Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**

** **

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

 

**For the quarterly period ended July 31, 2010**

 

**OR**

 

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 000-51315**

 

**CITI TRENDS, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

(**912) 236-1561**

Registrant’s telephone number, including area code

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  o Yes  o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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

 

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

 

| **Class**                     | ** ** | **Outstanding at August 13, 2010** |
|-------------------------------|------------|--------------------------------------------------------|
| Common  Stock, $.01 par value |       | 14,836,037  shares                                     |

 

 

 

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Table of Contents

 

**CITI TRENDS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| ** **   | ** ** | ** **                                                                                                                      | ** ** | **PAGE  NUMBER** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I  |       | FINANCIAL INFORMATION                                                                                                           |       |             |
|         |       |                                                                                                                            |       |             |
| Item 1       |       | Financial Statements                                                                                                            |       |             |
|         |       |                                                                                                                            |       |             |
|         |       | Condensed  Consolidated Balance Sheets (unaudited) July 31, 2010 and  January 30, 2010                                |       | 3                |
|         |       |                                                                                                                            |       |             |
|         |       | Condensed  Consolidated Statements of Operations (unaudited) Twenty-six weeks ended  July 31, 2010 and August 1, 2009 |       | 4                |
|         |       |                                                                                                                            |       |             |
|         |       | Condensed  Consolidated Statements of Operations (unaudited) Thirteen weeks ended  July 31, 2010 and August 1, 2009   |       | 4                |
|         |       |                                                                                                                            |       |             |
|         |       | Condensed  Consolidated Statements of Cash Flows (unaudited) Twenty-six weeks ended  July 31, 2010 and August 1, 2009 |       | 5                |
|         |       |                                                                                                                            |       |             |
|         |       | Notes  to the Condensed Consolidated Financial Statements (unaudited)                                                           |       | 6                |
|         |       |                                                                                                                            |       |             |
| Item 2       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     |       | 10               |
|         |       |                                                                                                                            |       |             |
| Item 3       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                     |       | 14               |
|         |       |                                                                                                                            |       |             |
| Item 4       |       | Controls and  Procedures                                                                                                        |       | 14               |
|         |       |                                                                                                                            |       |             |
| PART II |       | OTHER INFORMATION                                                                                                               |       |             |
|         |       |                                                                                                                            |       |             |
| Item 1       |       | Legal Proceedings                                                                                                               |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 1A      |       | Risk Factors                                                                                                                    |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 2       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 3       |       | Defaults Upon  Senior Securities                                                                                                |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 4       |       | (Removed and Reserved)                                                                                                          |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 5       |       | Other Information                                                                                                               |       | 15               |
|         |       |                                                                                                                            |       |             |
| Item 6       |       | Exhibits                                                                                                                        |       | 15               |
|         |       |                                                                                                                            |       |             |
|         |       | SIGNATURES                                                                                                                      |       | 16               |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

**Citi Trends, Inc.**

** **

**CondensedConsolidated Balance Sheets**

**July 31, 2010 and January 30, 2010**

**(Unaudited)**

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

 
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **July 31,** | ** ** | **January 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2010**          | ** ** | **2010**             | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                 |       |              |       |                 |       |
| Current assets:                                                                                                                                                                                                                                                                            |       |              |       |                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                  |       | $                 | 84,636     |                 | $          | 62,993 |   |
| Short-term investment securities                                                                                                                                                                                                                                                           |       | 3,148             |       | 33,025               |       |
| Inventory                                                                                                                                                                                                                                                                                  |       | 107,556           |       | 100,874              |       |
| Prepaid and other current assets                                                                                                                                                                                                                                                           |       | 9,294             |       | 10,409               |       |
| Income tax receivable                                                                                                                                                                                                                                                                      |       | 2,741             |       | —               |       |
| Deferred tax asset                                                                                                                                                                                                                                                                         |       | 4,707             |       | 4,518                |       |
| Total current assets                                                                                                                                                                                                                                                                       |       | 212,082           |       | 211,819              |       |
| Property and equipment, net of accumulated  depreciation and amortization of $85,069 and $76,247 as of July 31, 2010  and January 30, 2010, respectively                                                                                                                         |       | 73,434            |       | 63,791               |       |
| Goodwill                                                                                                                                                                                                                                                                                   |       | 1,371             |       | 1,371                |       |
| Deferred tax asset                                                                                                                                                                                                                                                                         |       | 2,916             |       | 2,488                |       |
| Other assets                                                                                                                                                                                                                                                                               |       | 562               |       | 517                  |       |
| Total assets                                                                                                                                                                                                                                                                               |       | $                 | 290,365    |                 | $          | 279,986 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                             |       |              |       |                 |       |
| Current liabilities:                                                                                                                                                                                                                                                                       |       |              |       |                 |       |
| Accounts payable                                                                                                                                                                                                                                                                           |       | $                 | 58,942     |                 | $          | 62,706 |   |
| Accrued expenses                                                                                                                                                                                                                                                                           |       | 15,517            |       | 12,773               |       |
| Accrued compensation                                                                                                                                                                                                                                                                       |       | 9,168             |       | 9,500                |       |
| Income tax payable                                                                                                                                                                                                                                                                         |       | —            |       | 3,024                |       |
| Layaway deposits                                                                                                                                                                                                                                                                           |       | 1,909             |       | 645                  |       |
| Total current liabilities                                                                                                                                                                                                                                                                  |       | 85,536            |       | 88,648               |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                |       | 9,253             |       | 9,995                |       |
| Total liabilities                                                                                                                                                                                                                                                                          |       | 94,789            |       | 98,643               |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                 |       |              |       |                 |       |
| Common stock, $0.01 par value. Authorized  32,000,000 shares; 15,002,218 shares issued as of July 31, 2010 and  14,899,577 shares issued as of January 30, 2010; 14,836,468 shares outstanding  as of July 31, 2010 and 14,733,827 outstanding as of January 30,  2010 |       | 147               |       | 146                  |       |
| Paid-in-capital                                                                                                                                                                                                                                                                            |       | 76,718            |       | 74,368               |       |
| Retained earnings                                                                                                                                                                                                                                                                          |       | 118,876           |       | 106,994              |       |
| Treasury stock, at cost; 165,750 shares as of  July 31, 2010 and January 30, 2010                                                                                                                                                                                                |       | (165              | )          | (165                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                            |       | 195,576           |       | 181,343              |       |
| Commitments and contingencies (note 7)                                                                                                                                                                                                                                                     |       |              |       |                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                            |       | $                 | 290,365    |                 | $          | 279,986 |   |

 

See accompanying notes tothe condensed consolidated financial statements (unaudited).

 

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**Citi Trends, Inc.**

** **

**CondensedConsolidated Statements of Operations**

**Twenty-six Weeks Ended July 31, 2010 and August 1,2009**

**(Unaudited)**

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

 
| ** **                                    | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **July 31,**          | ** ** | **August 1,** | ** ** |
| ** **                                    | ** ** | **2010**                   | ** ** | **2009** | ** ** |
| Net sales                                     |       | $                          | 310,448    |   | $ | 254,702 |   |
| Cost of sales                                 |       | 189,778                    |       | 154,920 |   |
| Gross profit                                  |       | 120,670                    |       | 99,782 |   |
| Selling, general and administrative expenses  |       | 92,876                     |       | 79,127 |   |
| Depreciation and amortization                 |       | 9,519                      |       | 8,828 |   |
| Income from operations                        |       | 18,275                     |       | 11,827 |   |
| Interest income                               |       | 99                         |       | 244 |   |
| Interest expense                              |       | (9                         | )          | (69 | ) |
| Unrealized loss on investment securities      |       | —                     |       | (57 | ) |
| Income before income tax expense              |       | 18,365                     |       | 11,945 |   |
| Income tax expense                            |       | 6,483                      |       | 4,085 |   |
| Net income                                    |       | $                          | 11,882     |   | $ | 7,860 |   |
|                                          |       |                       |       |   |   |
| Basic net income per common share             |       | $                          | 0.82       |   | $ | 0.54 |   |
| Diluted net income per common share           |       | $                          | 0.82       |   | $ | 0.54 |   |
|                                          |       |                       |       |   |   |
| Net income attributable to common shares      |       |                       |       |   |   |
| Basic                                         |       | $                          | 11,882     |   | $ | 7,700 |   |
| Diluted                                       |       | $                          | 11,882     |   | $ | 7,700 |   |
|                                          |       |                       |       |   |   |
| Weighted average number of shares outstanding |       |                       |       |   |   |
| Basic                                         |       | 14,486                     |       | 14,342 |   |
| Diluted                                       |       | 14,510                     |       | 14,370 |   |

 

**Citi Trends, Inc.**

** **

**CondensedConsolidated Statements of Operations**

**Thirteen Weeks Ended July 31, 2010 and August 1,2009**

**(Unaudited)**

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

** **
| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **July 31,**        | ** ** | **August 1,** | ** ** |
| ** **                                    | ** ** | **2010**                 | ** ** | **2009** | ** ** |
| Net sales                                     |       | $                        | 129,042    |   | $ | 111,605 |   |
| Cost of sales                                 |       | 80,762                   |       | 69,011 |   |
| Gross profit                                  |       | 48,280                   |       | 42,594 |   |
| Selling, general and administrative expenses  |       | 44,426                   |       | 38,994 |   |
| Depreciation and amortization                 |       | 4,769                    |       | 4,455 |   |
| Loss from operations                          |       | (915                     | )          | (855 | ) |
| Interest income                               |       | 44                       |       | 105 |   |
| Interest expense                              |       | (5                       | )          | (28 | ) |
| Unrealized gain on investment securities      |       | —                   |       | 671 |   |
| Loss before income tax benefit                |       | (876                     | )          | (107 | ) |
| Income tax benefit                            |       | (309                     | )          | (38 | ) |
| Net loss                                      |       | $                        | (567       | ) | $ | (69 | ) |
|                                          |       |                     |       |   |   |
| Basic net loss per common share               |       | $                        | (0.04      | ) | $ | (0.00 | ) |
| Diluted net loss per common share             |       | $                        | (0.04      | ) | $ | (0.00 | ) |
|                                          |       |                     |       |   |   |
| Net loss attributable to common shares        |       |                     |       |   |   |
| Basic                                         |       | $                        | (567       | ) | $ | (69 | ) |
| Diluted                                       |       | $                        | (567       | ) | $ | (69 | ) |
|                                          |       |                     |       |   |   |
| Weighted average number of shares outstanding |       |                     |       |   |   |
| Basic                                         |       | 14,515                   |       | 14,365 |   |
| Diluted                                       |       | 14,515                   |       | 14,365 |   |

 

See accompanying notes tothe condensed consolidated financial statements (unaudited).

 

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**Citi Trends, Inc.**

** **

**CondensedConsolidated Statements of Cash Flows**

**Twenty-six Weeks Ended July 31, 2010 and August 1,2009**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Twenty-six Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **July 31,**          | ** ** | **August 1,** | ** ** |
| ** **                                                                         | ** ** | **2010**                   | ** ** | **2009** | ** ** |
| Operating activities:                                                              |       |                       |       |   |   |
| Net income                                                                         |       | $                          | 11,882     |   | $ | 7,860 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                       |       |   |   |
| Depreciation and amortization                                                      |       | 9,519                      |       | 8,828 |   |
| Loss on disposal of property and equipment                                         |       | 143                        |       | 254 |   |
| Deferred income taxes                                                              |       | (617                       | )          | (687 | ) |
| Noncash stock-based compensation expense                                           |       | 1,635                      |       | 1,004 |   |
| Excess tax benefits from stock-based payment  arrangements                         |       | (1,496                     | )          | (685 | ) |
| Unrealized loss on investment securities                                           |       | —                     |       | 57 |   |
| Changes in assets and liabilities:                                                 |       |                       |       |   |   |
| Inventory                                                                          |       | (6,682                     | )          | (2,570 | ) |
| Prepaid and other current assets                                                   |       | 1,115                      |       | 1,652 |   |
| Other assets                                                                       |       | (45                        | )          | (76 | ) |
| Accounts payable                                                                   |       | (3,764                     | )          | (6,166 | ) |
| Accrued expenses and other long-term liabilities                                   |       | 780                        |       | 80 |   |
| Accrued compensation                                                               |       | (332                       | )          | 750 |   |
| Income tax receivable/payable                                                      |       | (4,269                     | )          | (501 | ) |
| Layaway deposits                                                                   |       | 1,264                      |       | 1,244 |   |
| Net cash provided by operating activities                                          |       | 9,133                      |       | 11,044 |   |
| Investing activities:                                                              |       |                       |       |   |   |
| Sales/redemptions of investment securities                                         |       | 33,025                     |       | 1,300 |   |
| Purchases of investment securities                                                 |       | (3,148                     | )          | — |   |
| Purchases of property and equipment                                                |       | (18,083                    | )          | (9,258 | ) |
| Net cash provided by (used in) investing  activities                               |       | 11,794                     |       | (7,958 | ) |
| Financing activities:                                                              |       |                       |       |   |   |
| Repayments on capital lease obligations                                            |       | —                     |       | (841 | ) |
| Excess tax benefits from stock-based payment  arrangements                         |       | 1,496                      |       | 685 |   |
| Proceeds from the exercise of stock options                                        |       | 216                        |       | 268 |   |
| Cash used to settle withholding taxes on stock  option exercises                   |       | (996                       | )          | (353 | ) |
| Net cash provided by (used in) financing  activities                               |       | 716                        |       | (241 | ) |
| Net increase in cash and cash equivalents                                          |       | 21,643                     |       | 2,845 |   |
| Cash and cash equivalents:                                                         |       |                       |       |   |   |
| Beginning of period                                                                |       | 62,993                     |       | 33,516 |   |
| End of period                                                                      |       | $                          | 84,636     |   | $ | 36,361 |   |
|                                                                               |       |                       |       |   |   |
| Supplemental disclosures of cash flow information:                                 |       |                       |       |   |   |
| Cash paid for interest                                                             |       | $                          | —     |   | $ | 59 |   |
| Cash paid for income taxes                                                         |       | $                          | 11,369     |   | $ | 5,273 |   |
| Supplemental disclosures of noncash investing  activities:                         |       |                       |       |   |   |
| Increase in accrual for purchases of property and  equipment                       |       | $                          | 1,222      |   | $ | 704 |   |

 

See accompanying notes tothe condensed consolidated financial statements (unaudited).

 

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

**July 31,2010**

 

1. Basis of Presentation

 

Citi Trends, Inc. andits subsidiary (the “Company”) operate as a rapidly growing, value-pricedretailer of urban fashion apparel and accessories for the entire family.  As of July 31, 2010, the Companyoperated 425 stores in 24 states.

 

The condensed consolidatedbalance sheet as of July 31, 2010, the condensed consolidated statementsof operations for the twenty-six and thirteen-week periods ended July 31,2010 and August 1, 2009, and the condensed consolidated statements of cashflows for the twenty-six week periods ended July 31, 2010 and August 1,2009 have been prepared by the Company without audit. The condensedconsolidated balance sheet as of January 30, 2010 has been derived fromthe audited financial statements as of that date, but does not include allrequired year end disclosures.  In the opinion of management, suchstatements include all adjustments considered necessary to present fairly theCompany’s financial position as of July 31, 2010 and January 30,2010, and its results of operations and cash flows for all periodspresented.  It is suggested that thesecondensed consolidated financial statements be read in conjunction with theconsolidated financial statements and the notes thereto included in the Company’slatest Annual Report on Form 10-K for the year ended January 30,2010.

 

The accompanying unauditedcondensed consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not include all information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements.  Operating results for the interim periods ended July 31,2010 are not necessarily indicative of the results that may be expected for thefiscal year ending January 29, 2011.

 

Certain prior year amountsin the consolidated statement of cash flows have been revised to conform to thecurrent year presentation.  The amount bywhich an accrual for purchases of property and equipment changed had previouslybeen included in the line items for changes in accrued expenses (operatingactivities) and purchases of property and equipment (investingactivities).  The revision removed theaccrual change from both line items by offsetting amounts, and a supplementaldisclosure of noncash investing activities has been added to the consolidatedstatement of cash flows for such amount. This revision caused net cash provided by operating activities todecrease and net cash used in investing activities to decrease by $704,000 inthe twenty-six weeks ended August 1, 2009 from that previously reported.

 

The following containsreferences to years 2010 and 2009, which represent fiscal years ending or endedon January 29, 2011 (fiscal 2010) and January 30, 2010 (fiscal 2009),respectively.  Fiscal 2010 and fiscal2009 both have 52-week accounting periods.

 

2. Use of Estimates

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and useassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

The most significantestimates made by management include those made in the valuation of inventory,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 commonshare amounts are calculated using the weighted average number of common sharesoutstanding for the period. Diluted earnings per common share amounts arecalculated using the weighted average number of common shares outstanding plusthe additional dilution for all potentially dilutive securities, such asnonvested restricted stock and stock options. During loss periods, diluted earnings per share amounts are based on theweighted average number of common shares outstanding.

 

The dilutive effect ofstock-based compensation arrangements is accounted for using the treasury stockmethod.  This method assumes that the proceeds the Company receives fromthe exercise of stock options are used to repurchase common shares in themarket.  The Company includes as assumed proceeds the amount ofcompensation cost attributed to future services and not yet recognized, and theamount of tax benefits, if any, that would be credited to additional paid-incapital assuming exercise of outstanding options and vesting of nonvestedrestricted stock.  For the thirteen weeks ended July 31, 2010 and August 1,2009, there were 51,000 and 67,000 options outstanding, respectively, topurchase shares of common stock excluded from the calculation of dilutedearnings per share because of antidilution.  For the twenty-six weeksended July 31, 2010 and August 1, 2009, there were 55,000 and 68,000options outstanding, respectively, to purchase shares of common stock excludedfrom the calculation of diluted earnings per share because of antidilution.

 

Nonvestedrestricted stock awards granted to employees and non-employee directorscontained nonforfeitable dividend rights prior to October 31, 2009, whenamendments 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.

 

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Accordingly,such awards were considered participating securities through the third quarterof 2009 and, therefore, were included in the earnings allocation in computingearnings per share under the required two-class method.  However, such awards will not be treated asparticipating securities after October 31, 2009 due to the aforementionedamendments.

 

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share (in thousands, except per share amounts):

 
| ** **                                                        | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **July 31, 2010**     | ** ** | **August 1, 2009** | ** ** |
|                                                              |       |                       |       |   |   |
| Basic:                                                            |       |                       |       |   |   |
| Numerator                                                         |       |                       |       |   |   |
| Net income                                                        |       | $                          | 11,882     |   | $ | 7,860 |   |
| Net income allocated to participating securities                  |       | —                     |       | (160 | ) |
| Net income attributable to common  stockholders-basic             |       | 11,882                     |       | 7,700 |   |
|                                                              |       |                       |       |   |   |
| Denominator                                                       |       |                       |       |   |   |
| Weighted average common shares                                    |       | 14,486                     |       | 14,342 |   |
|                                                              |       |                       |       |   |   |
| Net income attributable to common stockholders per  share-basic   |       | $                          | 0.82       |   | $ | 0.54 |   |
|                                                              |       |                       |       |   |   |
| Diluted:                                                          |       |                       |       |   |   |
| Numerator                                                         |       |                       |       |   |   |
| Net income                                                        |       | $                          | 11,882     |   | $ | 7,860 |   |
| Net income allocated to participating securities                  |       | —                     |       | (160 | ) |
| Net income attributable to common  stockholders-diluted           |       | 11,882                     |       | 7,700 |   |
|                                                              |       |                       |       |   |   |
| Denominator                                                       |       |                       |       |   |   |
| Denominator for basic calculation                                 |       | 14,486                     |       | 14,342 |   |
| Effect of dilutive securities                                     |       | 24                         |       | 28 |   |
| Denominator for diluted calculation                               |       | 14,510                     |       | 14,370 |   |
|                                                              |       |                       |       |   |   |
| Net income attributable to common stockholders per  share-diluted |       | $                          | 0.82       |   | $ | 0.54 |   |

 
|                                                           | ** ** | **Thirteen  Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|
|                                                           | ** ** | **July 31,  2010**   | ** ** | **August 1,  2009** | ** ** |
|                                                           |       |                      |       |   |   |
| Basic:                                                         |       |                      |       |   |   |
| Numerator                                                      |       |                      |       |   |   |
| Net loss                                                       |       | $                         | (567       | ) | $ | (69 | ) |
| Net income allocated to participating securities               |       | —                    |       | — |   |
| Net loss attributable to common stockholders-basic             |       | (567                      | )          | (69 | ) |
|                                                           |       |                      |       |   |   |
| Denominator                                                    |       |                      |       |   |   |
| Weighted average common shares                                 |       | 14,515                    |       | 14,365 |   |
|                                                           |       |                      |       |   |   |
| Net loss attributable to common stockholders per  share-basic  |       | $                         | (0.04      | ) | $ | (0.00 | ) |
|                                                           |       |                      |       |   |   |
| Diluted:                                                       |       |                      |       |   |   |
| Numerator                                                      |       |                      |       |   |   |
| Net loss                                                       |       | $                         | (567       | ) | $ | (69 | ) |
| Net income allocated to participating securities               |       | —                    |       | — |   |
| Net loss attributable to common stockholders-diluted           |       | (567                      | )          | (69 | ) |
|                                                           |       |                      |       |   |   |
| Denominator                                                    |       |                      |       |   |   |
| Denominator for basic calculation                              |       | 14,515                    |       | 14,365 |   |
| Effect of dilutive securities                                  |       | —                    |       | — |   |
| Denominator for diluted calculation                            |       | 14,515                    |       | 14,365 |   |
|                                                           |       |                      |       |   |   |
| Net loss attributable to common stockholders per share-diluted |       | $                         | (0.04      | ) | $ | (0.00 | ) |

 

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4. Fair Value Measurement

 

Fair value is defined as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the principal or mostadvantageous market at the measurement date. Fair value is establishedaccording to a hierarchy that prioritizes observable and unobservable inputsused to measure fair value into three broad levels, which are described below:

 

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

 

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

 

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

 

The Company held investmentsin municipal auction rate securities (“ARS”) issued by student loan fundingorganizations at the time the ARS market experienced a disruption in liquidity inFebruary 2008.  Since that time, allof the ARS have been redeemed at par value by the original issuers and theCompany’s investment banks, with the final redemptions occurring on June 30,2010 in connection with the Company’s exercise of a put option offered by oneof the investment banks.  There were nolosses incurred as the result of any of the ARS redemptions.

 

The following table providesa summary of activity for the Company’s ARS and related put option measured atfair value on a recurring basis using significant unobservable inputs (Level 3)for the twenty-six weeks ended July 31, 2010 (in thousands):

 
| ** **                                     | ** ** | **Put Option Related to ARS** | ** ** | **Auction Rate Securities** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Balance as of January 30, 2010            |       | $                             | 3,307      |                        | $          | 29,718 |   |
| Unrealized gains (losses) included in earnings |       | 62                            |       | (62                         | )          |
| Sales/redemptions of investment securities     |       | (3,369                        | )          | (29,656                     | )          |
| Balance as of July 31, 2010               |       | $                             | —     |                        | $          | — |   |

 

The Company’s short-terminvestment securities as of July 31, 2010 consist of pre-refundedmunicipal bonds which are bonds that have been refinanced by the issuer andremain outstanding in the marketplace until a specific call date isreached.  Pre-refunded municipal bondsare secured by U.S. Treasury securities placed in an irrevocable escrow account.  All of the Company’s pre-refunded municipalbonds have call dates of less than one year, therefore, are classified ascurrent assets.   As of July 31,2010, these available-for-sale securities have fair values that are essentiallyequal to the original cost of $3,148,000.

 

5. Revolving Line ofCredit

 

OnMarch 22, 2010, the Company’s $20 million unsecured revolving creditfacility with Bank of America wasamended to extend the expiration date to March 22, 2012.  The facility has an unused commitment fee of0.25% and loans under the facility bear interest at either (a) arate equal to the highest of (i) the Federal Funds Rate plus 0.50%,(ii) LIBOR plus 1.0% and (iii) Bank of America’s prime rate, plus anapplicable margin; or (b) a rate equal to LIBOR plus an applicablemargin.  The applicable margin isdependent on the Company’s consolidated leverage ratio and ranges from 0.75% to1.25% for loans bearing interest at the rate described under (a) above and from1.75% to 2.25% for loans bearing interest at the rate described under(b) above. The Company has had no borrowings under this facility.

 

6. Other Long-TermLiabilities

 

The components of otherlong-term liabilities as of July 31, 2010 and January 30, 2010 are asfollows (in thousands):

 
| ** **                    | ** ** | **July 31,  2010** | ** ** | **January 30,  2010** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Deferred rent                 |       | $                       | 3,529      |                       | $          | 3,528 |   |
| Tenant improvement allowances |       | 4,970                   |       | 5,600                      |       |
| Other                         |       | 754                     |       | 867                        |       |
|                          |       | $                       | 9,253      |                       | $          | 9,995 |   |

 

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7. Commitments andContingencies

 

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

 

8. Recent AccountingPronouncements

 

In January 2010, theFASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair ValueMeasurements and Disclosures – Improving Disclosures about Fair ValueMeasurements” (ASU 2010-06).  Thisstandard requires new disclosures for significant transfers in and out ofLevels 1 and 2 of the fair value hierarchy and the activity within Level 3 ofthe hierarchy, while also clarifying existing disclosures regarding the levelof disaggregation of assets or liabilities and the valuation techniques andinputs used to measure fair value.  Thestandard is effective for interim and annual reporting periods beginning after December 15,2009, with the exception of the new Level 3 activity disclosures, which areeffective for interim and annual reporting periods beginning after December 15,2010.  The adoption of the applicableprovisions of this standard in the first quarter of fiscal 2010 did not have amaterial impact on the Company’s consolidated financial statements and the futureadoption of the Level 3 activity disclosures is not expected to have a materialimpact.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

**Forward-LookingStatements**

 

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

 

The factors that may resultin actual results differing from such forward-looking information include, butare not limited to: transportation and distribution delays or interruptions;changes in freight rates; the Company’s ability to negotiate effectively thecost and purchase of merchandise; inventory risks due to shifts in marketdemand; the Company’s ability to gauge fashion trends and changing consumerpreferences; changes in consumer spending on apparel; changes in product mix;interruptions in suppliers’ businesses; interest rate fluctuations; adeterioration in general economic conditions caused by acts of war or terrorismor other factors; temporary changes in demand due to weather patterns;seasonality of the Company’s business; delays associated with building, openingand operating new stores; delays associated with building, opening, expandingor converting new or existing distribution centers; and other factors describedin the section titled “Item 1A. Risk Factors” and elsewhere in the Company’sAnnual Report on Form 10-K for the fiscal year ended January 30, 2010and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’sQuarterly Reports on Form 10-Q and any amendments thereto and in the otherdocuments the Company files with the SEC, including reports on Form 8-K.

 

Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this Form 10-Q. Except as may be required by law, theCompany undertakes no obligation to update or revise publicly anyforward-looking statements contained herein to reflect events or circumstancesoccurring after the date of this Form 10-Q or to reflect the occurrence ofunanticipated events. Readers are advised, however, to read any furtherdisclosures the Company may make on related subjects in its public disclosuresor documents filed with the SEC, including reports on Form 8-K.

 

**Overview**

 

We are a rapidly growing,value-priced retailer of urban fashion apparel and accessories for the entirefamily. Our merchandise offerings are designed to appeal to the preferences offashion conscious consumers, particularly African-Americans. Originally ourstores were located in the Southeast, and in recent years we expanded into theMid-Atlantic and Midwest regions and the states of Texas and California. Weoperated 425 stores in both urban and rural markets in 24 states as of July 31,2010.

 

We measure performance usingkey operating statistics. One of the main performance measures we use iscomparable store sales growth. We define a comparable store as a store that hasbeen opened for an entire fiscal year. Therefore, a store will not beconsidered a comparable store until its 13th month of operation at the earliestor until its 24th month at the latest. As an example, stores opened in fiscal2009 and fiscal 2010 are not considered comparable stores in fiscal 2010.Relocated and expanded stores are included in the comparable store salesresults. We also use other operating statistics, most notably average sales perstore, to measure our performance. As we typically occupy existing space inestablished shopping centers rather than sites built specifically for ourstores, store square footage (and therefore sales per square foot) varies bystore. We focus on overall store sales volume as the critical driver ofprofitability. The average sales per store has increased over the years, as wehave increased comparable store sales and opened new stores that are generallylarger than our historical store base. Average sales per store increased from$0.8 million in fiscal 2000 to $1.5 million in fiscal 2009. In addition tosales, we measure gross profit as a percentage of sales and store operatingexpenses, with a particular focus on labor, as a percentage of sales. Theseresults translate into store level contribution, which we use to evaluateoverall performance of each individual store. Finally, we monitor corporateexpenses against budgeted amounts.  Allof the statistics discussed above are critical components of earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) which is consideredour most important operating statistic. Provided below is a reconciliation of EBITDA to net income for the twenty-sixand thirteen week periods ended July 31, 2010 and August 1, 2009:

 

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| ** **                    | ** ** | **Twenty-Six Weeks Ended** | ** ** | **Thirteen Weeks Ended** | ** ** |
|-------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **July 31, 2010**     | ** ** | **August 1, 2009**  | ** ** | **July 31, 2010** | ** ** | **August 1, 2009** | ** ** |
| Net income (loss)             |       | $                          | 11,882     |                     | $          | 7,860 |   | $ | (567 | ) | $ | (69 | ) |
|                          |       |                       |       |                     |       |   |   |   |   |
| Plus:                         |       |                       |       |                     |       |   |   |   |   |
| Interest expense              |       | 9                          |       | 69                       |       | 5 |   | 28 |   |
| Income tax expense            |       | 6,483                      |       | 4,085                    |       | — |   | — |   |
| Depreciation and amortization |       | 9,519                      |       | 8,828                    |       | 4,769 |   | 4,455 |   |
|                          |       |                       |       |                     |       |   |   |   |   |
| Less:                         |       |                       |       |                     |       |   |   |   |   |
| Interest income               |       | (99                        | )          | (244                     | )          | (44 | ) | (105 | ) |
| Income tax benefit            |       | —                     |       | —                   |       | (309 | ) | (38 | ) |
|                          |       |                       |       |                     |       |   |   |   |   |
| EBITDA                        |       | $                          | 27,794     |                     | $          | 20,598 |   | $ | 3,854 |   | $ | 4,271 |   |

 

**AccountingPeriods**

 

The following discussioncontains references to fiscal years 2010 and 2009, which represent fiscal yearsending or ended on January 29, 2011 (fiscal 2010) and January 30,2010 (fiscal 2009), respectively. Fiscal 2010 and fiscal 2009 both have 52-weekaccounting periods. This discussion and analysis should be read with theunaudited condensed consolidated financial statements and the notes thereto.

 

**Results ofOperations**

 

The following discussion ofthe Company’s financial performance is based on the unaudited condensedconsolidated financial statements set forth herein. The nature of the Company’sbusiness is seasonal. Historically, sales in the first and fourth quarters havebeen higher than sales achieved in the second and third quarters of the fiscalyear. Expenses and, to a greater extent, operating income, vary by quarter.Results of a period shorter than a full year may not be indicative of resultsexpected for the entire year. Furthermore, the seasonal nature of the Company’sbusiness may affect comparisons between periods.

 

**Twenty-sixWeeks Ended July 31, 2010 and August 1, 2009**

 

*NetSales. * Net sales increased $55.7 million, or 21.9%, to$310.4 million in the twenty-six weeks ended July 31, 2010 from $254.7million in the twenty-six weeks ended August 1, 2009.  The increase innet sales was due primarily to the opening of 57 new stores since last year’ssecond quarter, together with a 5.1% increase in comparable store sales,partially offset by the effect of closing two stores since last year’s secondquarter. Comparable store sales benefited from a strong spring merchandiseassortment that resonated well with our customers.  In addition, we believe that our customersreceived their tax refunds later this year which caused a shift of sales fromJanuary, the last month of fiscal 2009, to February, the first month of fiscal2010.  Comparable stores includelocations that have been relocated or expanded. There were thirteen storesrelocated or expanded since last year’s second quarter, all of which impactedcomparable store sales. Sales in comparable relocated and expanded storesincreased 11.1% in the first half of 2010, while sales in all other comparablestores increased 4.8%.  Substantially allof the 5.1% overall increase in comparable store sales was due to an increasein the number of customer transactions, with only a minor amount resulting froma higher average ticket. Comparable store sales changes by major merchandiseclass were as follows in the first half of 2010:  Accessories +18%; Home +15%; Men’s +3%; Women’s+3%; and Children’s 0%.

 

The new stores opened in2009 and 2010, net of the closed stores, accounted for $43.0 million of theincrease in total sales, while the 5.1% sales increase in the 352 comparablestores totaled $12.7 million.

 

*GrossProfit. * Gross profit increased $20.9 million, or 20.9%, to$120.7 million in the first half of 2010 from $99.8 million in last year’sfirst half.  The increase in gross profit is a result of the increase insales, partially offset by a slight decline in the gross margin to 38.9% from39.2% in last year’s first half.  Thedecrease in gross margin was due primarily to an increase of 50 basis points inmarkdowns as a percentage of sales, partially offset by a decrease of 20 basispoints in inventory shrinkage.

 

*Selling,General and Administrative Expenses. *Selling,general and administrative expenses increased $13.8 million, or 17.4%, to $92.9million in the first half of 2010 from $79.1 million in last year’s firsthalf.  The increase in these expenses was due primarily to additionalstore level, distribution and corporate costs arising from the opening of 57new stores since last year’s second quarter. As a percentage of sales, selling, general and administrative expensesimproved to 29.9% in the first half of fiscal 2010 from 31.1% in the first halfof fiscal 2009, due primarily to the leveraging effect that occurs on expensesas a percentage of sales when comparable store sales increase at a rate that ishigher than the rate of inflation on expenses and due to strong payroll controls.  In particular, payroll expenses, which have asizable fixed component

 

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associated with storemanagement and corporate overhead, decreased 80 basis points as a percentage ofsales, and occupancy expenses, which tend to be highly fixed in nature,decreased 30 basis points.

 

*Depreciation andAmortization. *Depreciationand amortization expense increased $0.7 million, or 7.8%, to $9.5 million inthe first half of 2010 from $8.8 million in the first half of 2009, as theresult of capital expenditures incurred for new and relocated/expanded stores.

 

*InterestIncome. * Interest income decreased to $0.1 million in thefirst half of 2010 from $0.2 million in the first half of 2009 due to adeclining interest rate environment.

 

*InterestExpense. * Interest expense decreased to $9,000 in the firsthalf of 2010 from $69,000 in the first half of 2009 due to the final liquidationof our capital lease obligations.

 

*UnrealizedLoss on Investment Securities. *An impairment loss of $57,000 on our investments in auction ratesecurities and a related put option was reflected in the first half of fiscal2009.

 

*Income TaxExpense. * Income tax expense increased $2.4 million, or58.7%, to $6.5 million in this year’s first half from $4.1 million in the firsthalf of 2009 due to an increase in pretax income, together with an increase inthe effective income tax rate to 35.3% from 34.2% as the result of tax creditsdecreasing slightly while pretax income was increasing.

 

*NetIncome. * Net income increased 51.2% to $11.9 million in thefirst half of 2010 from $7.9 million in the first half of 2009 due to thefactors discussed above.

 

**Thirteen Weeks Ended July 31,2010 and August 1, 2009**

 

*NetSales. * Net sales increased $17.4 million, or 15.6%, to$129.0 million in the thirteen weeks ended July 31, 2010 from $111.6million in the thirteen weeks ended August 1, 2009.  The increase innet sales was due primarily to the opening of 57 new stores since last year’ssecond quarter, partially offset by a 0.6% decrease in comparable store salesand the effect of closing two stores since last year’s second quarter.  Comparable stores include locations that havebeen relocated or expanded. There were thirteen stores relocated or expandedsince last year’s second quarter, all of which impacted comparable store sales.Sales in comparable relocated and expanded stores increased 5.4% in the secondquarter of 2010, while sales in all other comparable stores decreased1.0%.  The 0.6% overall decrease incomparable store sales was due to an approximately 3% decrease in the averageticket, partially offset by an increase in the number of customertransactions.   Comparable store saleschanges by major merchandise class were as follows in the second quarter of2010:  Home +15%; Accessories +11%; Men’s-2%; Women’s -4%; and Children’s -6%.

 

The new stores opened in2009 and 2010, net of closed stores, accounted for an increase of $18.1 millionin total sales, while the 0.6% sales decrease in the 352 comparable storestotaled $0.7 million.

 

*GrossProfit. * Gross profit increased $5.7 million, or 13.3%, to$48.3 million in the second quarter of 2010 from $42.6 million in last year’ssecond quarter.  The increase in gross profit is a result of the increasein sales, partially offset by a decline in the gross margin to 37.4% from 38.2%in last year’s second quarter.  Thedecrease in the gross margin was due primarily to more merchandise clearancemarkdowns resulting from the negative comparable store sales during thequarter.

 

*Selling,General and Administrative Expenses. *Selling,general and administrative expenses increased $5.4 million, or 13.9%, to $44.4million in the second quarter of 2010 from $39.0 million in last year’s secondquarter.  The increase in these expenses was due primarily to additionalstore level, distribution and corporate costs arising from the opening of 57new stores since last year’s second quarter. As a percentage of sales, selling, general and administrative expensesdecreased to 34.4% in the second quarter of fiscal 2010 from 34.9% in thesecond quarter of fiscal 2009, due primarily to strong controls over payroll.

 

*Depreciation and Amortization. *Depreciation andamortization expense increased $0.3 million, or 7.0%, to $4.8 million in thesecond quarter of 2010 from $4.5 million in the second quarter of 2009, as theresult of capital expenditures incurred for new and relocated/expanded stores.

 

*InterestIncome. * Interest income decreased to $44,000 in the secondquarter of 2010 from $105,000 in the second quarter of 2009 due to a declininginterest rate environment.

 

*InterestExpense. * Interest expense decreased to $5,000 in the secondquarter of 2010 from $28,000 in the second quarter of 2009 due to the finalliquidation of our capital lease obligations.

 

*UnrealizedGain on Investment Securities. *An unrealized gain of $671,000 on our investments in auction ratesecurities and a related put option was reflected in the second quarter offiscal 2009 due primarily to an improvement in the credit spreads and liquidityassociated with the auction rate securities market.

 

*Income TaxBenefit. * Income tax benefit increased to $309,000 in thisyear’s second quarter from $38,000 in the second quarter of 2009 due to ahigher pretax loss.

 

*NetLoss. * Net loss increased to $567,000 in the secondquarter of 2010 from $69,000 in the second quarter of 2009 due to the factorsdiscussed above.

 

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**Liquidity and Capital Resources**

 

Our cash requirements areprimarily for working capital, expansion of our distribution infrastructure,opening of new stores, remodeling of our existing stores and the improvement ofour information 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 in 2005.  We expect to be able to meetfuture cash requirements with cash flow from operations, short-term tradecredit, existing cash balances and, if necessary, borrowings under our revolvingcredit facility.

 

*Current Financial Condition.*As of July 31,2010, we had total cash and cash equivalents of $84.6 million compared withtotal cash and cash equivalents of $63.0 million as of January 30,2010. Inventory represented 37.0% of our total assets as of July 31,2010.  Management’s ability to manage ourinventory can have a significant impact on our cash flows from operationsduring a given interim period or fiscal year. In addition, inventory purchasescan be seasonal in nature, such as the purchase of warm-weather orChristmas-related merchandise.  Totalinventories at the end of the second quarter of 2010 were up $18.7 million, or21.1%, compared to the second quarter of fiscal 2009, while store selling squarefootage increased 17.3%.  Inventory incomparable stores was 4.0% higher than at the end of the second quarter offiscal 2009, but only after significant reductions of comparable storeinventories of 10.2% and 18.0% in the second quarters of 2009 and 2008,respectively.

 

*Cash FlowsFrom Operating Activities*. Net cash provided by operating activitieswas $9.1 million in the first half of fiscal 2010 compared to $11.0million in the first half of fiscal 2009. The main source of cash provided during the first half of fiscal 2010was net income adjusted for noncash expenses such as depreciation andamortization, loss on disposal of property and equipment, deferred income taxesand stock-based compensation expense, totaling $22.6 million (compared to$17.3 million in last year’s first half). Other significant sources of cash in the first half of fiscal 2010 were (1) a$1.3 million increase in layaway deposits (compared to $1.2 million in thefirst half of fiscal 2009) 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,and (2) a $1.1 million decrease in prepaid and other current assets(compared to $1.7 million in the first half of fiscal 2009) due to lowerreceivables from landlords for tenant improvement reimbursements as a result ofthere being fewer store openings in the second quarter of 2010 than the fourthquarter of 2009.  Significant uses ofcash included (1) a $6.7 million increase in inventory (compared to $2.6million in the first half of fiscal 2009) as the result of opening 24 newstores in the first half of 2010, partially offset by two store closings, (2) a$4.3 million change in income tax receivable/payable (compared to $0.5 millionin the first half of fiscal 2009) due to the timing of quarterly estimatedpayments and because the payment in July 2010 was unusually high based onour record first quarter earnings, and (3) a $3.8 million decrease inaccounts payable (compared to $6.2 million in the first half of fiscal 2009)due primarily to seasonality, as a larger portion of inventory is stillincluded in accounts payable at the end of January than the end of July,because January inventory includes recent purchases for the upcoming springseason which are more significant than the recent purchases of merchandise in July forthe upcoming back-to-school season.

 

*Cash FlowsFrom Investing Activities.* Cash provided by investingactivities was $11.8 million in the first half of fiscal 2010 compared to cashused in investing activities of $8.0 million in the first half of fiscal2009.  Redemptions of investmentsecurities provided cash of $33.0 million in the first half of 2010 and $1.3million in the first half of 2009, as our investment bank repurchased ourremaining auction rate securities in June 2010 in connection with ourexercise of a put option that had been offered to us in November 2008after the auction rate securities market became illiquid.  Cash used for purchases of investmentsecurities totaled $3.1 million in the first half of 2010.  Cash used for purchases of property andequipment totaled $18.1 million and $9.3 million in the first half of fiscal2010 and 2009, respectively, with the increase resulting from the acquisition ofa new distribution center in Roland, Oklahoma and the opening of 24 new storesin the first half of fiscal 2010 compared with 16 in the first half of fiscal2009.

 

*Cash FlowsFrom Financing Activities.* Cash flows from financingactivities were insignificant in the first half of both fiscal 2010 and 2009.

 

**CashRequirements**

 

Our principal sources ofliquidity consist of: (i) cash and cash equivalents (which equaled$84.6 million as of July 31, 2010); (ii) short-term tradecredit; (iii) cash generated from operations on an ongoing basis as wesell our merchandise inventory; and (iv) a $20 million revolving creditfacility. Trade credit represents a significant source of financing forinventory purchases and arises from customary payment terms and trade practiceswith our vendors.  Historically, our principal liquidity requirements havebeen for working capital and capital expenditure needs.

 

We believe that our existingsources of liquidity will be sufficient to fund our operations and anticipatedcapital expenditures for at least the next 12 months.

 

**CriticalAccounting Policies**

 

The preparation of ourcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the 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. There have been no material changes to the CriticalAccounting Policies outlined in the Company’s Annual Report on Form 10-Kfor the year ended January 30, 2010.

 

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** **

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk.**

 

There have been no materialchanges in our market risk during the twenty-six weeks ended July 31, 2010compared to the disclosures in Part II, Item 7A of our Annual Reporton Form 10-K for the year ended January 30, 2010, except that ourrisk related to the illiquid auction rate securities market was eliminated whenour investment bank redeemed our remaining securities on June 30, 2010 inconnection with our exercise of a put option that had been offered to us by theinvestment bank in November 2008.

 

**Item 4.Controls and Procedures.**

 

We have carried out anevaluation under the supervision and with the participation of management,including the Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of July 31, 2010 pursuant to Rules 13a-15 and 15d-15 ofthe Exchange Act. Based on that evaluation, the Chief Executive Officer and theChief Financial Officer each concluded that our disclosure controls andprocedures are effective to provide reasonable assurance that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such informationhas been accumulated and communicated to our management, including the officerswho certify our financial reports, as appropriate, to allow timely decisionsregarding the required disclosures.

 

Our disclosure controls andprocedures are designed to provide reasonable assurance that the controls andprocedures will meet their objectives. Management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.

 

There were no changes in ourinternal control over financial reporting that occurred during the fiscalquarter ended July 31, 2010 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

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

 

**Item 1A.Risk Factors.**

 

There are no materialchanges to the Risk Factors described under the section “ITEM 1A. RISK FACTORS”in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30,2010, except that our risk related to the illiquid auction rate securitiesmarket was eliminated when our investment bank redeemed our remainingsecurities on June 30, 2010 in connection with our exercise of a putoption that had been offered to us by the investment bank in November 2008.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.**

 

Not applicable.

 

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

 

Not applicable.

 

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

 

**Item 5.Other Information.**

 

Notapplicable.

 

**Item 6.Exhibits.**

 
| 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.* †                                                       |

 

----

*                    Filed herewith.

 

†                     Pursuant to Securities andExchange Commission Release No. 33-8238, this certification will betreated as “accompanying” this Quarterly Report on Form 10-Q and not “filed”as part of such report for purposes of Section 18 of the SecuritiesExchange Act of 1934, or otherwise subject to the liability of Section 18of the Securities Exchange Act of 1934 and this certification will not bedeemed to be incorporated by reference into any filing under the Securities Actof 1933 or the Securities Exchange Act of 1934, except to the extent that theregistrant specifically incorporates it by reference.

 

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**SIGNATURES**

 

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

 
|                       | CITI TRENDS, INC. |
|----------------------------|------------------------|
|                       |                   |   |
|                       |                   |   |
| Date: August 27, 2010 |                   |   |
|                       |                   |   |
|                       | By:                    | /s/ Bruce D. Smith |
|                       | Name:                  | Bruce D. Smith |
|                       | Title:                 | Executive Vice President,  Chief Financial Officer and Secretary |

 

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