Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**(MarkOne)**
| **x**  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934** |
|--------|-----------------------------------------------------------------------------------------------------------|
|   |                                                                                                      |

**Forthe quarterly period ended October 31, 2009**

 

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

 

**CommissionFile Number  000-51315**

 

**CITITRENDS, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
| **Class**                     | ** ** | **Outstanding  at November 10, 2009** |
|-------------------------------|------------|--------------------------------------------|
| Common Stock,  $.01 par value |       | 14,692,699  shares                         |

 

 

 

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Table of Contents

 

**CITITRENDS, INC.**

**FORM 10-Q**

**TABLE OFCONTENTS**

 
| ** **   | ** **                                                                                                                            | **PAGE  NUMBER** |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------|------------------|
| PART I  | FINANCIAL INFORMATION                                                                                                                 |             |
|         |                                                                                                                                  |             |
| Item 1       | Financial Statements                                                                                                                  |             |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Balance Sheets (unaudited) October 31, 2009 and  January 31, 2009                                   | 3                |
|         |                                                                                                                                  |             |
|         | Condensed Consolidated  Statements of Operations (unaudited) Thirty-nine weeks ended October 31,  2009 and November 1, 2008 | 4                |
|         |                                                                                                                                  |             |
|         | Condensed Consolidated  Statements of Operations (unaudited) Thirteen weeks ended October 31,  2009 and November 1, 2008    | 4                |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Statements of Cash Flows (unaudited) Thirty-nine weeks ended  October 31, 2009 and November 1, 2008 | 5                |
|         |                                                                                                                                  |             |
|         | Notes to the  Condensed Consolidated Financial Statements (unaudited)                                                                 | 6                |
|         |                                                                                                                                  |             |
| Item 2       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           | 12               |
|         |                                                                                                                                  |             |
| Item 3       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           | 16               |
|         |                                                                                                                                  |             |
| Item 4       | Controls and  Procedures                                                                                                              | 16               |
|         |                                                                                                                                  |             |
| PART II | OTHER INFORMATION                                                                                                                     |             |
|         |                                                                                                                                  |             |
| Item 1       | Legal Proceedings                                                                                                                     | 17               |
|         |                                                                                                                                  |             |
| Item 1A      | Risk Factors                                                                                                                          | 17               |
|         |                                                                                                                                  |             |
| Item 2       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                          | 17               |
|         |                                                                                                                                  |             |
| Item 3       | Defaults Upon  Senior Securities                                                                                                      | 17               |
|         |                                                                                                                                  |             |
| Item 4       | Submission of  Matters to a Vote of Security Holders                                                                                  | 17               |
|         |                                                                                                                                  |             |
| Item 5       | Other Information                                                                                                                     | 17               |
|         |                                                                                                                                  |             |
| Item 6       | Exhibits                                                                                                                              | 17               |
|         |                                                                                                                                  |             |
|         | SIGNATURES                                                                                                                            | 18               |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**CitiTrends, Inc.**

** **

**Condensed Consolidated Balance Sheets**

**October 31,2009 and January 31, 2009**

**(Unaudited)**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **2009**             | ** ** | **2009**             | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                     |       |                 |       |                 |       |
| Current  assets:                                                                                                                                                                                                                                                                               |       |                 |       |                 |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                     |       | $                    | 32,487     |                 | $          | 33,516 |   |
| Short-term  investment securities                                                                                                                                                                                                                                                              |       | 42,225               |       | —               |       |
| Inventory                                                                                                                                                                                                                                                                                      |       | 105,314              |       | 86,259               |       |
| Prepaid  and other current assets                                                                                                                                                                                                                                                              |       | 9,432                |       | 10,625               |       |
| Income  tax receivable                                                                                                                                                                                                                                                                         |       | 2,623                |       | —               |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                            |       | 4,365                |       | 3,447                |       |
| Total  current assets                                                                                                                                                                                                                                                                          |       | 196,446              |       | 133,847              |       |
| Property  and equipment, net                                                                                                                                                                                                                                                                   |       | 62,422               |       | 58,861               |       |
| Long-term  investment securities                                                                                                                                                                                                                                                               |       | —               |       | 43,825               |       |
| Goodwill                                                                                                                                                                                                                                                                                       |       | 1,371                |       | 1,371                |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                            |       | 2,409                |       | 2,480                |       |
| Other  assets                                                                                                                                                                                                                                                                                  |       | 502                  |       | 405                  |       |
| Total  assets                                                                                                                                                                                                                                                                                  |       | $                    | 263,150    |                 | $          | 240,789 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                                                 |       |                 |       |                 |       |
| Current  liabilities:                                                                                                                                                                                                                                                                          |       |                 |       |                 |       |
| Accounts  payable                                                                                                                                                                                                                                                                              |       | $                    | 60,762     |                 | $          | 52,295 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                              |       | 12,506               |       | 11,478               |       |
| Accrued  compensation                                                                                                                                                                                                                                                                          |       | 7,757                |       | 7,514                |       |
| Current  portion of capital lease obligations                                                                                                                                                                                                                                                  |       | 123                  |       | 1,403                |       |
| Income  tax payable                                                                                                                                                                                                                                                                            |       | —               |       | 682                  |       |
| Layaway  deposits                                                                                                                                                                                                                                                                              |       | 3,381                |       | 564                  |       |
| Total  current liabilities                                                                                                                                                                                                                                                                     |       | 84,529               |       | 73,936               |       |
| Other  long-term liabilities                                                                                                                                                                                                                                                                   |       | 9,719                |       | 8,646                |       |
| Total  liabilities                                                                                                                                                                                                                                                                             |       | 94,248               |       | 82,582               |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                    |       |                 |       |                 |       |
| Common stock, $0.01 par value. Authorized 32,000,000 shares;  14,858,625 shares issued as ofOctober 31, 2009 and 14,698,852 shares  issued as of January 31, 2009; 14,692,875 shares outstanding as of  October 31, 2009 and 14,533,102 outstanding as of January 31, 2009 |       | 146                  |       | 145                  |       |
| Paid-in-capital                                                                                                                                                                                                                                                                                |       | 73,178               |       | 70,950               |       |
| Retained  earnings                                                                                                                                                                                                                                                                             |       | 95,743               |       | 87,277               |       |
| Treasury  stock, at cost; 165,750 shares as of October 31, 2009 and  January 31, 2009                                                                                                                                                                                                |       | (165                 | )          | (165                 | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                               |       | 168,902              |       | 158,207              |       |
| Commitments  and contingencies (note 7)                                                                                                                                                                                                                                                        |       |                 |       |                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                               |       | $                    | 263,150    |                 | $          | 240,789 |   |

 

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

 

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**Citi Trends, Inc.**

** **

**CondensedConsolidated Statements of Operations**

**Thirty-nine Weeks Ended October 31, 2009 and November 1,2008**

**(Unaudited)**

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

 
| ** **                                    | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **October 31,**        | ** ** | **November 1,** | ** ** |
| ** **                                    | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Net sales                                     |       | $                           | 382,058    |   | $ | 341,599 |   |
| Cost of sales                                 |       | 234,640                     |       | 211,172 |   |
| Gross profit                                  |       | 147,418                     |       | 130,427 |   |
| Selling, general and administrative expenses  |       | 121,116                     |       | 109,600 |   |
| Depreciation and amortization                 |       | 13,679                      |       | 11,915 |   |
| Income from operations                        |       | 12,623                      |       | 8,912 |   |
| Interest income                               |       | 329                         |       | 2,215 |   |
| Interest expense                              |       | (86                         | )          | (256 | ) |
| Income before income tax expense              |       | 12,866                      |       | 10,871 |   |
| Income tax expense                            |       | 4,400                       |       | 3,544 |   |
| Net income                                    |       | $                           | 8,466      |   | $ | 7,327 |   |
| Basic net income per common share             |       | $                           | 0.58       |   | $ | 0.51 |   |
| Diluted net income per common share           |       | $                           | 0.58       |   | $ | 0.51 |   |
| Net income attributable to common shares      |       |                        |       |   |   |
| Basic                                         |       | $                           | 8,289      |   | $ | 7,239 |   |
| Diluted                                       |       | $                           | 8,289      |   | $ | 7,240 |   |
| Weighted average number of shares outstanding |       |                        |       |   |   |
| Basic                                         |       | 14,351                      |       | 14,095 |   |
| Diluted                                       |       | 14,383                      |       | 14,262 |   |

 

**Citi Trends, Inc.**

 

**Condensed Consolidated Statements of Operations**

**ThirteenWeeks Ended October 31, 2009 and November 1,2008**

**(Unaudited)**

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

 
| ** **                                        | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **October 31,**     | ** ** | **November 1,** | ** ** |
| ** **                                        | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| Net sales                                         |       | $                        | 127,356    |   | $ | 104,948 |   |
| Cost of sales                                     |       | 79,720                   |       | 66,208 |   |
| Gross profit                                      |       | 47,636                   |       | 38,740 |   |
| Selling, general and administrative expenses      |       | 41,989                   |       | 36,482 |   |
| Depreciation and amortization                     |       | 4,851                    |       | 4,134 |   |
| Income (loss) from operations                     |       | 796                      |       | (1,876 | ) |
| Interest income                                   |       | 85                       |       | 790 |   |
| Interest expense                                  |       | (17                      | )          | (94 | ) |
| Unrealized gain on investment securities          |       | 57                       |       | — |   |
| Income (loss) before income tax expense (benefit) |       | 921                      |       | (1,180 | ) |
| Income tax expense (benefit)                      |       | 315                      |       | (493 | ) |
| Net income (loss)                                 |       | $                        | 606        |   | $ | (687 | ) |
| Basic net income (loss) per common share          |       | $                        | 0.04       |   | $ | (0.05 | ) |
| Diluted net income (loss) per common share        |       | $                        | 0.04       |   | $ | (0.05 | ) |
| Net income (loss) attributable to common shares   |       |                     |       |   |   |
| Basic                                             |       | $                        | 593        |   | $ | (687 | ) |
| Diluted                                           |       | $                        | 593        |   | $ | (687 | ) |
| Weighted average number of shares outstanding     |       |                     |       |   |   |
| Basic                                             |       | 14,370                   |       | 14,141 |   |
| Diluted                                           |       | 14,409                   |       | 14,141 |   |

 

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

 

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**CitiTrends, Inc.**

 

**Condensed Consolidated Statements ofCash Flows**

**Thirty-nineWeeks Ended October 31, 2009 and November 1, 2008**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                              | ** ** | **2009**             | ** ** | **2008**             | ** ** |
| Operating  activities:                                                                  |       |                 |       |                 |       |
| Net  income                                                                             |       | $                    | 8,466      |                 | $          | 7,327 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:      |       |                 |       |                 |       |
| Depreciation  and amortization                                                          |       | 13,679               |       | 11,915               |       |
| Loss  on disposal of property and equipment                                             |       | 257                  |       | 110                  |       |
| Deferred  income taxes                                                                  |       | (847                 | )          | (2,333               | )          |
| Noncash  stock-based compensation expense                                               |       | 1,601                |       | 1,500                |       |
| Excess  tax benefits from stock-based payment arrangements                              |       | (709                 | )          | (863                 | )          |
| Changes  in assets and liabilities:                                                     |       |                 |       |                 |       |
| Inventory                                                                               |       | (19,055              | )          | (7,402               | )          |
| Prepaid  and other current assets                                                       |       | 1,193                |       | (1,476               | )          |
| Other  assets                                                                           |       | (97                  | )          | (43                  | )          |
| Accounts  payable                                                                       |       | 8,467                |       | 2,800                |       |
| Accrued  expenses and other long-term liabilities                                       |       | 2,101                |       | 740                  |       |
| Accrued  compensation                                                                   |       | 243                  |       | 635                  |       |
| Income  tax receivable/payable                                                          |       | (2,596               | )          | (1,441               | )          |
| Layaway  deposits                                                                       |       | 2,817                |       | 1,963                |       |
| Net  cash provided by operating activities                                              |       | 15,520               |       | 13,432               |       |
| Investing  activities:                                                                  |       |                 |       |                 |       |
| Purchases  of investment securities                                                     |       | —               |       | (4,000               | )          |
| Sales/redemptions  of investment securities                                             |       | 1,600                |       | 15,175               |       |
| Purchases  of property and equipment                                                    |       | (17,497              | )          | (18,477              | )          |
| Net  cash used in investing activities                                                  |       | (15,897              | )          | (7,302               | )          |
| Financing  activities:                                                                  |       |                 |       |                 |       |
| Repayments  on capital lease obligations                                                |       | (1,280               | )          | (1,177               | )          |
| Excess  tax benefits from stock-based payment arrangements                              |       | 709                  |       | 863                  |       |
| Proceeds  from the exercise of stock options                                            |       | 289                  |       | 469                  |       |
| Cash  used to settle equity instruments granted under stock-based payment  arrangements |       | (370                 | )          | (73                  | )          |
| Net  cash (used in) provided by financing activities                                    |       | (652                 | )          | 82                   |       |
| Net  (decrease) increase in cash and cash equivalents                                   |       | (1,029               | )          | 6,212                |       |
| Cash  and cash equivalents:                                                             |       |                 |       |                 |       |
| Beginning  of period                                                                    |       | 33,516               |       | 6,203                |       |
| End  of period                                                                          |       | $                    | 32,487     |                 | $          | 12,415 |   |
|                                                                                    |       |                 |       |                 |       |
| Supplemental  disclosures of cash flow information:                                     |       |                 |       |                 |       |
| Cash  paid for interest                                                                 |       | $                    | 71         |                 | $          | 239 |   |
| Cash  paid for income taxes                                                             |       | $                    | 7,843      |                 | $          | 7,272 |   |

 

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

 

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

**October 31, 2009**

 

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 October 31, 2009, the Company operated 392 stores in 24states.

 

The condensed consolidated balance sheet as of October 31,2009, the condensed consolidated statements of operations for the thirty-nineand thirteen-week periods ended October 31, 2009 and November 1,2008, and the condensed consolidated statements of cash flows for thethirty-nine week periods ended October 31, 2009 and November 1, 2008have been prepared by the Company without audit. The condensed consolidatedbalance sheet as of January 31, 2009 has been derived from the auditedfinancial statements as of that date, but does not include all required yearend disclosures.  In the opinion of management, such statements includeall adjustments considered necessary to present fairly the Company’s financialposition as of October 31, 2009 and January 31, 2009, and its resultsof operations and cash flows for all periods presented.  It is suggested that these condensedconsolidated financial statements be read in conjunction with the financialstatements and the notes thereto included in the Company’s latest Annual Reporton Form 10-K for the year ended January 31, 2009.

 

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 interim periods ended October 31,2009 are not necessarily indicative of the results that may be expected for thefiscal year ending January 30, 2010.

 

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

 

In preparing these financial statements, the Companyevaluated the events and transactions through the time of filing thesefinancial statements with the Securities and Exchange Commission (“SEC”) on December 7,2009.

 

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 the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

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

 

3. Earnings per Share

 

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

 

The dilutive effect of stock-based compensation arrangementsare accounted for using the treasury stock method.  This method assumesthat the proceeds the Company receives from the exercise of stock options areused to repurchase common shares in the market.  The Company includes asassumed proceeds the amount of compensation cost attributed to future servicesand not yet recognized, and the amount of tax benefits, if any, that would becredited to additional paid-in capital assuming exercise of outstanding optionsand vesting of nonvested restricted stock.  For the thirteen weeks ended October 31,2009 and November 1, 2008, there were 62,000 and 149,000 optionsoutstanding, respectively, to purchase shares of common stock excluded from thecalculation of diluted earnings per share because of antidilution.  Forthe thirty-nine weeks ended October 31, 2009 and November 1, 2008,there were 66,000 and 77,000 options outstanding, respectively, to purchaseshares of common stock excluded from the calculation of diluted earnings pershare because of antidilution.

 

On February 1, 2009, the Company changed itsmethod of computing earnings per share as required by the newly issued FASBStaff Position Emerging Issues Task Force (“EITF”) 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions areParticipating Securities* (“FSP EITF 03-6-1”).  This EITF was subsequently codified under theFASB Accounting Standards Codification, as issued in June 2009, into FASBASC Topic 260-10, *Earnings Per Share. *This pronouncement addressesdeterminations as to whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the

 

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earnings allocation in computing earnings per shareunder the required two-class method. Nonvested restricted stock awards granted to employees and non-employeedirectors 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; however, they willnot be treated as participating securities after October 31, 2009.  We have prepared our current and prior periodearnings per share computations to exclude net income allocated to nonvestedshare awards containing nonforfeitable dividend rights.

 

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

 
| ** **                                                        | ** ** | **Thirty-nine  Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **October 31,  2009**   | ** ** | **November 1,  2008** | ** ** |
|                                                              |       |                         |       |   |   |
| Basic:                                                            |       |                         |       |   |   |
| Numerator                                                         |       |                         |       |   |   |
| Net income                                                        |       | $                            | 8,466      |   | $ | 7,327 |   |
| Net income allocated to participating securities                  |       | (177                         | )          | (88 | ) |
| Net income attributable to common  stockholders-basic             |       | $                            | 8,289      |   | $ | 7,239 |   |
|                                                              |       |                         |       |   |   |
| Denominator                                                       |       |                         |       |   |   |
| Weighted average common shares                                    |       | 14,351                       |       | 14,095 |   |
|                                                              |       |                         |       |   |   |
| Net income attributable to common stockholders per  share-basic   |       | $                            | 0.58       |   | $ | 0.51 |   |
|                                                              |       |                         |       |   |   |
| Diluted:                                                          |       |                         |       |   |   |
| Numerator                                                         |       |                         |       |   |   |
| Net income                                                        |       | $                            | 8,466      |   | $ | 7,327 |   |
| Net income allocated to participating securities                  |       | (177                         | )          | (87 | ) |
| Net income attributable to common  stockholders-diluted           |       | $                            | 8,289      |   | $ | 7,240 |   |
|                                                              |       |                         |       |   |   |
| Denominator                                                       |       |                         |       |   |   |
| Denominator for basic calculation                                 |       | 14,351                       |       | 14,095 |   |
| Effect of dilutive securities — stock options                |       | 32                           |       | 167 |   |
| Denominator for diluted calculation                               |       | 14,383                       |       | 14,262 |   |
|                                                              |       |                         |       |   |   |
| Net income attributable to common stockholders per  share-diluted |       | $                            | 0.58       |   | $ | 0.51 |   |

 
| ** **                                                               | ** ** | **Thirteen  Weeks Ended**  | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **October 31,  2009** | ** ** | **November 1,  2008** | ** ** |
|                                                                     |       |                       |       |   |   |
| Basic:                                                                   |       |                       |       |   |   |
| Numerator                                                                |       |                       |       |   |   |
| Net income (loss)                                                        |       | $                          | 606        |   | $ | (687 | ) |
| Net income allocated to participating securities                         |       | (13                        | )          | — |   |
| Net income (loss) attributable to common  stockholders-basic             |       | $                          | 593        |   | $ | (687 | ) |
|                                                                     |       |                       |       |   |   |
| Denominator                                                              |       |                       |       |   |   |
| Weighted average common shares                                           |       | 14,370                     |       | 14,141 |   |
|                                                                     |       |                       |       |   |   |
| Net income (loss) attributable to common  stockholders per share-basic   |       | $                          | 0.04       |   | $ | (0.05 | ) |
|                                                                     |       |                       |       |   |   |
| Diluted:                                                                 |       |                       |       |   |   |
| Numerator                                                                |       |                       |       |   |   |
| Net income (loss)                                                        |       | $                          | 606        |   | $ | (687 | ) |
| Net income allocated to participating securities                         |       | (13                        | )          | — |   |
| Net income (loss) attributable to common  stockholders-diluted           |       | $                          | 593        |   | $ | (687 | ) |
|                                                                     |       |                       |       |   |   |
| Denominator                                                              |       |                       |       |   |   |
| Denominator for basic calculation                                        |       | 14,370                     |       | 14,141 |   |
| Effect of dilutive securities — stock options                       |       | 39                         |       | — |   |
| Denominator for diluted calculation                                      |       | 14,409                     |       | 14,141 |   |
|                                                                     |       |                       |       |   |   |
| Net income (loss) attributable to common  stockholders per share-diluted |       | $                          | 0.04       |   | $ | (0.05 | ) |

 

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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 October 31, 2009, the Company had $37.8million ($42.2 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 79% 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 (12%).Historically, liquidity for investors in ARS was provided via an auctionprocess that reset the interest rate every 35 days, allowing investors toeither roll over their investments or sell them at par value. Beginning in February 2008,there was insufficient demand for these types of investments during theauctions and, as a result, these securities became illiquid. Although theauctions for the securities have failed, the Company has not experienced anydefaults and continues to earn and receive interest on all of the investmentsstill owned by the Company.

 

There was insufficient observable market informationavailable as of October 31, 2009 to determine the fair value of theCompany’s ARS. 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 ARS investmentswere valued at $37.8 million as of October 31, 2009, representing a $4.4million decline from par value.

 

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

 

TheRight represents a put option and is recognized as an instrument separate fromthe ARS.  The Company elected to accountfor this Right at fair value.  The Right was valued at $4.4million as of October 31, 2009 using a discounted cash flow approach thatincludes estimates of interest rates and the credit risk associated withUBS.  This valuation is based onunobservable inputs, therefore, represents a Level 3 fair value.  Prior to the acceptance of the Right, the ARSwere classified as available-for-sale. Upon acceptance of the Right, the ARS were reclassified to tradingsecurities.  The ARS and the Rightincluded in the October 31, 2009 condensed consolidated balance sheet areclassified as current assets due to the expectation that liquidity will occurduring the next twelve months through 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 thirty-nine weeks ended October 31,2009 (in thousands):

 
| ** **                                                            | ** ** | **Put  Option Related to ARS** | ** ** | **Auction  Rate Securities** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| Balance as of January 31, 2009                                   |       | $                              | 4,901      |                         | $          | 38,924 |   |
| Unrealized (loss) gain on investment securities  included in earnings |       | (376                           | )          | 376                          |       |
| Sales/redemptions of investment securities                            |       | (147                           | )          | (1,453                       | )          |
| Balance as of October 31, 2009                                   |       | $                              | 4,378      |                         | $          | 37,847 |   |

 

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5. Comprehensive Income (Loss)

 

The components of comprehensive income (loss) for allperiods presented are as follows (in thousands):

 
| ** **                                                                                                                                                | ** ** | **Thirty-nine Weeks Ended** | ** ** | **Thirteen Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                | ** ** | **October 31,  2009**            | ** ** | **November 1,  2008**         | ** ** | **October 31,  2009** | ** ** | **November 1,  2008** | ** ** |
| Net income (loss), as reported                                                                                                                            |       | $                                     | 8,466      |                               | $          | 7,327 |   | $ | 606 |   | $ | (687 | ) |
| Other comprehensive loss:                                                                                                                                 |       |                                  |       |                               |       |   |   |   |   |
| Unrealized loss on available-for-sale securities,  net of tax benefit of $1,182 and $89 in the 39 and 13 weeks ended  November 1, 2008, respectively |       | —                                |       | (1,832                             | )          | — |   | (137 | ) |
| Reclassification of realized gains for redeemed  securities, net of tax provision of $187 in the 39 and 13 weeks ended  November 1, 2008             |       | —                                |       | 288                                |       | — |   | 288 |   |
| Comprehensive income (loss)                                                                                                                               |       | $                                     | 8,466      |                               | $          | 5,783 |   | $ | 606 |   | $ | (536 | ) |

 

6. Revolving Line of Credit

 

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

 

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 subjectto uncertainties and the outcome of any litigated matter is not predictable,the Company is not aware of any legal proceedings pending or threatened againstit that it expects to have a material adverse effect on its financialcondition, results of operations or liquidity.

 

8. Recent Accounting Pronouncements

 

In June 2009, theFASB Accounting Standards Codification (the “Codification”) was approved as thesingle source of authoritative nongovernmental GAAP. All existing accountingstandard documents, such as FASB, American Institute of Certified PublicAccountants, Emerging Issues Task Force and other related literature, excludingguidance from the Securities and Exchange Commission (“SEC”), have beensuperseded by the Codification. All other non-grandfathered, non-SEC accountingliterature not included in the Codification has become nonauthoritative. TheCodification did not change GAAP, but instead introduced a new structure thatcombines all authoritative standards into a comprehensive, topically organizedonline database. The Codification is effective for interim or annual periodsending after September 15, 2009 and impacts the Company’s financialstatements as all future references to authoritative accounting literature willbe referenced in accordance with the Codification. There have been no changesto the content of the Company’s financial statements as a result ofimplementing the Codification during the quarter ended October 31, 2009.

 

As a result of the Company’s implementation of theCodification, previous references to new accounting standards and literatureare no longer applicable. In the current quarter financial statements, theCompany has provided reference to both new and old guidance to assist inunderstanding the impacts of recently adopted accounting literature,particularly for guidance adopted since the beginning of the current fiscalyear but prior to the Codification.

 

The Company adopted the methods of fair value asdescribed in SFAS No. 157, *Fair ValueMeasurements,*for financialassets and liabilities on February 3, 2008 and for non-financial assetsand liabilities on February 1, 2009 and has incorporated the related staffpositions and interpretations, including FSP SFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly,*which was issued in April 2009*.* As of June 2009, this guidance became part of FASB ASC Topic 820, *Fair Value Measurements and Disclosures,*which defines fairvalue, establishes a framework for

 

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measuring fair value, and requires additionaldisclosures about fair value measurements. The adoption of the standard did not have a material impact on theCompany’s financial statements.

 

As discussed in Note 3, the Company adopted FSP EITF03-6-1 (now part of FASB ASC Topic 260, *Earnings Per Share*)on February 1, 2009.  Implementationof FSP EITF 03-6-1 has changed the way the Company calculates earnings pershare and is expected to reduce basic and diluted earnings per share allocatedto common shareholders for the fiscal year ending January 30, 2010 byapproximately $0.01.  All prior periodearnings per share information must be adjusted retrospectively.  Previously reported basic and dilutedearnings per share allocated to common shareholders for the year ended January 31,2009 will decrease by $0.02.

 

In April 2009, the FASB issued FSP SFAS 107-1 andAccounting Principles Board (APB) Opinion No. 28-1, *InterimDisclosures about Fair Value of Financial Instruments,*which amendsSFAS No. 107, *Disclosures about FairValue of Financial Instruments,* and APB Opinion No. 28, *Interim Financial Reporting,* to require an entity to provide interimdisclosures about the fair value of all financial instruments within the scopeof SFAS No. 107 and to include disclosures related to the methods andsignificant assumptions used in estimating those instruments.  This FSP is effective for interim and annualperiods ending after June 15, 2009, and accordingly, the Company adoptedit during the second quarter of 2009. Adoption of this FSP had no material impact on the Company’s financialstatements.  See Note 4 for thesedisclosures.  As of June 2009, thisguidance became part of FASB ASC Topic 825, *Financial Instruments.*

 

In May 2009, the FASB issued SFAS No. 165,*Subsequent Events*, which establishesgeneral standards for accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued. SFAS No. 165 requires thedisclosure of the date through which anentity has evaluated subsequent events and the rationale for why that date wasselected. This statement is effective for interim and annual periods endingafter June 15, 2009, and accordingly, the Company adopted it during thesecond quarter of 2009.  As of June 2009,this guidance became part of FASB ASC Topic 855, *SubsequentEvents.*

 

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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 other factors.The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,”“forecast,” “goal,” “intend,” “will likely result,” or “will continue” andsimilar words and expressions generally identify forward-looking statements.The Company believes the assumptions underlying these forward-lookingstatements are reasonable; however, any of the assumptions could be inaccurate,and therefore, actual results may differ materially from those projected in theforward-looking statements.

 

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

 

Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date of this Form 10-Q.Except as may be required by law, the Company undertakes no obligation 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.

 

**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 392 storesin both urban and rural markets in 24 states as of October 31, 2009.

 

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

 

**Accounting Periods**

 

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

 

**Results of Operations**

 

The following discussion of the Company’s financialperformance is based on the condensed consolidated financial statements setforth herein. The nature of the Company’s business is seasonal. Historically,sales in the first and fourth quarters have been higher than sales achieved inthe

 

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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 October 31,2009 and November 1, 2008**

 

*Net Sales. * Net sales increased $22.5 million, or21.4%, to $127.4 million in the thirteen weeks ended October 31, 2009 from$104.9 million in the thirteen weeks ended November 1, 2008.  Theincrease in net sales was due primarily to 54 new stores opened since last year’sthird quarter and a 6.3% increase in comparable store sales, partially offsetby the effect of closing three stores since last year’s third quarter.Comparable store sales benefited from a strong back-to-school season and afavorable comparison to last year’s third quarter which was impacted by lessdiscretionary spending by consumers onapparel due to high gasoline and food prices. Also, approximately $1 million of sales areestimated to have shifted from the second quarter tothe first week of the third quarter this year due to later back-to-school salestax holidays ineight of the states in which we operate.  Comparable stores include locations that havebeen relocated or expanded. There were ten storesrelocated or expanded in the first three quarters of2009 and nine stores relocated or expanded in fiscal 2008, all of whichimpacted comparable store sales in the third quarter of 2009.  Sales in comparable relocated and expandedstores increased 14.4% in this year’s third quarter, while sales in all othercomparable stores increased 5.7%. The 6.3% increase in overall comparable storesales was driven by an increase in the number of customer transactions,partially offset by a 0.2% decrease in the average customer purchase.Comparable store sales changes by major merchandise class were as follows inthe third quarter of 2009:  Accessories+19%; Men’s +7%; Women’s +6%; Home +4%; Children’s +4%.

 

The new stores opened in 2008 and 2009, net of theclosed stores, accounted for a $16.0 million increase in total sales, while the6.3% sales increase in the 315 comparable stores totaled $6.5 million.

 

*Gross Profit. * Gross profit increased $8.9 million, or23.0%, to $47.6 million in the third quarter of 2009 from $38.7 million in lastyear’s third quarter.  The increase in gross profit is a result of theincrease in sales, together with an improvement in the gross margin to 37.4% inthis year’s third quarter from 36.9% last year.  The higher gross marginwas the result of a 50 basis point reduction in inventory shrinkage as apercentage of sales due to steps taken to better control shrinkage, including agreater focus on problem stores by the store operations and loss preventiondepartments, the addition of sophisticated surveillance systems in highshrinkage stores, and lower inventory levels.  In addition, there was a 30 basis pointimprovement in merchandise markdowns in this year’s third quarter which wasoffset by slightly higher freight costs and lower initial merchandise markup.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $5.5 million, or 15.1%, to $42.0 million in the thirdquarter of 2009 from $36.5 million in last year’s third quarter.  Theincrease in these expenses was due primarily to additional store level,distribution and corporate costs arising from the opening of 54 new stores, netof the effect of closing three stores, since last year’s third quarter.  As a percentage of sales, selling, generaland administrative expenses decreased to 33.0% in the third quarter of 2009 from34.8% in the third quarter of 2008, due primarily to the leveraging effect thatoccurs on expenses as a percentage of sales when comparable store salesincrease at a rate as high as 6.3% while operating expenses are increasing onlyat a normal rate of inflation.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased $0.8million, or 17.3%, to $4.9 million in the third quarter of 2009 from $4.1million in the third quarter of 2008, as the result of capital expendituresincurred for new and relocated/expanded stores.

 

*Interest Income. * Interest income decreased to $85,000 inthe third quarter of 2009 from $790,000 in last year’s third quarter due to adeclining interest rate environment which affected our returns on auction ratesecurities as well as cash and cash equivalents.

 

*Interest Expense. * Interest expense decreased to $17,000 inthe third quarter of 2009 from $94,000 in the third quarter of 2008 due to thenormal decline in the interest portion of payments on our capital leaseobligations as the principal portion of such obligations is reduced.

 

*Unrealized Gain on InvestmentSecurities. *A $57,000unrealized gain on our investments in auction rate securities and a related putoption is reflected in the third quarter of fiscal 2009, reversing a $57,000impairment loss recorded in the first half of 2009.

 

*Income Tax Expense (Benefit). *Due to aprofitable third quarter in 2009, income tax expense of $315,000 was recorded,whereas, the third quarter of 2008 included an income tax benefit of $493,000due to a pretax loss.

 

*Net Income (Loss). *Net income of$606,000 was recognized in the third quarter of 2009, compared to a net loss of$687,000 in last year’s third quarter due to the factors discussed above.

 

**Thirty-nine Weeks Ended October 31,2009 and November 1, 2008**

 

*Net Sales. * Net sales increased $40.5 million, or11.8%, to $382.1 million in the thirty-nine weeks ended October 31, 2009from $341.6 million in the thirty-nine weeks ended November 1, 2008. The increase in net sales was due primarily to 54 new stores opened since lastyear’s third quarter and 23 new stores opened in the first thirty-nine weeks of2008 for which there was not a full thirty-nine weeks of sales in 2008’s firstthree quarters, together with a 0.4% increase in comparable store sales,partially offset by the effect of closing three stores since last year’s thirdquarter.  Comparable stores includelocations that have been relocated or expanded. There were ten stores relocatedor expanded in the first thirty-nine weeks of 2009 and nine stores relocated orexpanded in fiscal 2008, all of which impacted comparable store sales. Sales incomparable relocated and expanded stores increased 9.5% in the firstthirty-nine weeks of 2009, while sales in all other comparable stores

 

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decreased 0.3%. The 0.4% increase in overallcomparable store sales consisted of an approximate 1% increase in the averagecustomer purchase, partially offset by a slight decrease in the number ofcustomer transactions. Comparable store sales changes by major merchandiseclass were as follows in the first thirty-nine weeks of 2009:   Accessories +7%; Children’s +2%; Home +2%;Women’s -1%; Men’s -1%.

 

The new stores opened in 2008 and 2009, net of theclosed stores, accounted for a $39.0 million increase in total sales, while the0.4% sales increase in the 315 comparable stores totaled $1.5 million.

 

*Gross Profit. * Gross profit increased $17.0 million, or13.0%, to $147.4 million in the first thirty-nine weeks of 2009 from $130.4million last year.  The increase in gross profit is a result of theincrease in sales, together with an improvement in the gross margin to 38.6% inthis year’s first thirty-nine weeks from 38.2% last year.  The highergross margin was the result of a 50 basis point reduction in inventoryshrinkage as a percentage of sales due to steps taken to better controlshrinkage, including a greater focus on problem stores by the store operationsand loss prevention departments, the addition of sophisticated surveillancesystems in high shrinkage stores, and lower inventory levels.  This improvement in shrinkage, together witha slight reduction in freight costs and a slight increase in the initial markupon merchandise, more than offset a 30 basis point increase in markdowns inresponse to comparable store sales increases that have been just slightlypositive.  Inventories in comparable storeshave been lower than at the same time of the previous year throughout the firstthree quarters of 2009, underscoring our commitment to take the markdownsneeded to move merchandise in a slow sales environment and maintain appropriateinventory levels.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $11.5 million, or 10.5%, to $121.1 million in the firstthirty-nine weeks of 2009 from $109.6 million in last year’s first thirty-nineweeks.  The increase in these expenses was due primarily to additionalstore level, distribution and corporate costs arising from the opening of 54new stores, net of the effect of closing three stores, since the end of lastyear’s third quarter.  As a percentage of sales, selling, general andadministrative expenses decreased in the first thirty-nine weeks of 2009 to31.7% from 32.1% last year, despite the deleveraging effect that occurs onexpenses as a percentage of sales when comparable store sales increase at arate as low as 0.4% while operating expenses are increasing at a normal rate ofinflation. Expenses were managed well, increasing only 10.5% despite a 14.7%average increase in store selling square footage during the first threequarters of 2009 compared to the same time period in 2008.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased $1.8million, or 14.8%, to $13.7 million in the first thirty-nine weeks of 2009 from$11.9 million in the first thirty-nine weeks of 2008, as the result of capitalexpenditures incurred for new and relocated/expanded stores and the expansionof the Darlington distribution center in early 2008.

 

*Interest Income. * Interest income decreased to $0.3million from $2.2 million in the first thirty-nine weeks of 2008 due to adeclining interest rate environment which affected our returns on auction ratesecurities as well as cash and cash equivalents.

 

*Interest Expense. * Interest expense decreased to $86,000 inthe first thirty-nine weeks of 2009 from $256,000 last year due to the normaldecline in the interest portion of payments on our capital lease obligations asthe principal portion of such obligations is reduced.

 

*Income Tax Expense. * The provision for income taxes increased24.2% to $4.4 million in this year’s first thirty-nine weeks from $3.5 millionin the first thirty-nine weeks of 2008 due to higher pretax income, togetherwith an increase in the effective income tax rate to 34.2% compared to 32.6%last year.  The increase in the effective rate is due primarily to havingless tax-exempt interest income this year, as discussed above.

 

*Net Income. * Net income increased 15.5% to $8.5million in the first thirty-nine weeks of 2009 from $7.3 million in last year’sfirst thirty-nine weeks due to the factors discussed above.

 

**Liquidityand Capital Resources**

 

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

 

*Current Financial Condition.*As of October 31, 2009, we had totalcash and cash equivalents of $32.5 million compared with total cash and cashequivalents of $33.5 million as of January 31, 2009. Inventoryrepresented 40.0% of our total assets as of October 31, 2009.  Management’s ability to manage our inventorycan have a significant impact on our cash flows from operations during a giveninterim period or fiscal year. In addition, inventory purchases can be seasonalin nature, such as the purchase of warm-weather or Christmas-relatedmerchandise.  Total inventories at theend of the third quarter of 2009 were up $15.5 million, or 17.2%, compared tothe third quarter of fiscal 2008, consistent with the increase in store sellingsquare footage.  Inventory in comparablestores was 0.2% lower than at the end of the third quarter of fiscal 2008,after being down 14.7% last year in relation to the end of fiscal 2007’s thirdquarter.

 

*Cash Flows From Operating Activities*. Net cash provided by operatingactivities was $15.5 million in the first thirty-nine weeks of fiscal 2009compared to $13.4 million in the first thirty-nine weeks of fiscal 2008.  The main source of cash provided during thefirst thirty-nine weeks of this year was net income adjusted for noncashexpenses such as depreciation and amortization, loss on disposal of propertyand equipment, deferred income taxes and stock-based compensation expense,totaling $23.2 million (compared to $18.5 million in last year’s firstthirty-nine

 

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weeks).  Othersignificant sources of cash in the first thirty-nine weeks of fiscal 2009 were (1) an$8.5 million increase in accounts payable (compared to $2.8 million in thefirst thirty-nine weeks of 2008), due to an increase in inventory and animprovement in inventory turnover this year which results in more of ourinventory still being in accounts payable at quarter end; (2) a $2.8million increase in layaway deposits (compared to $2.0 million in last year’sfirst thirty-nine weeks) due to the seasonality of layaway transactions whichare low at the end of our fiscal year, because all balances have to be redeemedby customers or they are cancelled by the middle of December each year; (3) a$2.1 million increase in accrued expenses and other long-term liabilities(compared to $0.7 million in the first thirty-nine weeks of 2008), whichrepresents a 10.4% increase, consistent with the Company’s growth during thepast twelve months; (4) a $1.2 million decrease in prepaid and othercurrent assets (compared to a $1.5 million increase in the first thirty-nineweeks of fiscal 2008) due primarily to the timing of collecting receivablesfrom landlords for tenant improvement reimbursements.  Significant uses of cash included (1) a$19.1 million increase in inventory (compared to $7.4 million in the firstthirty-nine weeks of 2008), due to the opening of 38 new stores and therelocation/expansion of ten other stores, partially offset by the closing ofthree stores, in the first thirty-nine weeks of 2009, together with the normalseasonal build leading up to the Christmas season; and (2) a $2.6 millionchange in the income tax receivable/payable (compared to $1.4 million in thefirst thirty-nine weeks of 2008) due to the seasonality of our earnings(highest earnings in the fourth quarter) and timing of estimated tax payments.

 

*Cash Flows From InvestingActivities.* Cashused in investing activities was $15.9 million in the first thirty-nine weeksof fiscal 2009 compared to $7.3 million in the first thirty-nine weeks offiscal 2008.  Purchases of property andequipment included in cash flows used in investing activities totaled $17.5million and $18.5 million in the first thirty-nine weeks of fiscal 2009 and2008, respectively, with the decrease being a result of capital expendituresearly in 2008 related to the expansion of the Darlington distribution center.Such capital expenditures in both years included routine amounts for newstores, relocated and expanded stores and other general corporate purposes.Sales of municipal auction rate securities, net of purchases, provided cash of$1.6 million and $11.2 million in the first thirty-nine weeks of fiscal 2009and 2008, respectively.

 

*Cash Flows From Financing Activities.* Cash flows from financing activitieswere insignificant in the first thirty-nine weeks of fiscal 2009 and 2008.

 

**Cash Requirements**

 

Our principal sources of liquidity consist of: (i) cashand cash equivalents (which equaled $32.5 million as of October 31,2009); (ii) short-term trade credit; (iii) cash generated fromoperations on an ongoing basis as we sell our merchandise inventory; and (iv) a$20 million revolving credit facility. Trade credit represents a significantsource of financing for inventory purchases and arises from customary paymentterms and trade practices with our vendors.  Historically, our principalliquidity requirements have been for working capital and capital expenditureneeds.

 

As of October 31, 2009, we had $37.8 million($42.2 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. Thesesecurities are high-grade (at least AA-rated with one or more rating agencies)and approximately 79% are either guaranteed by the Department of Educationunder the Federal Family Education Loan Program (35%) or backed by insurancecompanies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation(12%). 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, we have not experienced any defaultsand continue to earn and receive interest on all of the investments that westill own.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  In accepting the Right, we grantedUBS the authority to sell or auction the ARS at par value at any time up untilthe expiration date of the Right and released UBS from any claims relating tothe marketing and sale of ARS.  We willcontinue to earn interest on the ARS until they are liquidated.  The obligations of UBS under the Right arenot secured by its assets and do not require UBS to obtain any financing topurchase the ARS.  UBS has disclaimed anyassurance that it will have sufficient financial resources to satisfy itsobligations under the Right.  If UBS doesnot have sufficient funding to buy back the ARS and no alternative buyers arelocated either through the auction process, issuer redemptions or other means,then we may not be able to access cash by selling these securities withoutincurring a loss of principal.  The Rightwas valued at $4.4 million as of October 31, 2009.

 

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

 

**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 fiscal 2008.

 

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

 

There have been no material changes in our market riskduring the nine months ended October 31, 2009 compared to the disclosuresin Part II, Item 7A of our Annual Report on Form 10-K for the yearended January 31, 2009.

 

**Item4. Controls and Procedures.**

 

We have carried out an evaluation, under thesupervision and with the participation of management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of October 31,2009 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based onthat evaluation, the Chief Executive Officer and the Chief Financial Officereach concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information has been accumulated and communicated to ourmanagement, including the officers who certify our financial reports, asappropriate, to allow timely decisions regarding the required disclosures.

 

There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended October 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

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

 

**Item 1A. Risk Factors.**

 

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

 

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

 

Not applicable.

 

**Item 3. Defaults Upon SeniorSecurities.**

 

Not applicable.

 

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

 

Not applicable.

 

**Item 5. Other Information.**

 

Not applicable.

 

**Item  6. Exhibits.**

 
| 10.1   | Form of  Restricted Stock Award Agreement for Employees*                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                              |
| 10.2   | Form of  Restricted Stock Award Agreement for Directors*                                                                                                                                     |
|   |                                                                                                                                                                                              |
| 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:  December 7, 2009 |               |   |
|                         |               |   |
|                         | By:                | /s/ Bruce D.  Smith |
|                         | Name:              | Bruce D. Smith |
|                         | Title:             | Senior Vice  President, Chief Financial Officer and Secretary |

 

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