Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**Forthe quarterly period ended May 1, 2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting 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                        |   | 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 of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date.

 
| **Class**                     | ** ** | **Outstanding  at May 17, 2010** |
|-------------------------------|------------|---------------------------------------|
| Common Stock,  $.01 par value |       | 14,835,285  shares                    |

 

 

 

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**CITITRENDS, INC.**

**FORM 10-Q**

**TABLEOF CONTENTS**

 
| ** **   | ** ** | ** **                                                                                                               | **PAGE  NUMBER** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
| ** **   | ** ** | ** **                                                                                                               | ** **       |
| PART I  |       | FINANCIAL INFORMATION                                                                                                    |             |
|         |       |                                                                                                                     |             |
| Item 1       |       | Financial Statements                                                                                                     |             |
|         |       |                                                                                                                     |             |
|         |       | Condensed  Consolidated Balance Sheets (unaudited) May 1, 2010 and January 30,  2010                           | 3                |
|         |       |                                                                                                                     |             |
|         |       | Condensed  Consolidated Statements of Income (unaudited) Thirteen weeks ended May 1,  2010 and May 2, 2009     | 4                |
|         |       |                                                                                                                     |             |
|         |       | Condensed Consolidated  Statements of Cash Flows (unaudited) Thirteen weeks ended May 1, 2010  and May 2, 2009 | 5                |
|         |       |                                                                                                                     |             |
|         |       | Notes to the  Condensed Consolidated 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       |       | (Removed and Reserved)                                                                                                   | 14               |
|         |       |                                                                                                                     |             |
| Item 5       |       | Other Information                                                                                                        | 14               |
|         |       |                                                                                                                     |             |
| Item 6       |       | Exhibits                                                                                                                 | 14               |
|         |       |                                                                                                                     |             |
|         |       | SIGNATURES                                                                                                               | 15               |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**CitiTrends, Inc.**

** **

**Condensed Consolidated Balance Sheets**

**May 1,2010 and January 30, 2010**

**(Unaudited)**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                            | ** ** | **May 1,** | ** ** | **January 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                            | ** ** | **2010**        | ** ** | **2010**             | ** ** |
| **Assets**                                                                                                                                                                                                                                                                            |       |            |       |                 |       |
| Current  assets:                                                                                                                                                                                                                                                                      |       |            |       |                 |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                            |       | $               | 83,390     |                 | $          | 62,993 |   |
| Short-term  investment securities                                                                                                                                                                                                                                                     |       | 30,025          |       | 33,025               |       |
| Inventory                                                                                                                                                                                                                                                                             |       | 95,685          |       | 100,874              |       |
| Prepaid  and other current assets                                                                                                                                                                                                                                                     |       | 9,671           |       | 10,409               |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                   |       | 4,460           |       | 4,518                |       |
| Total  current assets                                                                                                                                                                                                                                                                 |       | 223,231         |       | 211,819              |       |
| Property  and equipment, net of accumulated depreciation and amortization of $80,300  and $76,247 as of May 1, 2010 and January 30, 2010, respectively                                                                                                                      |       | 64,300          |       | 63,791               |       |
| Goodwill                                                                                                                                                                                                                                                                              |       | 1,371           |       | 1,371                |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                   |       | 2,094           |       | 2,488                |       |
| Other  assets                                                                                                                                                                                                                                                                         |       | 595             |       | 517                  |       |
| Total  assets                                                                                                                                                                                                                                                                         |       | $               | 291,591    |                 | $          | 279,986 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                                        |       |            |       |                 |       |
| Current  liabilities:                                                                                                                                                                                                                                                                 |       |            |       |                 |       |
| Accounts  payable                                                                                                                                                                                                                                                                     |       | $               | 61,289     |                 | $          | 62,706 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                     |       | 12,046          |       | 12,773               |       |
| Accrued  compensation                                                                                                                                                                                                                                                                 |       | 7,033           |       | 9,500                |       |
| Income  tax payable                                                                                                                                                                                                                                                                   |       | 3,949           |       | 3,024                |       |
| Layaway  deposits                                                                                                                                                                                                                                                                     |       | 1,937           |       | 645                  |       |
| Total  current liabilities                                                                                                                                                                                                                                                            |       | 86,254          |       | 88,648               |       |
| Other  long-term liabilities                                                                                                                                                                                                                                                          |       | 10,024          |       | 9,995                |       |
| Total  liabilities                                                                                                                                                                                                                                                                    |       | 96,278          |       | 98,643               |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                           |       |            |       |                 |       |
| Common stock, $0.01 par value. Authorized  32,000,000 shares; 15,001,169 shares issued as of May 1, 2010 and  14,899,577 shares issued as of January 30, 2010; 14,835,419 shares outstanding  as of May 1, 2010 and 14,733,827 outstanding as of January 30, 2010 |       | 147             |       | 146                  |       |
| Paid-in-capital                                                                                                                                                                                                                                                                       |       | 75,888          |       | 74,368               |       |
| Retained  earnings                                                                                                                                                                                                                                                                    |       | 119,443         |       | 106,994              |       |
| Treasury  stock, at cost; 165,750 shares as of May 1, 2010 and January 30,  2010                                                                                                                                                                                            |       | (165            | )          | (165                 | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                      |       | 195,313         |       | 181,343              |       |
| Commitments  and contingencies (note 7)                                                                                                                                                                                                                                               |       |            |       |                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                      |       | $               | 291,591    |                 | $          | 279,986 |   |

 

See accompanying notes to the condensed consolidatedfinancial statements (unaudited).

 

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**Citi Trends, Inc.**

** **

**CondensedConsolidated Statements of Income**

**Thirteen Weeks Ended May 1, 2010 and May 2,2009**

**(Unaudited)**

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

 
| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **May 1,**          | ** ** | **May 2,** | ** ** |
| ** **                                    | ** ** | **2010**                 | ** ** | **2009** | ** ** |
| Net sales                                     |       | $                        | 181,406    |   | $ | 143,097 |   |
| Cost of sales                                 |       | 109,016                  |       | 85,909 |   |
| Gross profit                                  |       | 72,390                   |       | 57,188 |   |
| Selling, general and administrative expenses  |       | 48,450                   |       | 40,133 |   |
| Depreciation and amortization                 |       | 4,750                    |       | 4,373 |   |
| Income from operations                        |       | 19,190                   |       | 12,682 |   |
| Interest income                               |       | 55                       |       | 139 |   |
| Interest expense                              |       | (4                       | )          | (41 | ) |
| Unrealized loss on investment securities      |       | —                   |       | (728 | ) |
| Income before income tax expense              |       | 19,241                   |       | 12,052 |   |
| Income tax expense                            |       | 6,792                    |       | 4,123 |   |
| Net income                                    |       | $                        | 12,449     |   | $ | 7,929 |   |
|                                          |       |                     |       |   |   |
| Basic net income per common share             |       | $                        | 0.86       |   | $ | 0.54 |   |
| Diluted net income per common share           |       | $                        | 0.86       |   | $ | 0.54 |   |
|                                          |       |                     |       |   |   |
| Net income attributable to common shares      |       |                     |       |   |   |
| Basic                                         |       | $                        | 12,449     |   | $ | 7,780 |   |
| Diluted                                       |       | $                        | 12,449     |   | $ | 7,780 |   |
|                                          |       |                     |       |   |   |
| Weighted average number of shares outstanding |       |                     |       |   |   |
| Basic                                         |       | 14,458                   |       | 14,318 |   |
| Diluted                                       |       | 14,489                   |       | 14,339 |   |

 

See accompanying notes to the condensedconsolidated financial statements (unaudited).

 

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**CitiTrends, Inc.**

** **

**Condensed Consolidated Statements ofCash Flows**

**ThirteenWeeks Ended May 1, 2010 and May 2, 2009**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                         | ** ** | **Thirteen  Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **May 1,**           | ** ** | **May 2,** | ** ** |
| ** **                                                                         | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| Operating  activities:                                                             |       |                      |       |   |   |
| Net  income                                                                        |       | $                         | 12,449     |   | $ | 7,929 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                      |       |   |   |
| Depreciation  and amortization                                                     |       | 4,750                     |       | 4,373 |   |
| Loss  on disposal of property and equipment                                        |       | 143                       |       | — |   |
| Deferred  income taxes                                                             |       | 452                       |       | (649 | ) |
| Noncash  stock-based compensation expense                                          |       | 914                       |       | 355 |   |
| Excess  tax benefits from stock-based payment arrangements                         |       | (1,410                    | )          | (622 | ) |
| Unrealized  loss on investment securities                                          |       | —                    |       | 728 |   |
| Changes  in assets and liabilities:                                                |       |                      |       |   |   |
| Inventory                                                                          |       | 5,189                     |       | 1,646 |   |
| Prepaid  and other current assets                                                  |       | 738                       |       | 2,027 |   |
| Other  assets                                                                      |       | (78                       | )          | (45 | ) |
| Accounts  payable                                                                  |       | (1,417                    | )          | (4,396 | ) |
| Accrued  expenses and other long-term liabilities                                  |       | (698                      | )          | 937 |   |
| Accrued  compensation                                                              |       | (2,467                    | )          | (2,187 | ) |
| Income  tax payable                                                                |       | 2,335                     |       | 3,917 |   |
| Layaway  deposits                                                                  |       | 1,292                     |       | 1,039 |   |
| Net  cash provided by operating activities                                         |       | 22,192                    |       | 15,052 |   |
| Investing  activities:                                                             |       |                      |       |   |   |
| Sales/redemptions  of investment securities                                        |       | 3,000                     |       | — |   |
| Purchases  of property and equipment                                               |       | (5,402                    | )          | (3,925 | ) |
| Net  cash used in investing activities                                             |       | (2,402                    | )          | (3,925 | ) |
| Financing  activities:                                                             |       |                      |       |   |   |
| Repayments  on capital lease obligations                                           |       | —                    |       | (415 | ) |
| Excess  tax benefits from stock-based payment arrangements                         |       | 1,410                     |       | 622 |   |
| Proceeds  from the exercise of stock options                                       |       | 151                       |       | 153 |   |
| Cash  used to settle withholding taxes on stock option exercises                   |       | (954                      | )          | (331 | ) |
| Net  cash provided by financing activities                                         |       | 607                       |       | 29 |   |
| Net  increase in cash and cash equivalents                                         |       | 20,397                    |       | 11,156 |   |
| Cash  and cash equivalents:                                                        |       |                      |       |   |   |
| Beginning  of period                                                               |       | 62,993                    |       | 33,516 |   |
| End  of period                                                                     |       | $                         | 83,390     |   | $ | 44,672 |   |
|                                                                               |       |                      |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                      |       |   |   |
| Cash  paid for interest                                                            |       | $                         | —     |   | $ | 35 |   |
| Cash  paid for income taxes                                                        |       | $                         | 4,005      |   | $ | 855 |   |

 

See accompanying notes to the condensed consolidatedfinancial statements (unaudited).

 

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

**May 1,2010**

 

1. Basis ofPresentation

 

Citi Trends, Inc. and its subsidiary (the “Company”)operate as a rapidly growing, value-priced retailer of urban fashion appareland accessories for the entire family. As of May 1, 2010, the Company operated 420 stores in 24 states.

 

The condensed consolidated balance sheet as of May 1,2010 and the condensed consolidated statements of income and cash flows for thethirteen-week periods ended May 1, 2010 and May 2, 2009 have beenprepared by the Company without audit. The condensed consolidated balance sheetas of January 30, 2010 has been derived from the audited financialstatements as of that date, but does not include all required year enddisclosures.  In the opinion of management, such statements include alladjustments considered necessary to present fairly the Company’s financial positionas of May 1, 2010 and January 30, 2010, and its results of operationsand cash flows for all periods presented. It is suggested that these condensed consolidated financial statementsbe read in conjunction with the consolidated financial statements and the notesthereto included in the Company’s latest Annual Report on Form 10-K forthe year ended January 30, 2010.

 

The accompanying unaudited condensed consolidatedfinancial statements are prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and with theinstructions 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.  Operating results for the thirteen weeks ended May 1,2010 are not necessarily indicative of the results that may be expected for thefiscal year ending January 29, 2011.

 

The following contains references to years 2010 and2009, which represent fiscal years ending or ended on January 29, 2011(fiscal 2010) and January 30, 2010 (fiscal 2009), respectively.  Fiscal 2010 and fiscal 2009 both have 52-weekaccounting 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 nonvested restricted stock andstock options.  During loss periods,diluted earnings per share amounts are based on the weighted average number ofcommon shares outstanding.

 

The dilutive effect of stock-based compensationarrangements is accounted for using the treasury stock method.  Thismethod assumes that the proceeds the Company receives from the exercise ofstock options are used to repurchase common shares in the market.  TheCompany includes as assumed proceeds the amount of compensation cost attributedto future services and not yet recognized, and the amount of tax benefits, ifany, that would be credited to additional paid-in capital assuming exercise ofoutstanding options and vesting of nonvested restricted stock.  For thethirteen weeks ended May 1, 2010 and May 2, 2009, there were 58,000and 69,000 options outstanding, respectively, to purchase shares of commonstock excluded from the calculation of diluted earnings per share because ofantidilution.

 

Nonvested restricted stock awards granted to employeesand non-employee directors contained nonforfeitable dividend rights prior to October 31,2009, when amendments agreed to between the Company and its associates becameeffective.  Such amendments resulted inthe dividend rights being forfeitable in the event an associate leaves theemploy of the Company prior to the vesting of the restricted stock awards.  Accordingly, such awards were consideredparticipating securities through the third quarter of 2009 and, therefore, wereincluded in the earnings allocation in computing earnings per share under therequired two-class method.  However, suchawards will not be treated as participating securities after October 31,2009 due to the aforementioned amendments.

 

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

 
| ** **                                                        | ** ** | **Thirteen  Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                        | ** ** | **May 1,  2010**     | ** ** | **May 2,  2009** | ** ** |
|                                                              |       |                      |       |   |   |
| Basic:                                                            |       |                      |       |   |   |
| Numerator                                                         |       |                      |       |   |   |
| Net income                                                        |       | $                         | 12,449     |   | $ | 7,929 |   |
| Net income allocated to participating securities                  |       | —                    |       | (149 | ) |
| Net income attributable to common  stockholders-basic             |       | 12,449                    |       | 7,780 |   |
|                                                              |       |                      |       |   |   |
| Denominator                                                       |       |                      |       |   |   |
| Weighted average common shares                                    |       | 14,458                    |       | 14,318 |   |
|                                                              |       |                      |       |   |   |
| Net income attributable to common stockholders per  share-basic   |       | $                         | 0.86       |   | $ | 0.54 |   |
|                                                              |       |                      |       |   |   |
| Diluted:                                                          |       |                      |       |   |   |
| Numerator                                                         |       |                      |       |   |   |
| Net income                                                        |       | $                         | 12,449     |   | $ | 7,929 |   |
| Net income allocated to participating securities                  |       | —                    |       | (149 | ) |
| Net income attributable to common stockholders-diluted            |       | 12,449                    |       | 7,780 |   |
|                                                              |       |                      |       |   |   |
| Denominator                                                       |       |                      |       |   |   |
| Denominator for basic calculation                                 |       | 14,458                    |       | 14,318 |   |
| Effect of dilutive securities                                     |       | 31                        |       | 21 |   |
| Denominator for diluted calculation                               |       | 14,489                    |       | 14,339 |   |
|                                                              |       |                      |       |   |   |
| Net income attributable to common stockholders per  share-diluted |       | $                         | 0.86       |   | $ | 0.54 |   |

 

4. Fair Value Measurement

 

Fair value is defined 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. Fair value is established according to ahierarchy 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 1, 2010, the Company had $26.8 million($30.0 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. The ARS areclassified as trading securities and are reflected at estimated fair value.These securities are high-grade (at least AA-rated with one or more ratingagencies) and approximately 74% are either guaranteed  by the Department of Education under theFederal Family Education Loan Program (35%) or backed by insurance companies,AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation (7%).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, $26.0 million of the Company’s ARShave been redeemed at par value by certain issuers and the Company’s investmentbanks since February 2008.  Inaddition, the Company has not experienced any defaults and continues to earnand receive interest on all of the investments still owned by the Company.

 

There was insufficient observable market informationavailable as of May 1, 2010 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 $26.8 million as of May 1, 2010, representing a$3.2 million decline from par value.

 

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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 using a discounted cash flow approach that includes estimates ofinterest rates and the credit risk associated with UBS.  The Right was valued at $3.2 million as of May 1,2010.  This valuation was based onunobservable inputs, therefore, represented a Level 3 fair value.  The Company expects that subsequent changesin the value of the Right will largely offset the subsequent fair valuemovements of the ARS, subject to the continued expected performance by UBS ofits obligations under the Right.  Priorto the acceptance of the Right, the ARS were classified as available-for-salesecurities.  Upon acceptance of the Rightto sell the ARS, the ARS were reclassified to trading securities.  The ARS and the Right included in the May 1,2010 condensed consolidated balance sheet are classified as current assets dueto the expectation that liquidity will occur during the next twelve monthsthrough the Company’s exercise of the Right.

 

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 1,2010 (in thousands):

 
| ** **                                     | ** ** | **Put  Option Related to ARS** | ** ** | **Auction  Rate Securities** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| Balance as of January 30, 2010            |       | $                              | 3,307      |                         | $          | 29,718 |   |
| Unrealized gains (losses) included in earnings |       | 62                             |       | (62                          | )          |
| Sales/redemptions of investment securities     |       | (149                           | )          | (2,851                       | )          |
| Balance as of May 1, 2010                 |       | $                              | 3,220      |                         | $          | 26,805 |   |

 

5. Revolving Line of Credit

 

On March 22, 2010, the Company’s $20 million unsecuredrevolving credit facility with Bank ofAmerica was amended to extend the expiration date to March 22, 2012.  The facility has an unused commitment fee of0.25% and loans under the facility 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 applicablemargin; or (b) a rate equal to LIBOR plus an applicable margin.  The applicable margin is dependent on theCompany’s consolidated leverage ratio and ranges from 0.75% to 1.25% for loansbearing interest at the rate described under (a) above and from 1.75% to2.25% for loans bearing interest at the rate described under (b) above.The Company has had no borrowings under this facility.

 

6. Other Long-Term Liabilities

 

The components of other long-term liabilities as of May 1,2010 and January 30, 2010 are as follows (in thousands):

 
| ** **                     | ** ** | **May 1,  2010** | ** ** | **January 30,  2010** | ** ** |
|--------------------------------|------------|-----------------------|------------|----------------------------|------------|
| Deferred  rent                 |       | $                     | 3,644      |                       | $          | 3,528 |   |
| Tenant  improvement allowances |       | 5,551                 |       | 5,600                      |       |
| Other                          |       | 829                   |       | 867                        |       |
|                           |       | $                     | 10,024     |                       | $          | 9,995 |   |

 

7. 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 subject touncertainties and the outcome of any litigated matter is not predictable, theCompany is not aware of any legal proceedings pending or threatened against itthat it expects to have a material adverse effect on its financial condition,results of operations or liquidity.

 

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8. Recent Accounting Pronouncements

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued a new accounting standardwhich established the Accounting Standards Codification (the “Codification” or “ASC”)as the single source of authoritative nongovernmental generally acceptedaccounting principles (“GAAP”).  Allpreviously existing accounting standard documents, such as FASB, AmericanInstitute of Certified Public Accountants, Emerging Issues Task Force and otherrelated literature, excluding guidance from the Securities and ExchangeCommission (“SEC”), were superseded by the Codification. All othernon-grandfathered, non-SEC accounting literature not included in theCodification became nonauthoritative. The Codification did not change GAAP, butinstead introduced a new structure that combines all authoritative standardsinto a comprehensive, topically organized online database. The Codificationimpacted the Company’s consolidated financial statements as all references toauthoritative accounting literature are now referenced in accordance with theCodification. There have been no changes to the content of the Company’sconsolidated financial statements as a result of adopting the Codificationduring the third quarter of fiscal 2009.

 

On February 1, 2009, the Company adopted newguidance (ASC Topic 260, *Earnings Per Share*)which addressed whether instruments granted in share-based payment transactionsare participating securities prior to vesting, and therefore, need to beincluded in the earnings allocation in computing earnings per share under thetwo-class method.  The adoption of thisnew guidance changed the way the Company calculated earnings per share.  All prior period earnings per shareinformation had to be adjusted retrospectively. Adoption of the new standard had the effect of retrospectivelydecreasing basic and diluted earnings per share by $0.02 in fiscal 2008, and itcaused basic and diluted earnings per share to be $0.01 lower than each wouldhave otherwise been in fiscal 2009. However, as discussed in Note 3, amendments to restricted stock awardsbetween the Company and its associates effective October 31, 2009eliminated the impact of this standard for periods subsequent to the thirdquarter of fiscal 2009.

 

In April 2009, the FASB issued guidance (ASCTopic 825, *Financial Instruments*)**requiring additional interim disclosures about the fairvalue of all financial instruments.  Thisstandard was adopted by the Company during the second quarter of 2009 and therewas no material impact on the Company’s consolidated financial statements.  See Note 4 for these disclosures.

 

In January 2010, the FASB issued AccountingStandards Update (“ASU”) No. 2010-06, “Fair Value Measurements andDisclosures — Improving Disclosures about Fair Value Measurements” (ASU2010-06).  This standard requires newdisclosures for significant transfers inand out of Levels 1 and 2 of the fair value hierarchyand the activity within Level 3 of the hierarchy, while also clarifyingexisting disclosures regarding the level of disaggregation of assets orliabilities and the valuation techniques and inputs used to measure fairvalue.  The standard is effective forinterim and annual reporting periods beginning after December 15, 2009,with the exception of the new Level 3 activity disclosures, which are effectivefor interim and annual reporting periods beginning after December 15,2010.  The adoption of the applicableprovisions of this standard in the first quarter of fiscal 2010 did not have amaterial impact on the Company’s consolidated financial statements and thefuture adoption of the Level 3 activity disclosures is not expected to have amaterial impact.

 

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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 30, 2010 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 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 toupdate or revise publicly any forward-looking statements contained herein toreflect events or circumstances occurring after the date of this Form 10-Qor to reflect the occurrence of unanticipated events. Readers are advised,however, to read any further disclosures the Company may make on relatedsubjects in its public disclosures or documents filed with the SEC, includingreports on Form 8-K.

 

**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 the states of Texas and California. We operated 420 storesin both urban and rural markets in 24 states as of May 1, 2010.

 

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 2009 and fiscal 2010 are notconsidered comparable stores in fiscal 2010. 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 $1.5million in fiscal 2009. 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.  All of the statistics discussed above arecritical components of earnings before interest, taxes, depreciation andamortization (“EBITDA”) which is considered our most important operatingstatistic.

 

**Accounting Periods**

 

The following discussion contains references to fiscalyears 2010 and 2009, which represent fiscal years ending or ended on January 29,2011 (fiscal 2010) and January 30, 2010 (fiscal 2009), respectively.Fiscal 2010 and fiscal 2009 both have 52-week accounting periods. Thisdiscussion and analysis should be read with the unaudited condensedconsolidated financial statements and the notes thereto.

 

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**Results of Operations**

 

The following discussion of the Company’s financialperformance is based on the unaudited condensed consolidated 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 third quarters of the fiscal year. Expensesand, to a greater extent, operating income, vary by quarter. Results of aperiod shorter than a full year may not be indicative of results expected forthe entire year. Furthermore, the seasonal nature of the Company’s business mayaffect comparisons between periods.

 

**Thirteen Weeks Ended May 1, 2010and May 2, 2009**

 

*Net Sales. * Net sales increased $38.3 million, or26.8%, to $181.4 million in the thirteen weeks ended May 1, 2010 from$143.1 million in the thirteen weeks ended May 2, 2009.  The increasein net sales was due primarily to the opening of 60 new stores since last year’sfirst quarter, together with a 9.6% increase in comparable store sales,partially offset by the effect of closing five stores since last year’s firstquarter. Comparable store sales benefited from a strong spring merchandiseassortment that resonated well with our customers.  In addition, we believe that our customersreceived their tax refunds later this year which caused a shift of sales fromJanuary, the last month of fiscal 2009, to February, the first month of fiscal2010.  Comparable stores includelocations that have been relocated or expanded. There were twelve storesrelocated or expanded since last year’s first quarter, all of which impactedcomparable store sales. Sales in comparable relocated and expanded storesincreased 15.2% in the first quarter of 2010, while sales in all othercomparable stores increased 9.3%. Approximately two-thirds of the 9.6% overallincrease in comparable store sales was due to an increase in the number ofcustomer transactions, with the other one-third resulting from a higher averageticket. Comparable store sales changes by major merchandise class were asfollows in the first quarter of 2010: Accessories; +25%; Home +15%; Men’s +8%; Women’s +8%; and Children’s+4%.

 

The new stores opened in 2009 and 2010, net of thefive closed stores, accounted for $24.9 million of the increase in total sales,while the 9.6% sales increase in the 352 comparable stores totaled $13.4million.

 

*Gross Profit. * Gross profit increased $15.2 million, or26.6%, to $72.4 million in the first quarter of 2010 from $57.2 million in lastyear’s first quarter.  The increase in gross profit is a result of theincrease in sales, partially offset by a slight decline in the gross margin to39.9% from 40.0% in last year’s first quarter.  None of the components ofgross margin (initial mark-up, markdowns, shrinkage and freight) individuallyfluctuated by more than 30 basis points as a percentage of sales between thefirst quarters of 2010 and 2009.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $8.3 million, or 20.7%, to $48.5 million in the firstquarter of 2010 from $40.1 million in last year’s first quarter.  Theincrease in these expenses was due primarily to additional store level,distribution and corporate costs arising from the opening of 60 new storessince last year’s first quarter.  As apercentage of sales, selling, general and administrative expenses improved to26.7% in the first quarter of fiscal 2010 from 28.0% in the first quarter offiscal 2009, due primarily to the leveraging effect that occurs on expenses asa percentage of sales when comparable store sales increase at a rate that ishigher than the rate of inflation on expenses. In particular, payroll expenses, which have a sizable fixed component associatedwith store management and corporate overhead, decreased 50 basis points as apercentage of sales, and occupancy expenses, which tend to be more fixed innature than other expenses, decreased 40 basis points as a percentage of salesdue to the leverage provided by the strong comparable store salesincrease.  Smaller amounts of expenseleverage were realized for items such as advertising, supplies and insurance.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased $0.4million, or 8.6%, to $4.8 million in the first quarter of 2010 from $4.4million in the first quarter of 2009, as the result of capital expendituresincurred for new and relocated/expanded stores.

 

*Interest Income. * Interest income decreased to $55,000 inthe first quarter of 2010 from $139,000 in the first quarter of 2009 dueprimarily to a declining interest rate environment which affected our returnson auction rate securities as well as cash and cash equivalents.

 

*Interest Expense. * Interest expense decreased to $4,000 inthe first quarter of 2010 from $41,000 in the first quarter of 2009 due to thefinal liquidation of our capital lease obligations.

 

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

 

*Income Tax Expense. * Income tax expense increased $2.7million, or 64.7%, to $6.8 million in this year’s first quarter from $4.1million in the first quarter of 2009 due to an increase in pretax income,together with an increase in the effective income tax rate to 35.3% from 34.2%as the result of tax credits increasing at a lower rate than pretax income.

 

*Net Income. * Net income increased 57.0% to $12.4million in the first quarter of 2010 from $7.9 million in the first quarter of2009 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, opening of new stores,remodeling of our existing stores and the improvement of our information systems.Historically, we have met these cash requirements from cash flow fromoperations, short-term trade credit, borrowings under our revolving lines ofcredit, long-term debt, capital leases, and cash proceeds from our initialpublic offering in 2005.  We expect to be able to meet future cashrequirements with cash flow from operations, short-term trade credit, existingcash balances and, if necessary, borrowings under our revolving creditfacility.

 

*Current Financial Condition.*As of May 1, 2010, we had total cash and cash equivalents of $83.4million compared with total cash and cash equivalents of $63.0 million asof January 30, 2010. Inventory represented 32.8% of our total assets as ofMay 1, 2010. 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-related merchandise.  Total inventories at the end of the firstquarter of 2010 were up $11.1 million, or 13.1%, compared to the first quarterof fiscal 2009, while store selling square footage increased 17.2%.  Inventory in comparable stores was 3.5% lowerthan the first quarter of fiscal 2009 due to our efforts to conservativelycontrol our investment in inventory.

 

*Cash Flows From Operating Activities*. Net cash provided by operatingactivities was $22.2 million in the first quarter of fiscal 2010 comparedto $15.1 million in the first quarter of fiscal 2009.  The main source of cash provided during thefirst quarter of fiscal 2010 was net income adjusted for noncash expenses suchas depreciation and amortization, loss on disposal of property and equipment,deferred income taxes and stock-based compensation expense, totaling$18.7 million (compared to $12.7 million in last year’s firstquarter).  Other significant sources ofcash in the first quarter of fiscal 2010 were (1) a $5.2 million decreasein inventory (compared to $1.6 million in the first quarter of fiscal 2009) dueto strong sales in the first quarter, including a shift in sales from January toFebruary as discussed in the “Results of Operations” section above, aswell as ongoing efforts to conservatively manage inventory, (2) a $2.3million increase in income tax payable (compared to $3.9 million in the firstquarter of fiscal 2009) resulting primarily from an increase in pretax income,and (3) a $1.3 million decrease in the liability for layaway deposits(compared to $1.0 million in the first quarter of fiscal 2009) due to theseasonality of layaway balances which are low at the end of our fiscal year,because all balances have to be redeemed by customers or they are cancelled bythe middle of December each year. Significant uses of cash included (1) a $2.5 million decrease inaccrued compensation (compared to $2.2 million in last year’s first quarter) asa result of the payment of the prior year’s annual accrued incentivecompensation in the first quarter and due to the accrual for our bi-weeklypayroll including one week of payroll at the end of the first quarter comparedwith two weeks at the end of the fiscal year, and (2) a $1.4 milliondecrease in accounts payable (compared to $4.4 million in last year’s firstquarter) due to the timing of payments made for spring merchandise purchases.

 

*Cash Flows From InvestingActivities.* Cashused in investing activities was $2.4 million in the first quarter of fiscal2010 compared to $3.9 million in the first quarter of fiscal 2009.Purchases of property and equipment included in cash flows from investingactivities totaled $5.4 million and $3.9 million in the first quarter of fiscal2010 and 2009, respectively, with the increase resulting from opening 19 newstores in the first quarter of fiscal 2010 compared with 8 in the first quarterof fiscal 2009.  Capital expenditures inboth years included routine amounts for new stores, relocated and expandedstores and other general corporate purposes. Redemptions of municipal auctionrate securities provided cash of $3.0 million in the first quarter of fiscal2010.

 

*Cash Flows From FinancingActivities.* Cashflows from financing activities were insignificant in the first quarters ofboth fiscal 2010 and 2009.

 

**Cash Requirements**

 

Our principal sources of liquidity consist of: (i) cashand cash equivalents (which equaled $83.4 million as of May 1, 2010);(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 1, 2010, we had $26.8 million ($30.0million 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 74% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (35%) or backed by insurance companies, AMBAC AssuranceCorporation (32%) or MBIA Insurance Corporation (7%). 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, $26.0 million of the Company’s ARS have been redeemedat par value by certain issuers and the Company’s investment banks since February 2008.  In addition, we have not experienced anydefaults and continue to earn and receive interest on all of the investmentsthat 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.  As of May 1, 2010, the Rightwas valued at $3.2 million.  In acceptingthe Right, we granted UBS the authority to sell or auction the ARS at par valueat any time up until the expiration date of the Right and released UBS from anyclaims relating to the marketing and sale of ARS.  We will continue to earn interest on the ARSuntil they are

 

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liquidated.  Theobligations of UBS under the Right are not secured by its assets and do notrequire UBS to obtain any financing to purchase the ARS.  UBS has disclaimed any assurance that it willhave sufficient financial resources to satisfy its obligations under theRight.  If UBS does not have sufficientfunding to buy back the ARS and no alternative buyers are located eitherthrough the auction process, issuer redemptions or other means, then we may notbe able to access cash by selling these securities without incurring a loss ofprincipal.

 

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

 

**CriticalAccounting Policies**

 

The preparation of our condensed consolidatedfinancial 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 the year ended January 30,2010.

 

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

 

There have been no material changes in our market riskduring the three months ended May 1, 2010 compared to the disclosures in Part II,Item 7A of our Annual Report on Form 10-K for the year ended January 30,2010.

 

**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 1,2010 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 toprovide reasonable assurance that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, 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.

 

Our disclosure controls and procedures are designed toprovide reasonable assurance that the controls and procedures will meet theirobjectives. Management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

 

There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended May 1,2010 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 30, 2010.

 

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

 

Not applicable.

 

**Item 3. Defaults Upon SeniorSecurities.**

 

Not applicable.

 

**Item 4. (Removed and Reserved).**

 

**Item 5. Other Information.**

 

Not applicable.

 

**Item  6. Exhibits.**

 
| 10.1   |   | Second Amendment  to Credit Agreement, dated as of March 22, 2010, by and between Citi  Trends, Inc. and Bank of America, N.A. (incorporated by reference to  Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the  year ended January 30, 2010) |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                        |
| 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 Commission ReleaseNo. 33-8238, this certification will be treated as “accompanying” thisQuarterly Report on Form 10-Q and not “filed” as part of such report forpurposes 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 of 1934, except to the extent  that the registrant specifically incorporatesit 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 28, 2010 |               |   |
|                     |               |   |
|                     | By:                | /s/ Bruce D.  Smith |
|                     | Name:              | Bruce D. Smith |
|                     | Title:             | Executive Vice  President, Chief Financial Officer and Secretary |

 

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