3 million in the first quarterof fiscal 2007.

 

*Cash FlowsFrom Financing Activities.* Cash flows from financing activities were insignificant in the firstquarter of both years.

 

**CashRequirements**

 

Our principal sources ofliquidity consist of: (i) cash and cash equivalents (which equaled$4.7 million as of May 3, 2008); (ii) short-term trade credit; (iii) cashgenerated from operations on an ongoing basis as we sell our merchandiseinventory; and (iv) a $35 million revolving credit facility. Short-termtrade credit, which arises from customary payment terms and trade practiceswith our vendors, represents a significant source of financing for inventorypurchases. Historically, our principal liquidity requirements have been forworking capital and capital expenditure needs.

 

As of May 3, 2008, theCompany had $53.7 million of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(AAA rated with at least one rating agency) and approximately 84% of them areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (40%) or backed by insurance companies, AMBAC AssuranceCorporation (35%) and MBIA Insurance Corporation (9%). Historically, the ARSprovided liquidity via an auction process that reset the interest rate every 35days, allowing investors to either roll over their investments or sell them at par.Beginning in February 2008, there was insufficient demand for these typesof investments during the auctions and, as a result, these securities are notcurrently liquid. The Company may not be able to access cash by selling thesesecurities without incurring a loss of principal until either, liquidityreturns to the auction process, a secondary market emerges, they are redeemedby the issuer, or they mature in years ranging from 2010 to 2040.

 

We believe that our existingsources of liquidity will be sufficient to fund our operations and anticipatedcapital expenditures for at least the next 24 months.

 

**CriticalAccounting Policies**

 

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates. Therehave been no material changes to the Critical Accounting Policies outlined inthe Company’s Annual Report on Form 10-K for fiscal 2007.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to financialmarket risks related to changes in interest rates connected with our revolvingline of credit, which bears interest at variable rates. We cannot predictmarket fluctuations in interest rates. As a result, future results may differmaterially from estimated results due to adverse changes in interest rates ordebt availability. 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 3,2008.  We do not engage in financial transactions for trading orspeculative purposes and have not entered into any interest rate hedgingcontracts.

 

11

----

 

We source all of our productfrom apparel markets in the United States in U.S. Dollars and, therefore, arenot directly subject to fluctuations in foreign currency exchange rates.However, fluctuations in foreign currency exchange rates could affect ourpurchasing power with vendors that import merchandise to sell to us. We havenot entered into forward contracts to hedge against fluctuations in foreigncurrency prices.

 

As of May 3, 2008, theCompany had $53.7 million of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(AAA rated with at least one rating agency) and approximately 84% of them areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (40%) or backed by insurance companies, AMBAC AssuranceCorporation (35%) and MBIA Insurance Corporation (9%). Historically, the ARSprovided liquidity via an auction process that reset the interest rate every 35days, allowing investors to either roll over their investments or sell them atpar. Beginning in February 2008, there was insufficient demand for thesetypes of investments during the auctions and, as a result, these securities arenot currently liquid. The Company may not be able to access cash by sellingthese securities without incurring a loss of principal until either, liquidityreturns to the auction process, a secondary market emerges, they are redeemedby the issuer, or they mature in years ranging from 2010 to 2040.

 

**Item 4. Controls and Procedures.**

 

We have carried out anevaluation, under the supervision and with the participation of management,including the Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of May 3, 2008 pursuant to Rules 13a-15 and 15d-15 ofthe Exchange Act. Based on that evaluation, the Chief Executive Officer and theChief Financial Officer each concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information has been accumulated andcommunicated to our management, including the officers who certify ourfinancial reports, as appropriate, to allow timely decisions regarding therequired disclosures. There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended May 3,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

12

----

 

**PART II— OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

We are from time to timeinvolved in various legal proceedings incidental to the conduct of ourbusiness, including claims by customers, employees or former employees. Whilelitigation is subject to uncertainties and the outcome of any litigated matteris not predictable, we are not aware of any legal proceedings pending orthreatened against us that we expect to have a material adverse effect on ourfinancial condition, results of operations or liquidity.

 

**Item 1A.Risk Factors.**

 

There are no materialchanges to the Risk Factors described under the section “ITEM 1A. RISK FACTORS”in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2,2008.

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds.**

 

Notapplicable.

 

**Item 3.Defaults Upon Senior Securities.**

 

Not applicable.

 

**Item 4.Submission of Matters to a Vote of Security Holders.**

 

Not applicable.

 

**Item 5.Other Information.**

 

Not applicable.

 

**Item 6. Exhibits.**

 
| 10.1   |   | Credit Agreement dated March 26, 2008 among Citi  Trends, Inc., as Borrower, the Subsidiaries of the Borrower identified  therein, as the Guarantors, and Bank of America, N.A., as Lender  (incorporated by reference to Exhibit 10.25 to the Company’s Annual  Report on Form 10-K for the year ended February 2, 2008). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Employment Agreement between the Company and Elizabeth Feher dated  April 2, 2008.*                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Employment Non-Compete, Non-Solicit and Confidentiality Agreement  between the Company and Elizabeth Feher dated April 2, 2008.*                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 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.* †                                                                                                                                                                                                               |

 

----

*           Filedherewith.

 

†                     Pursuant to Securities and ExchangeCommission Release No. 33-8238, this certification will be treated as “accompanying”this Quarterly Report on Form 10-Q and not “filed” as part of such 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 beincorporated by reference into any filing under the Securities Act of 1933 orthe Securities Exchange Act 1934, except to the extent that the registrantspecifically incorporates it by reference.

 

13

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, and the undersigned also has signed this report inhis capacity as the Registrant’s Chief Financial Officer (Principal FinancialOfficer).

 

 
|                    | CITI TRENDS, INC. |
|-------------------------|-------------------|
|                    |              |   |
|                    |              |   |
| Date: May 30, 2008 |              |   |
|                    |              |   |
|                    |              |   |
|                    | By:               | /s/ Bruce D. Smith |
|                    | Name:             | Bruce D. Smith |
|                    | Title:            | Senior Vice President, Chief Financial Officer and Secretary |

 

14

----