Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 
| **(Mark One)**                                          |
|---------------------------------------------------------|
| ** **                                              |
| **x**                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                    |   |
| **For  the quarterly period ended August 1, 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 Exchange Act). Yes  o No  x

 

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

 

| **Class**                     | ** ** | **Outstanding  at August 12, 2009** |
|-------------------------------|------------|------------------------------------------|
| Common Stock, $.01 par  value |       | 14,690,583 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 Balance Sheets (unaudited) August 1,  2009 and January 31, 2009                                | 3                |
|         |                                                                                                               |             |
|         | Condensed Statements of Operations (unaudited) Twenty-six  weeks ended August 1, 2009 and August 2, 2008 | 4                |
|         |                                                                                                               |             |
|         | Condensed Statements of Operations (unaudited)  Thirteen weeks ended August 1, 2009 and August 2, 2008   | 4                |
|         |                                                                                                               |             |
|         | Condensed Statements of Cash Flows (unaudited)  Twenty-six weeks ended August 1, 2009 and August 2, 2008 | 5                |
|         |                                                                                                               |             |
|         | Notes to the Condensed Financial Statements  (unaudited)                                                           | 6                |
|         |                                                                                                               |             |
| Item 2       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 10               |
|         |                                                                                                               |             |
| Item 3       | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 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       | Submission  of Matters to a Vote of Security Holders                                                               | 15               |
|         |                                                                                                               |             |
| Item 5       | Other Information                                                                                                  | 15               |
|         |                                                                                                               |             |
| Item  6      | Exhibits                                                                                                           | 16               |
|         |                                                                                                               |             |
|         | SIGNATURES                                                                                                         | 17               |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**CitiTrends, Inc.**

** **

**Condensed Balance Sheets**

**August 1,2009 and January 31, 2009**

**(Unaudited)**

** **

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **August 1,** | ** ** | **January 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2009**           | ** ** | **2009**             | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                 |       |               |       |                 |       |
| Current  assets:                                                                                                                                                                                                                                                                           |       |               |       |                 |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                 |       | $                  | 36,361     |                 | $          | 33,516 |   |
| Short-term  investment securities                                                                                                                                                                                                                                                          |       | 42,468             |       | —               |       |
| Inventory                                                                                                                                                                                                                                                                                  |       | 88,829             |       | 86,259               |       |
| Prepaid  and other current assets                                                                                                                                                                                                                                                          |       | 8,973              |       | 10,625               |       |
| Income  tax receivable                                                                                                                                                                                                                                                                     |       | 504                |       | —               |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                        |       | 3,722              |       | 3,447                |       |
| Total  current assets                                                                                                                                                                                                                                                                      |       | 180,857            |       | 133,847              |       |
| Property  and equipment, net                                                                                                                                                                                                                                                               |       | 59,741             |       | 58,861               |       |
| Long-term  investment securities                                                                                                                                                                                                                                                           |       | —             |       | 43,825               |       |
| Goodwill                                                                                                                                                                                                                                                                                   |       | 1,371              |       | 1,371                |       |
| Deferred  tax asset                                                                                                                                                                                                                                                                        |       | 2,892              |       | 2,480                |       |
| Other  assets                                                                                                                                                                                                                                                                              |       | 481                |       | 405                  |       |
| Total  assets                                                                                                                                                                                                                                                                              |       | $                  | 245,342    |                 | $          | 240,789 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                             |       |               |       |                 |       |
| Current  liabilities:                                                                                                                                                                                                                                                                      |       |               |       |                 |       |
| Accounts  payable                                                                                                                                                                                                                                                                          |       | $                  | 46,129     |                 | $          | 52,295 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                          |       | 12,072             |       | 11,478               |       |
| Accrued  compensation                                                                                                                                                                                                                                                                      |       | 8,264              |       | 7,514                |       |
| Current  portion of capital lease obligations                                                                                                                                                                                                                                              |       | 562                |       | 1,403                |       |
| Income  tax payable                                                                                                                                                                                                                                                                        |       | —             |       | 682                  |       |
| Layaway  deposits                                                                                                                                                                                                                                                                          |       | 1,808              |       | 564                  |       |
| Total  current liabilities                                                                                                                                                                                                                                                                 |       | 68,835             |       | 73,936               |       |
| Other  long-term liabilities                                                                                                                                                                                                                                                               |       | 8,836              |       | 8,646                |       |
| Total  liabilities                                                                                                                                                                                                                                                                         |       | 77,671             |       | 82,582               |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                |       |               |       |                 |       |
| Common stock, $0.01 par value. Authorized  32,000,000 shares; 14,845,679 shares issued as ofAugust 1, 2009 and 14,698,852 shares  issued as of January 31, 2009; 14,679,929 shares outstanding as of  August 1, 2009 and 14,533,102 outstanding as of January 31, 2009 |       | 145                |       | 145                  |       |
| Paid-in-capital                                                                                                                                                                                                                                                                            |       | 72,554             |       | 70,950               |       |
| Retained  earnings                                                                                                                                                                                                                                                                         |       | 95,137             |       | 87,277               |       |
| Treasury  stock, at cost; 165,750 shares as of August 1, 2009 and January 31,  2009                                                                                                                                                                                              |       | (165               | )          | (165                 | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                           |       | 167,671            |       | 158,207              |       |
| Commitments  and contingencies (note 7)                                                                                                                                                                                                                                                    |       |               |       |                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                           |       | $                  | 245,342    |                 | $          | 240,789 |   |

 

See accompanying notes to the condensed financialstatements (unaudited).

 

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**Citi Trends, Inc.**

**Condensed Statements of Operations**

**Twenty-sixWeeks Ended August 1, 2009 and August 2, 2008**

**(Unaudited)**

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

 
| ** **                                     | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| Net  sales                                     |       | $                  | 254,702    |               | $          | 236,651 |   |
| Cost  of sales                                 |       | 154,920            |       | 144,964            |       |
| Gross  profit                                  |       | 99,782             |       | 91,687             |       |
| Selling,  general and administrative expenses  |       | 79,127             |       | 73,118             |       |
| Depreciation  and amortization                 |       | 8,828              |       | 7,781              |       |
| Income  from operations                        |       | 11,827             |       | 10,788             |       |
| Interest  income                               |       | 244                |       | 1,425              |       |
| Interest  expense                              |       | (69                | )          | (162               | )          |
| Unrealized  loss on investment securities      |       | (57                | )          | —             |       |
| Income  before income tax expense              |       | 11,945             |       | 12,051             |       |
| Income  tax expense                            |       | 4,085              |       | 4,037              |       |
| Net  income                                    |       | $                  | 7,860      |               | $          | 8,014 |   |
| Basic  net income per common share             |       | $                  | 0.54       |               | $          | 0.56 |   |
| Diluted  net income per common share           |       | $                  | 0.54       |               | $          | 0.56 |   |
| Net  income attributable to common shares      |       |               |       |               |       |
| Basic                                          |       | $                  | 7,700      |               | $          | 7,927 |   |
| Diluted                                        |       | $                  | 7,700      |               | $          | 7,928 |   |
| Weighted  average number of shares outstanding |       |               |       |               |       |
| Basic                                          |       | 14,342             |       | 14,071             |       |
| Diluted                                        |       | 14,370             |       | 14,248             |       |

 

**CitiTrends, Inc.**

**Condensed Statements of Operations**

**ThirteenWeeks Ended August 1, 2009 and August 2, 2008**

**(Unaudited)**

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

 
| ** **                                         | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| Net  sales                                         |       | $                  | 111,605    |               | $          | 115,655 |   |
| Cost  of sales                                     |       | 69,011             |       | 70,731             |       |
| Gross  profit                                      |       | 42,594             |       | 44,924             |       |
| Selling,  general and administrative expenses      |       | 38,994             |       | 36,877             |       |
| Depreciation  and amortization                     |       | 4,455              |       | 4,078              |       |
| Income  (loss) from operations                     |       | (855               | )          | 3,969              |       |
| Interest  income                                   |       | 105                |       | 557                |       |
| Interest  expense                                  |       | (28                | )          | (75                | )          |
| Unrealized  gain on investment securities          |       | 671                |       | —             |       |
| Income  (loss) before income tax expense (benefit) |       | (107               | )          | 4,451              |       |
| Income  tax expense (benefit)                      |       | (38                | )          | 1,605              |       |
| Net  income (loss)                                 |       | $                  | (69        | )                  | $          | 2,846 |   |
| Basic  net income (loss) per common share          |       | $                  | (0.00      | )                  | $          | 0.20 |   |
| Diluted  net income (loss) per common share        |       | $                  | (0.00      | )                  | $          | 0.20 |   |
| Net  income (loss) attributable to common shares   |       |               |       |               |       |
| Basic                                              |       | $                  | (69        | )                  | $          | 2,807 |   |
| Diluted                                            |       | $                  | (69        | )                  | $          | 2,808 |   |
| Weighted  average number of shares outstanding     |       |               |       |               |       |
| Basic                                              |       | 14,365             |       | 14,095             |       |
| Diluted                                            |       | 14,365             |       | 14,279             |       |

 

See accompanying notes to the condensed financialstatements (unaudited).

 

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**CitiTrends, Inc.**

** **

**Condensed Statements of Cash Flow**

**Twenty-sixWeeks Ended August 1, 2009 and August 2, 2008**

**(Unaudited)**

** **

**(inthousands)**

 
| ** **                                                                             | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                             | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| Operating  activities:                                                                 |       |               |       |               |       |
| Net  income                                                                            |       | $                  | 7,860      |               | $          | 8,014 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:     |       |               |       |               |       |
| Depreciation  and amortization                                                         |       | 8,828              |       | 7,781              |       |
| Loss  on disposal of property and equipment                                            |       | 254                |       | 8                  |       |
| Deferred  income taxes                                                                 |       | (687               | )          | (1,568             | )          |
| Noncash  stock-based compensation expense                                              |       | 1,004              |       | 973                |       |
| Excess  tax benefits from stock-based payment arrangements                             |       | (685               | )          | (465               | )          |
| Unrealized  loss on auction rate securities                                            |       | 57                 |       | —             |       |
| Changes  in assets and liabilities:                                                    |       |               |       |               |       |
| Inventory                                                                              |       | (2,570             | )          | (2,910             | )          |
| Prepaid  and other current assets                                                      |       | 1,652              |       | (1,504             | )          |
| Other  assets                                                                          |       | (76                | )          | (40                | )          |
| Accounts  payable                                                                      |       | (6,166             | )          | (45                | )          |
| Accrued  expenses and other long-term liabilities                                      |       | 784                |       | (855               | )          |
| Accrued  compensation                                                                  |       | 750                |       | 1,546              |       |
| Income  tax receivable / payable                                                       |       | (501               | )          | 100                |       |
| Layaway  deposits                                                                      |       | 1,244              |       | 982                |       |
| Net  cash provided by operating activities                                             |       | 11,748             |       | 12,017             |       |
| Investing  activities:                                                                 |       |               |       |               |       |
| Purchases  of investment securities                                                    |       | —             |       | (4,000             | )          |
| Sales/redemptions  of investment securities                                            |       | 1,300              |       | 5,775              |       |
| Purchases  of property and equipment                                                   |       | (9,962             | )          | (12,747            | )          |
| Net  cash used in investing activities                                                 |       | (8,662             | )          | (10,972            | )          |
| Financing  activities:                                                                 |       |               |       |               |       |
| Repayments  on capital lease obligations                                               |       | (841               | )          | (785               | )          |
| Excess  tax benefits from stock-based payment arrangements                             |       | 685                |       | 465                |       |
| Proceeds  from the exercise of stock options                                           |       | 268                |       | 333                |       |
| Cash  used to settle equity instruments granted under stock-based payment arrangements |       | (353               | )          | (70                | )          |
| Net  cash used in financing activities                                                 |       | (241               | )          | (57                | )          |
| Net  increase in cash and cash equivalents                                             |       | 2,845              |       | 988                |       |
| Cash  and cash equivalents:                                                            |       |               |       |               |       |
| Beginning  of period                                                                   |       | 33,516             |       | 6,203              |       |
| End  of period                                                                         |       | $                  | 36,361     |               | $          | 7,191 |   |
|                                                                                   |       |               |       |               |       |
| Supplemental  disclosures of cash flow information:                                    |       |               |       |               |       |
| Cash  paid for interest                                                                |       | $                  | 59         |               | $          | 151 |   |
| Cash  paid for income taxes                                                            |       | $                  | 5,273      |               | $          | 5,505 |   |

 

See accompanying notes to the condensed financialstatements (unaudited).

 

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**CitiTrends, Inc.******

**Notesto the Condensed Financial Statements (unaudited)******

**August 1,2009**

 

1. Basis ofPresentation

 

Citi Trends, Inc. (the “Company”) is a rapidlygrowing, value-priced retailer of urban fashion apparel and accessories for theentire family.  As of August 1,2009, the Company operated 370 stores in 23 states.

 

The condensed balance sheet as of August 1, 2009,the condensed statements of operations for the twenty-six and thirteen-weekperiods ended August 1, 2009 and August 2, 2008, and the condensedstatements of cash flows for the twenty-six week periods ended August 1,2009 and August 2, 2008 have been prepared by the Company without audit.The condensed balance sheet as of January 31, 2009 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 August 1, 2009 and January 31,2009, and its results of operations and cash flows for all periodspresented.  It is suggested that thesecondensed 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 financialstatements are prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X.  Accordingly, they do not includeall information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.  Operating results for theinterim periods ended August 1, 2009 are not necessarily indicative of theresults that may be expected for the fiscal year ending January 30, 2010.

 

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

 

2. Use ofEstimates

 

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

 

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

 

3. Earnings per Share

 

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

 

In accordance with the Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128,*Earnings per Share*, the Companycalculates the dilutive effect of stock-based compensation arrangements usingthe treasury stock method.  This method assumes that the proceeds theCompany receives from the exercise of stock options are used to repurchasecommon shares in the market.  In accordance with SFAS No. 123R, *Share-Based Payment,* the Company includes as assumedproceeds the amount of compensation cost attributed to future services and notyet recognized, and the amount of tax benefits, if any, that would be creditedto additional paid-in capital assuming exercise of outstanding options andvesting of nonvested restricted stock.  For the thirteen weeks ended August 1,2009 and August 2, 2008, there were 67,000 and 77,000 options outstanding,respectively, to purchase shares of common stock excluded from the calculationof diluted earnings per share because of antidilution.  For the twenty-sixweeks ended August 1, 2009 and August 2, 2008, there were 68,000 and79,000 options outstanding, respectively, to purchase shares of common stockexcluded from the calculation of diluted earnings per share because ofantidilution.

 

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

 

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

 
| ** **                                                        | ** ** | **Twenty-six  Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                        | ** ** | **August 1,  2009**    | ** ** | **August 2,  2008** | ** ** |
|                                                              |       |                        |       |   |   |
| Basic:                                                            |       |                        |       |   |   |
| Numerator                                                         |       |                        |       |   |   |
| Net income                                                        |       | $                           | 7,860      |   | $ | 8,014 |   |
| Net income allocated to participating securities                  |       | (160                        | )          | (87 | ) |
| Net income attributable to common  stockholders-basic             |       | $                           | 7,700      |   | $ | 7,927 |   |
|                                                              |       |                        |       |   |   |
| Denominator                                                       |       |                        |       |   |   |
| Weighted average common shares                                    |       | 14,342                      |       | 14,071 |   |
|                                                              |       |                        |       |   |   |
| Net income attributable to common stockholders per  share-basic   |       | $                           | 0.54       |   | $ | 0.56 |   |
|                                                              |       |                        |       |   |   |
| Diluted:                                                          |       |                        |       |   |   |
| Numerator                                                         |       |                        |       |   |   |
| Net income                                                        |       | $                           | 7,860      |   | $ | 8,014 |   |
| Net income allocated to participating securities                  |       | (160                        | )          | (86 | ) |
| Net income attributable to common  stockholders-diluted           |       | $                           | 7,700      |   | $ | 7,928 |   |
|                                                              |       |                        |       |   |   |
| Denominator                                                       |       |                        |       |   |   |
| Denominator for basic calculation                                 |       | 14,342                      |       | 14,071 |   |
| Effect of dilutive securities — stock options                |       | 28                          |       | 177 |   |
| Denominator for diluted calculation                               |       | 14,370                      |       | 14,248 |   |
|                                                              |       |                        |       |   |   |
| Net income attributable to common stockholders per  share-diluted |       | $                           | 0.54       |   | $ | 0.56 |   |

 
| ** **                                                               | ** ** | **Thirteen  Weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                               | ** ** | **August 1,  2009**  | ** ** | **August 2,  2008** | ** ** |
|                                                                     |       |                      |       |   |   |
| Basic:                                                                   |       |                      |       |   |   |
| Numerator                                                                |       |                      |       |   |   |
| Net income (loss)                                                        |       | $                         | (69        | ) | $ | 2,846 |   |
| Net income allocated to participating securities                         |       | —                    |       | (39 | ) |
| Net income (loss) attributable to common  stockholders-basic             |       | $                         | (69        | ) | $ | 2,807 |   |
|                                                                     |       |                      |       |   |   |
| Denominator                                                              |       |                      |       |   |   |
| Weighted average common shares                                           |       | 14,365                    |       | 14,095 |   |
|                                                                     |       |                      |       |   |   |
| Net income (loss) attributable to common  stockholders per share-basic   |       | $                         | (0.00      | ) | $ | 0.20 |   |
|                                                                     |       |                      |       |   |   |
| Diluted:                                                                 |       |                      |       |   |   |
| Numerator                                                                |       |                      |       |   |   |
| Net income (loss)                                                        |       | $                         | (69        | ) | $ | 2,846 |   |
| Net income allocated to participating securities                         |       | —                    |       | (38 | ) |
| Net income (loss) attributable to common  stockholders-diluted           |       | $                         | (69        | ) | $ | 2,808 |   |
|                                                                     |       |                      |       |   |   |
| Denominator                                                              |       |                      |       |   |   |
| Denominator for basic calculation                                        |       | 14,365                    |       | 14,095 |   |
| Effect of dilutive securities — stock options                       |       | —                    |       | 184 |   |
| Denominator for diluted calculation                                      |       | 14,365                    |       | 14,279 |   |
|                                                                     |       |                      |       |   |   |
| Net income (loss) attributable to common  stockholders per share-diluted |       | $                         | (0.00      | ) | $ | 0.20 |   |

 

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4. Fair Value Measurement

 

SFAS No. 157, *Fair Value Measurements,*defines fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsin the principal or most advantageous market at the measurement date. Thisstatement also establishes a fair value hierarchy that prioritizes observableand unobservable inputs used to measure fair 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 August 1, 2009, the Company had $38.1million ($42.5 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 August 1, 2009 to determine the fair value of the Company’sARS. Accordingly, the Company estimated Level 3 fair values for thesesecurities based on assumptions that market participants would use in theirestimates of fair value. These assumptions included, among other things,discounted cash flow projections, the timing of expected future successfulauctions or redemptions, collateralization of the underlying securities and thecreditworthiness of the issuers and insurance companies.  Based on this Level 3 valuation, the ARSinvestments were valued at $38.1 million as of August 1, 2009,representing a $4.4 million decline from par value.

 

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

 

TheRight represents a put option and is recognized as an instrument separate fromthe ARS.  The Company elected to accountfor this Right at fair value under SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*.  The Right wasvalued at $4.3 million as of August 1, 2009 using a discounted cash flowapproach that includes estimates of interest rates and the credit riskassociated with UBS.  This valuation isbased on unobservable inputs, therefore, represents a Level 3 fair value.  Prior to the acceptance of the Right, the ARSwere classified as available-for-sale. Upon acceptance of the Right, the ARS were reclassified to tradingsecurities.  The ARS and the Rightincluded in the August 1, 2009 condensed balance sheet are classified ascurrent assets due to the expectation that liquidity will occur during the nexttwelve 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 twenty-six weeks ended August 1,2009 (in thousands):

 
| ** **                                                            | ** ** | **Put  Option Related to ARS** | ** ** | **Auction  Rate Securities** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| Balance as of January 31, 2009                                   |       | $                              | 4,901      |                         | $          | 38,924 |   |
| Unrealized gain (loss) on investment securities  included in earnings |       | (440                           | )          | 383                          |       |
| Sales/redemptions of investment securities                            |       | (119                           | )          | (1,181                       | )          |
| Balance as of August 1, 2009                                     |       | $                              | 4,342      |                         | $          | 38,126 |   |

 

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5. Comprehensive Income (Loss)

 

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

 
| ** **                                                                                                                                             | ** ** | **Twenty-six Weeks Ended** | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **August 1,  2009**             | ** ** | **August 2,  2008**           | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
| Net income (loss), as reported                                                                                                                         |       | $                                    | 7,860      |                               | $          | 8,014 |   | $ | (69 | ) | $ | 2,846 |   |
| Other comprehensive loss:                                                                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Unrealized loss on available-for-sale securities,  net of tax of $209 and $1,093 in the 13 weeks and 26 weeks ended  August 2, 2008, respectively |       | —                               |       | (1,695                             | )          | — |   | (324 | ) |
| Comprehensive income (loss)                                                                                                                            |       | $                                    | 7,860      |                               | $          | 6,319 |   | $ | (69 | ) | $ | 2,522 |   |

 

6. Revolving Line ofCredit

 

On March 25, 2009, the Company’s $35 million unsecuredrevolving credit facility with Bank ofAmerica was amended to extend the expiration date to March 24, 2010 and tolower the commitment to $20 million, reflecting the Company’s cash position andthe fact that there 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  theinterest rates. Loans under the facility now bear interest at either (a) arate equal to the highest of (i) the Federal Funds Rate plus 0.50%, (ii) LIBORplus 1.0% and (iii) Bank of America’s prime rate, plus an applicablemargin; or (b) a rate equal to LIBOR plus an applicable margin. Theapplicable margin, which increased 0.75% under the amendment, is dependent onthe Company’s consolidated leverage ratio and ranges from 0.75% to 1.25% forloans 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.

 

7. Commitments and Contingencies

 

The Company from time to time is involved in variouslegal proceedings incidental to the conduct of its business, including claims bycustomers, employees or former employees.  While litigation is subject touncertainties and the outcome of any litigated matter is not predictable, theCompany is not aware of any legal proceedings pending or threatened against itthat it expects to have a material adverse effect on its financial condition,results of operations or liquidity.

 

8. Recent Accounting Pronouncements

 

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*.* SFAS No. 157 defines fair value, establishes a framework formeasuring fair value, and requires additional disclosures about fair valuemeasurements.  The adoption of SFAS No. 157did not have a material impact on the Company’s financial statements.

 

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

 

In April 2009, the FASB issued FSP 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.

 

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 the disclosure of the datethrough which an entity has evaluated subsequent events and the rationale forwhy that date was selected. This statement is effective for interim and annualperiods ending after June 15, 2009, and accordingly, the Company adoptedit during the second quarter of 2009.  Inpreparing these financial statements, the Company evaluated the events andtransactions through the time of filing these financial statements with the SECon August 28, 2009.

 

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In July 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles.* SFAS No. 168 establishes the FASB AccountingStandards Codification (the “Codification”), which supersedes all existingaccounting standards and will become the single source of authoritativenon-governmental U.S. GAAP.  All otheraccounting literature not included in the Codification will be considerednon-authoritative.  The Company willbegin to use the new guidelines and numbering system prescribed by theCodification when referring to GAAP beginning in the third quarter of 2009 andthere is not expected to be any impact on the Company’s financial statementssince the Codification was not intended to change existing GAAP.

 

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

 

**Forward-Looking Statements**

 

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

 

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

 

Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date of this Form 10-Q.Except as may be required by law, the Company undertakes no obligation 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 370 storesin both urban and rural markets in 23 states as of August 1, 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.

 

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**Accounting Periods**

 

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

 

**Results of Operations**

 

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

 

**Twenty-six Weeks Ended August 1,2009 and August 2, 2008**

 

*Net Sales. * Net sales increased $18.0 million, or7.6%, to $254.7 million in the twenty-six weeks ended August 1, 2009 from$236.7 million in the twenty-six weeks ended August 2, 2008.  Theincrease in net sales was due primarily to 39 new stores opened since last year’ssecond quarter and 16 new stores opened in the first half of 2008 for whichthere was not a full twenty-six weeks of sales in 2008’s first half, partiallyoffset by a 2.2% decrease in comparable store sales and the effect of closingfour stores since last year’s second quarter. Comparable store sales wereadversely affected by the comparison against last year’s first half whichincluded the benefit of strong spending by our customers when they receivedtheir government stimulus checks.  Inaddition, approximately $1 million of sales are estimated to have shifted fromthe first half of this year to the first week of the third quarter due to laterback-to-school sales tax holidays in eight of the states in which weoperate.  Comparable stores includelocations that have been relocated or expanded. There were five storesrelocated or expanded in the first half of 2009 and nine stores relocated orexpanded in fiscal 2008, all of which impacted comparable store sales. Sales incomparable relocated and expanded stores increased 11.0% in the first half of2009, while sales in all other comparable stores decreased 2.8%. The 2.2%decrease in overall comparable store sales consisted of a 3.7% decrease in thenumber of customer transactions, partially offset by a 1.5% increase in theaverage customer purchase. Comparable store sales changes by major merchandiseclass were as follows in the first half of 2009:   Accessories +2%; Children’s +2%; Home +2%;Women’s -4%; Men’s -5%.

 

The new stores opened in 2008 and 2009, net of theclosed stores, accounted for a $22.9 million increase in total sales, while the2.2% sales decrease in the 315 comparable stores totaled $4.9 million.

 

*Gross Profit. * Gross profit increased $8.1 million, or8.8%, to $99.8 million in the first half of 2009 from $91.7 million lastyear.  The increase in gross profit is a result of the increase in sales,together with an improvement in the gross margin to 39.2% in this year’s firsthalf from 38.7% last year.  The higher gross margin was the result of a 50basis point reduction in inventory shrinkage as a percentage of sales due tosteps taken to better control shrinkage, including a greater focus on problemstores by the store operations and loss prevention departments, the addition ofsophisticated surveillance systems in high shrinkage stores, and lowerinventory levels.  A reduction in freightcosts resulting from lower gasoline prices and a slight increase in the initialmarkup on merchandise combined to offset a 40 basis point increase in markdownsthat was a result of the negative comparable store sales.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $6.0 million, or 8.2%, to $79.1 million in the first half of2009 from $73.1 million in last year’s first half.  The increase in theseexpenses was due primarily to additional store level, distribution andcorporate costs arising from the opening of 39 new stores, net of the effect ofclosing four stores, since the end of last year’s second quarter.  As apercentage of sales, selling, general and administrative expenses increased inthe first half to 31.1% from 30.9% last year, due primarily to the deleveragingeffect that occurs on expenses as a percentage of sales when comparable storesales decrease while operating expenses are increasing at a normal rate ofinflation. Expenses were managed well, increasing only 8.2% despite a 13%increase in store selling square footage since the second quarter of 2008.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased $1.0million, or 13.5%, to $8.8 million in the first half of 2009 from $7.8 millionin the first half of 2008, as the result of capital expenditures incurred fornew and relocated/expanded stores and the expansion of the Darlingtondistribution center.

 

*Interest Income. * Interest income decreased to $0.2 millionfrom $1.4 million in the first half of 2008 due to a declining interest rateenvironment which affected our returns on auction rate securities as well ascash and cash equivalents.

 

*Interest Expense. * Interest expense decreased to $69,000 inthe first half of 2009 from $162,000 last year due to the normal decline in theinterest portion of payments on our capital lease obligations as the principalportion of such obligations is reduced.

 

*Unrealized Loss on Investment Securities. *An impairment loss of $57,000on our investments in auction rate securities and a related put option isreflected in the first half of 2009.

 

*Income Tax Expense. * The provision for income taxes increased1.2% to $4.1 million in this year’s first half from $4.0 million in the firsthalf of 2008 due to an increase in the effective income tax rate to 34.2%compared to 33.5% last year, partially offset by a slight decrease in pretaxincome.  The increase in the effective rate is a result of less tax-exemptinterest income this year, as discussed above.

 

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*Net Income. * Net income decreased 1.9% to $7.9million in the first half of 2009 from $8.0 million in last year’s first halfdue to the factors discussed above.

 

**Thirteen Weeks Ended August 1,2009 and August 2, 2008**

 

*Net Sales. * Net sales decreased $4.1 million, or3.5%, to $111.6 million in the thirteen weeks ended August 1, 2009 from$115.7 million in the thirteen weeks ended August 2, 2008.  Thedecrease in net sales was due primarily to a 12.4% decrease in comparable storesales and the effect of closing four stores since last year’s second quarter,partially offset by 39 new stores opened since last year’s second quarter.Comparable store sales were adversely affected by the comparison against lastyear’s second quarter which included the benefit of strong spending by ourcustomers when they received their government stimulus checks.  In addition, approximately $1 million ofsales are estimated to have shifted from the second quarter to the first weekof the third quarter due to later back-to-school sales tax holidays in eight ofthe states in which we operate. Comparable stores include locations that have been relocated orexpanded. There were five stores relocated or expanded in the first half of2009 and nine stores relocated or expanded in fiscal 2008, all of whichimpacted comparable store sales in the second quarter of 2009. Sales incomparable relocated and expanded stores decreased 3.5% in this year’s secondquarter, while sales in all other comparable stores decreased 12.8%. The 12.4%decrease in overall comparable store sales consisted of a 10.1% decrease in thenumber of customer transactions and a 2.3% decrease in the average customerpurchase. Comparable store sales changes by major merchandise class were asfollows in the second quarter of 2009: Accessories -4%; Home -11%; Children’s -11%; Women’s -13%; Men’s -15%.

 

The new stores opened in 2008 and 2009, net of theclosed stores, accounted for a $9.4 million increase in total sales, while the12.4% sales decrease in the 315 comparable stores totaled $13.5 million.

 

*Gross Profit. * Gross profit decreased $2.3 million, or5.2%, to $42.6 million in the second quarter of 2009 from $44.9 million in lastyear’s second quarter.  The decrease in gross profit is a result of thedecrease in sales, together with a decline in the gross margin to 38.2% in thisyear’s second quarter from 38.8% last year.  Merchandise markdowns were130 basis points higher in the second quarter this year as a result of thedecline in comparable store sales.  Theincrease in markdowns was partially offset by a 60 basis point improvement ininventory shrinkage due to the steps taken to better control shrinkage,including a greater focus on problem stores by the store operations and lossprevention departments, the addition of sophisticated surveillance systems inhigh shrinkage stores, and lower inventory levels.  The initial merchandise mark-up, combinedwith freight costs, improved 10 basis points in this year’s second quarter.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses increased $2.1 million, or 5.7%, to $39.0 million in the secondquarter of 2009 from $36.9 million in last year’s second quarter.  Theincrease in these expenses was due primarily to additional store level,distribution and corporate costs arising from the opening of 39 new stores, netof the effect of closing four stores, since last year’s second quarter.  As a percentage of sales, selling, generaland administrative expenses increased to 34.9% in the second quarter of fiscal2009 from 31.9% in the second quarter of fiscal 2008, due primarily to thedeleveraging effect that occurs on expenses as a percentage of sales whencomparable store sales decrease, while operating expenses are increasing at anormal rate of inflation. Expenses were managed well, increasing only 5.7%despite a 13% increase in store selling square footage since the second quarterof 2008.

 

*Depreciation and Amortization. *Depreciation and amortization expense increased $0.4million, or 9.2%, to $4.5 million in the second quarter of 2009 from $4.1million in the second quarter of 2008, as the result of capital expendituresincurred for new and relocated/expanded stores.

 

*Interest Income. * Interest income decreased to $105,000 inthe second quarter of 2009 from $557,000 in last year’s second 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 $28,000 inthe second quarter of 2009 from $75,000 in the second quarter of 2008 due tothe normal decline in the interest portion of payments on our capital leaseobligations as the principal portion of such obligations is reduced.

 

*Unrealized Gain on Investment Securities. *A reversal of $671,000 ofthe first quarter’s impairment loss of $728,000 on our investments in auctionrate securities and a related put option is reflected in the second quarter offiscal 2009 due primarily to an improvement in the credit spreads and liquidityassociated with the ARS market.

 

*Income Tax Expense (Benefit). *Due to a lossin this year’s second quarter, an income tax benefit of $38,000 was recorded,whereas, the second quarter of 2008 included income tax expense of $1.6million.

 

*Net Income (Loss). *A net loss of$69,000 was recognized in the second quarter of 2009, compared to net income of$2.8 million in last year’s second quarter 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.

 

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*Current Financial Condition.*As of August 1, 2009, we had totalcash and cash equivalents of $36.4 million compared with total cash and cashequivalents of $33.5 million as of January 31, 2009. Inventoryrepresented 36.2% of our total assets as of August 1, 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 second quarter of 2009 were up $3.5 million, or 4.1%, compared tothe second quarter of fiscal 2008, despite an increase in store selling squarefootage of 13%.  Inventory in comparablestores was 10.2% lower than at the end of the second quarter of fiscal 2008,due to our efforts to conservatively control our investment in inventory.

 

*Cash Flows From Operating Activities*. Net cash provided by operatingactivities was $11.7 million in the first half of fiscal 2009 compared to$12.0 million in the first half of fiscal 2008. The main source of cash provided during the first half of this year wasnet income adjusted for noncash expenses such as depreciation and amortization,loss on disposal of property and equipment, deferred income taxes, stock-basedcompensation expense, and the unrealized loss on auction rate securities,totaling $17.3 million (compared to $15.2 million in last year’s firsthalf).  Other significant sources of cashin the first half of fiscal 2009 were (1) a $1.7 million decrease inprepaid and other current assets (compared to a $1.5 million increase in thefirst half of fiscal 2008) due primarily to the timing of collectingreceivables from landlords for tenant improvement reimbursements, and (2) a$1.2 million increase in layaway deposits (compared to a $1.0 million increasein last year’s first half) 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.  Significant uses of cash included (1) a$6.2 million decrease in accounts payable (compared to $0.0 million in lastyear’s first half) due to the negative comparable store sales in the secondquarter reducing the need to purchase inventory late in the quarter, whichinventory purchases would have been included in accounts payable at the end ofthe second quarter, and (2) a $2.6 million increase in inventory (comparedto $2.9 million in the first half of 2008) due to the opening of 16 stores inthe first half of 2009, net of three store closings.

 

*Cash Flows From InvestingActivities.* Cashused in investing activities was $8.7 million in the first half of fiscal 2009compared to $11.0 million in the first half of fiscal 2008.  Purchases of property and equipment includedin cash flows used in investing activities totaled $10.0 million and $12.8million in the first half of fiscal 2009 and 2008, respectively, with thedecrease being a result of capital expenditures in the first half of last yearrelated to the expansion of the Darlington distribution center. Such capitalexpenditures in both years included routine amounts for new stores, relocatedand expanded stores and other general corporate purposes. Sales of municipalauction rate securities, net of purchases, provided cash of $1.3 million and$1.8 million in the first half of fiscal 2009 and 2008, respectively.

 

*Cash Flows From FinancingActivities.* Cashflows from financing activities were insignificant in the first half of fiscal2009 and 2008.

 

**Cash Requirements**

 

Our principal sources of liquidity consist of: (i) cashand cash equivalents (which equaled $36.4 million as of August 1,2009); (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 August 1, 2009, we had $38.1 million ($42.5million at par value) of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(at least AA-rated with one or more rating agencies) and approximately 79% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (35%) or backed by insurance companies, AMBAC AssuranceCorporation (32%) or MBIA Insurance Corporation (12%). Historically, liquidityfor investors in ARS was provided via an auction process that reset theinterest rate every 35 days, allowing investors to either roll over theirinvestments or sell them at par value. Beginning in February 2008, therewas insufficient demand for these types of investments during the auctions and,as a result, these securities became illiquid. Although the auctions for thesecurities have failed, we have not experienced any defaults and continue toearn and receive interest on all of the investments that we still own.

 

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 $4.3 million as of August 1, 2009.

 

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

 

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**CriticalAccounting Policies**

 

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

 

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

 

We are exposed to financial market risks related tochanges in interest rates connected with our revolving line of credit, whichbears interest at variable rates. We cannot predict market fluctuations ininterest rates. As a result, future results may differ materially fromestimated results due to adverse changes in interest rates or debtavailability. A hypothetical 100 basis point increase in prevailing marketinterest rates would not have materially impacted our financial position,results of operations or cash flows for the twenty-six weeks ended August 1,2009, because we did not borrow during this period of time.  We do notengage in financial transactions for trading or speculative purposes and havenot entered into any interest rate hedging contracts.

 

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

 

As of August 1, 2009, we had $38.1 million ($42.5million at par value) of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. These securities are high-grade(at least AA-rated with one or more rating agencies) and approximately 79% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (35%) or backed by insurance companies, AMBAC AssuranceCorporation (32%) or MBIA Insurance Corporation (12%). Historically, liquidityfor investors in ARS was provided via an auction process that reset theinterest rate every 35 days, allowing investors to either roll over their investmentsor sell them at par value. Beginning in February 2008, there wasinsufficient demand for these types of investments during the auctions and, asa result, these securities became illiquid. Although the auctions for thesecurities have failed, we have not experienced any defaults and continue toearn and receive interest on all of the investments that we still own.  However, interest rates have declined tolevels that are much lower than in most of fiscal 2008.  As a result, interest income is expected tobe significantly lower in fiscal 2009 than in fiscal 2008.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  In accepting the Right, we grantedUBS the authority to sell or auction the ARS at par value at any time up untilthe expiration date of the Right and released UBS from any claims relating tothe marketing and sale of ARS.  We willcontinue to earn interest on the ARS until they are liquidated.  The obligations of UBS under the Right arenot secured by its assets and do not require UBS to obtain any financing topurchase the ARS.  UBS has disclaimed anyassurance that it will have sufficient financial resources to satisfy itsobligations under the Right.  If UBS doesnot have sufficient funding to buy back the ARS and no alternative buyers arelocated either through the auction process, issuer redemptions or other means,then we may not be able to access cash by selling these securities withoutincurring a loss of principal.  The Rightwas valued at $4.3 million as of August 1, 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 August 1,2009 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 August 1,2009 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 to uncertaintiesand the outcome of any litigated matter is not predictable, we are not aware ofany legal proceedings pending or threatened against us that we expect to have amaterial adverse effect on our financial condition, results of operations orliquidity.

 

**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.**

 

The annual meeting of our shareholders was held on May 27,2009.  The following proposals weresubmitted to a vote:

 

1)  The electionof two directors to hold office until our annual meeting of shareholders in2012 and until their respective successors are duly elected and qualified.  This proposal received the following numberof votes:

 
| ** **                    | ** ** | **Affirmative** | ** ** | **Withheld** | ** ** |
|-------------------------------|------------|-----------------|------------|--------------|------------|
|                          |       |            |       |         |       |
| R. David  Alexander, Jr. |       | 13,382,574      |       | 46,597       |       |
|                          |       |            |       |         |       |
| Patricia M. Luzier            |       | 12,940,128      |       | 489,043      |       |

 

The other members of our board of directors whoseterms of office continued after the meeting are R. Edward Anderson, Brian P. Carney,Lawrence E. Hyatt and John S. Lupo.

 

2)  The approvalof the Citi Trends, Inc. Annual Incentive Bonus Plan.  This proposal was approved with 13,331,398shares voting for approval, 97,056 shares voting against approval, and 712shares abstaining.

 

3)  Theratification of the appointment of KPMG LLP as our independent auditors forfiscal year 2009.  This proposal wasapproved with 13,395,640 shares voting for approval, 33,508 shares votingagainst approval, and 23 shares abstaining.

 

**Item 5. Other Information.**

 

Not applicable.

 

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** **

**Item  6. Exhibits.**

 
| 10.1   |   | Citi  Trends, Inc. Annual Incentive Bonus Plan.*                                                                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                              |
| 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 ExchangeCommission Release No. 33-8238, this certification will be treated as “accompanying”this Quarterly Report on Form 10-Q and not “filed” as part of such reportfor purposes of Section 18 of the Securities Exchange Act of 1934, orotherwise subject to the liability of Section 18 of the SecuritiesExchange Act of 1934 and this certification will not be deemed to beincorporated by reference into any filing under the Securities Act of 1933 orthe Securities Exchange Act of 1934, except to the extent that the registrantspecifically incorporates it by reference.

 

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**SIGNATURES**

 

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

 
|                        | CITI TRENDS,  INC. |
|-----------------------------|--------------------|
|                        |               |   |
| Date:  August 28, 2009 |               |   |
|                        |               |   |
|                        | By:                | /s/ Bruce D.  Smith |
|                        | Name:              | Bruce D. Smith |
|                        | Title:             | Senior Vice  President, Chief Financial Officer and Secretary |

 

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