Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**

** **

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

 

**For the quarterly period endedOctober 30, 2010**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 000-51315**

 

**CITI TRENDS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

Registrant’s telephone number, including areacode (**912) 236-1561**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). o Yeso No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

 

| **Class**                    | ** ** | **Outstanding as of November 19, 2010** |
|------------------------------|------------|------------------------------------------------------------------|
| Common Stock, $.01 par value |       | 14,832,386 shares                                                |

 

 

** **

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** **

**CITI TRENDS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| ** **   | ** **                                                                                                                            | **PAGE  NUMBER** |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------|------------------|
| PART I  | FINANCIAL INFORMATION                                                                                                                 |             |
|         |                                                                                                                                  |             |
| Item 1       | Financial Statements                                                                                                                  |             |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Balance Sheets (unaudited) October 30, 2010 and  January 30, 2010                                   | 3                |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Statements of Operations (unaudited) Thirty-nine weeks ended  October 30, 2010 and October 31, 2009 | 4                |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Statements of Operations (unaudited) Thirteen weeks ended  October 30, 2010 and October 31, 2009    | 4                |
|         |                                                                                                                                  |             |
|         | Condensed  Consolidated Statements of Cash Flows (unaudited) Thirty-nine weeks ended  October 30, 2010 and October 31, 2009 | 5                |
|         |                                                                                                                                  |             |
|         | Notes to the Condensed Consolidated Financial  Statements (unaudited)                                                                 | 6                |
|         |                                                                                                                                  |             |
| Item 2       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           | 11               |
|         |                                                                                                                                  |             |
| Item 3       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           | 14               |
|         |                                                                                                                                  |             |
| Item 4       | Controls and  Procedures                                                                                                              | 15               |
|         |                                                                                                                                  |             |
| PART II | OTHER INFORMATION                                                                                                                     |             |
|         |                                                                                                                                  |             |
| Item 1       | Legal Proceedings                                                                                                                     | 16               |
|         |                                                                                                                                  |             |
| Item 1A      | Risk Factors                                                                                                                          | 16               |
|         |                                                                                                                                  |             |
| Item 2       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                          | 16               |
|         |                                                                                                                                  |             |
| Item 3       | Defaults  Upon Senior Securities                                                                                                      | 16               |
|         |                                                                                                                                  |             |
| Item 4       | (Removed and  Reserved)                                                                                                               | 16               |
|         |                                                                                                                                  |             |
| Item 5       | Other Information                                                                                                                     | 16               |
|         |                                                                                                                                  |             |
| Item 6       | Exhibits                                                                                                                              | 16               |
|         |                                                                                                                                  |             |
|         | SIGNATURES                                                                                                                            | 17               |

 

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**PART I - FINANCIALINFORMATION**

 

**Item 1. Financial Statements.**

 

**Citi Trends, Inc.**

** **

**Condensed Consolidated Balance Sheets**

**October 30, 2010 and January 30, 2010**

**(Unaudited)**

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

 
| ** **                                                                                                                                                                                                                                                                                       | ** ** | **October 30,** | ** ** | **January 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                       | ** ** | **2010**             | ** ** | **2010**             | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                       |       |                 |       |                 |       |
| Current assets:                                                                                                                                                                                                                                                                                  |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                        |       | $                    | 69,632     |                 | $          | 62,993 |   |
| Short-term investment securities                                                                                                                                                                                                                                                                 |       | 4,752                |       | 33,025               |       |
| Inventory                                                                                                                                                                                                                                                                                        |       | 115,273              |       | 100,874              |       |
| Prepaid and other current assets                                                                                                                                                                                                                                                                 |       | 11,349               |       | 10,409               |       |
| Income tax receivable                                                                                                                                                                                                                                                                            |       | 5,261                |       | —               |       |
| Deferred tax asset                                                                                                                                                                                                                                                                               |       | 5,385                |       | 4,518                |       |
| Total current assets                                                                                                                                                                                                                                                                             |       | 211,652              |       | 211,819              |       |
| Property and equipment, net of accumulated  depreciation and amortization of $89,722 and $76,247 as of October 30,  2010 and January 30, 2010, respectively                                                                                                                            |       | 76,879               |       | 63,791               |       |
| Goodwill                                                                                                                                                                                                                                                                                         |       | 1,371                |       | 1,371                |       |
| Deferred tax asset                                                                                                                                                                                                                                                                               |       | 2,507                |       | 2,488                |       |
| Other assets                                                                                                                                                                                                                                                                                     |       | 592                  |       | 517                  |       |
| Total assets                                                                                                                                                                                                                                                                                     |       | $                    | 293,001    |                 | $          | 279,986 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                   |       |                 |       |                 |       |
| Current liabilities:                                                                                                                                                                                                                                                                             |       |                 |       |                 |       |
| Accounts payable                                                                                                                                                                                                                                                                                 |       | $                    | 61,355     |                 | $          | 62,706 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                 |       | 13,715               |       | 12,773               |       |
| Accrued compensation                                                                                                                                                                                                                                                                             |       | 8,396                |       | 9,500                |       |
| Income tax payable                                                                                                                                                                                                                                                                               |       | —               |       | 3,024                |       |
| Layaway deposits                                                                                                                                                                                                                                                                                 |       | 3,200                |       | 645                  |       |
| Total current liabilities                                                                                                                                                                                                                                                                        |       | 86,666               |       | 88,648               |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                      |       | 10,422               |       | 9,995                |       |
| Total liabilities                                                                                                                                                                                                                                                                                |       | 97,088               |       | 98,643               |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                       |       |                 |       |                 |       |
| Common stock, $0.01 par value. Authorized 32,000,000  shares; 14,996,824 shares issued as of October 30, 2010 and 14,899,577  shares issued as of January 30, 2010; 14,831,074 shares outstanding as  of October 30, 2010 and 14,733,827 outstanding as of January 30,  2010 |       | 147                  |       | 146                  |       |
| Paid-in-capital                                                                                                                                                                                                                                                                                  |       | 77,449               |       | 74,368               |       |
| Retained earnings                                                                                                                                                                                                                                                                                |       | 118,482              |       | 106,994              |       |
| Treasury stock, at cost; 165,750 shares as of  October 30, 2010 and January 30, 2010                                                                                                                                                                                                   |       | (165                 | )          | (165                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                  |       | 195,913              |       | 181,343              |       |
| Commitments and contingencies (note 8)                                                                                                                                                                                                                                                           |       |                 |       |                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                  |       | $                    | 293,001    |                 | $          | 279,986 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements(unaudited).

 

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** **

**Citi Trends, Inc.**

**Condensed Consolidated Statements ofOperations**

**Thirty-nine Weeks Ended October 30, 2010 and October 31,2009**

**(Unaudited)**

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

 
| ** **                                    | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **October 30,**                  | ** ** | **October 31,** | ** ** |
| ** **                                    | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Net sales                                     |       | $                                     | 450,485    |   | $ | 382,058 |   |
| Cost of sales                                 |       | 278,134                               |       | 234,640 |   |
| Gross profit                                  |       | 172,351                               |       | 147,418 |   |
| Selling, general and administrative expenses  |       | 140,119                               |       | 121,116 |   |
| Depreciation and amortization                 |       | 14,843                                |       | 13,679 |   |
| Income from operations                        |       | 17,389                                |       | 12,623 |   |
| Interest income                               |       | 140                                   |       | 329 |   |
| Interest expense                              |       | (17                                   | )          | (86 | ) |
| Income before income tax expense              |       | 17,512                                |       | 12,866 |   |
| Income tax expense                            |       | 6,024                                 |       | 4,400 |   |
| Net income                                    |       | $                                     | 11,488     |   | $ | 8,466 |   |
|                                          |       |                                  |       |   |   |
| Basic net income per common share             |       | $                                     | 0.79       |   | $ | 0.58 |   |
| Diluted net income per common share           |       | $                                     | 0.79       |   | $ | 0.58 |   |
|                                          |       |                                  |       |   |   |
| Net income attributable to common shares      |       |                                  |       |   |   |
| Basic                                         |       | $                                     | 11,488     |   | $ | 8,289 |   |
| Diluted                                       |       | $                                     | 11,488     |   | $ | 8,289 |   |
|                                          |       |                                  |       |   |   |
| Weighted average number of shares outstanding |       |                                  |       |   |   |
| Basic                                         |       | 14,497                                |       | 14,351 |   |
| Diluted                                       |       | 14,518                                |       | 14,383 |   |

 

**Citi Trends, Inc.**

**Condensed Consolidated Statements of Operations**

**Thirteen Weeks Ended October 30,2010 and October 31, 2009**

**(Unaudited)**

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

 
| ** **                                        | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **October 30,**               | ** ** | **October 31,** | ** ** |
| ** **                                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Net sales                                         |       | $                                  | 140,037    |   | $ | 127,356 |   |
| Cost of sales                                     |       | 88,356                             |       | 79,720 |   |
| Gross profit                                      |       | 51,681                             |       | 47,636 |   |
| Selling, general and administrative expenses      |       | 47,243                             |       | 41,989 |   |
| Depreciation and amortization                     |       | 5,324                              |       | 4,851 |   |
| (Loss) income from operations                     |       | (886                               | )          | 796 |   |
| Interest income                                   |       | 41                                 |       | 85 |   |
| Interest expense                                  |       | (8                                 | )          | (17 | ) |
| Unrealized gain on investment securities          |       | —                             |       | 57 |   |
| (Loss) income before income tax (benefit) expense |       | (853                               | )          | 921 |   |
| Income tax (benefit) expense                      |       | (459                               | )          | 315 |   |
| Net (loss) income                                 |       | $                                  | (394       | ) | $ | 606 |   |
|                                              |       |                               |       |   |   |
| Basic net (loss) income per common share          |       | $                                  | (0.03      | ) | $ | 0.04 |   |
| Diluted net (loss) income per common share        |       | $                                  | (0.03      | ) | $ | 0.04 |   |
|                                              |       |                               |       |   |   |
| Net (loss) income attributable to common shares   |       |                               |       |   |   |
| Basic                                             |       | $                                  | (394       | ) | $ | 593 |   |
| Diluted                                           |       | $                                  | (394       | ) | $ | 593 |   |
|                                              |       |                               |       |   |   |
| Weighted average number of shares outstanding     |       |                               |       |   |   |
| Basic                                             |       | 14,519                             |       | 14,370 |   |
| Diluted                                           |       | 14,519                             |       | 14,409 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements(unaudited).

 

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**Citi Trends, Inc.**

** **

**Condensed Consolidated Statements ofCash Flows**

**Thirty-nine Weeks Ended October 30, 2010 and October 31,2009**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **October 30,**                  | ** ** | **October 31,** | ** ** |
| ** **                                                                         | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Operating activities:                                                              |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 11,488     |   | $ | 8,466 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 14,843                                |       | 13,679 |   |
| Loss on disposal of property and equipment                                         |       | —                                |       | 257 |   |
| Gain on insurance claims                                                           |       | (383                                  | )          | — |   |
| Deferred income taxes                                                              |       | (886                                  | )          | (847 | ) |
| Noncash stock-based compensation expense                                           |       | 2,352                                 |       | 1,601 |   |
| Excess tax benefits from stock-based payment  arrangements                         |       | (1,522                                | )          | (709 | ) |
| Changes in assets and liabilities:                                                 |       |                                  |       |   |   |
| Inventory                                                                          |       | (14,399                               | )          | (19,055 | ) |
| Prepaid and other current assets                                                   |       | (266                                  | )          | 1,193 |   |
| Other assets                                                                       |       | (75                                   | )          | (97 | ) |
| Accounts payable                                                                   |       | (1,351                                | )          | 8,467 |   |
| Accrued expenses and other long-term liabilities                                   |       | 1,795                                 |       | 1,659 |   |
| Accrued compensation                                                               |       | (1,104                                | )          | 243 |   |
| Income tax receivable/payable                                                      |       | (6,763                                | )          | (2,596 | ) |
| Layaway deposits                                                                   |       | 2,555                                 |       | 2,817 |   |
| Net cash provided by operating activities                                          |       | 6,284                                 |       | 15,078 |   |
| Investing activities:                                                              |       |                                  |       |   |   |
| Sales/redemptions of investment securities                                         |       | 33,025                                |       | 1,600 |   |
| Purchases of investment securities                                                 |       | (4,752                                | )          | — |   |
| Purchases of property and equipment                                                |       | (28,648                               | )          | (17,055 | ) |
| Net cash used in investing activities                                              |       | (375                                  | )          | (15,455 | ) |
| Financing activities:                                                              |       |                                  |       |   |   |
| Repayments on capital lease obligations                                            |       | —                                |       | (1,280 | ) |
| Excess tax benefits from stock-based payment  arrangements                         |       | 1,522                                 |       | 709 |   |
| Proceeds from the exercise of stock options                                        |       | 224                                   |       | 289 |   |
| Cash used to settle withholding taxes on stock  option exercises                   |       | (1,016                                | )          | (370 | ) |
| Net cash provided by (used in) financing activities                                |       | 730                                   |       | (652 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | 6,639                                 |       | (1,029 | ) |
| Cash and cash equivalents:                                                         |       |                                  |       |   |   |
| Beginning of period                                                                |       | 62,993                                |       | 33,516 |   |
| End of period                                                                      |       | $                                     | 69,632     |   | $ | 32,487 |   |
|                                                                               |       |                                  |       |   |   |
| Supplemental disclosures of cash flow information:                                 |       |                                  |       |   |   |
| Cash paid for interest                                                             |       | $                                     | 3          |   | $ | 71 |   |
| Cash paid for income taxes                                                         |       | $                                     | 13,673     |   | $ | 7,843 |   |
| Supplemental disclosures of noncash investing  activities:                         |       |                                  |       |   |   |
| Receivable for insurance proceeds on property and  equipment                       |       | $                                     | (674       | ) | $ | — |   |
| (Decrease) increase in accrual for purchases of  property and equipment            |       | $                                     | (426       | ) | $ | 442 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements(unaudited).

 

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

**October 30, 2010**

 

1. Basis of Presentation

 

CitiTrends, Inc. and its subsidiary (the “Company”) operate as a rapidlygrowing, value-priced retailer of urban fashion apparel and accessories for theentire family.  As of October 30,2010, the Company operated 458 stores in 27 states.

 

Thecondensed consolidated balance sheet as of October 30, 2010, the condensedconsolidated statements of operations for the thirty-nine and thirteen-weekperiods ended October 30, 2010 and October 31, 2009, and thecondensed consolidated statements of cash flows for the thirty-nine weekperiods ended October 30, 2010 and October 31, 2009 have beenprepared by the Company without audit. The condensed consolidated balance sheetas of January 30, 2010 has been derived from the audited financialstatements as of that date, but does not include all required year enddisclosures.  In the opinion of management, such statements include alladjustments considered necessary to present fairly the Company’s financialposition as of October 30, 2010 and January 30, 2010, and its resultsof operations and cash flows for all periods presented.  It is suggested that these condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s latestAnnual Report on Form 10-K for the year ended January 30, 2010.

 

Theaccompanying unaudited condensed consolidated financial statements are preparedin accordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X.  Accordingly, they do not include allinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.  Operating results for theinterim periods ended October 30, 2010 are not necessarily indicative ofthe results that may be expected for the fiscal year ending January 29,2011.

 

Certainprior year amounts in the condensed consolidated statement of cash flows havebeen revised to conform to the current year presentation.  The amount by which an accrual for purchasesof property and equipment changed had previously been included in the lineitems for changes in accrued expenses (operating activities) and purchases ofproperty and equipment (investing activities). The revision removed the accrual change from both line items byoffsetting amounts, and a supplemental disclosure of noncash investingactivities has been added to the condensed consolidated statement of cash flowsfor such amount.  This revision causednet cash provided by operating activities to decrease and net cash used ininvesting activities to decrease by $442,000 in the thirty-nine weeks ended October 31,2009 from that previously reported.

 

Thefollowing contains references to years 2010 and 2009, which represent fiscalyears ending or ended on January 29, 2011 (fiscal 2010) and January 30,2010 (fiscal 2009), respectively.  Fiscal2010 and fiscal 2009 both have 52-week accounting periods.

 

2. Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and use assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

Themost significant estimates made by management include those made in thevaluation of inventory, stock-based compensation, property and equipment, andincome taxes. Management periodically evaluates estimates used in thepreparation of the financial statements for continued reasonableness.Appropriate adjustments, if any, to the estimates used are made prospectivelybased on such periodic evaluations.

 

3. Cashand Cash Equivalents/Concentration of Credit Risk

 

Forpurposes of the condensed consolidated balance sheets and condensedconsolidated statements of cash flows, the Company considers all highly liquidinvestments with maturities at date of purchase of three months or less to becash equivalents.  Financial instrumentsthat potentially subject the Company to a concentration of credit risk consistprincipally of cash and cash equivalents. The Company places its cash and cash equivalents in what it believes tobe high credit quality banks and institutional money market funds.  The Company maintains cash accounts thatexceed federally insured limits.

 

4. Earningsper Share

 

Basicearnings per common share amounts are calculated using the weighted averagenumber of common shares outstanding for the period. Diluted earnings per commonshare amounts are calculated using the weighted average number of common sharesoutstanding plus the additional dilution for all potentially dilutivesecurities, such as nonvested restricted stock and stock options.  During loss periods, diluted earnings pershare amounts are based on the weighted average number of common sharesoutstanding.

 

Thedilutive effect of stock-based compensation arrangements is accounted for 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.  The Company includes as assumed proceeds theamount of compensation cost attributed to future services and not yetrecognized, and the amount of tax 

 

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benefits,if any, that would be credited to additional paid-in capital assuming exerciseof outstanding options and vesting of nonvested restricted stock.  For thethirteen weeks ended October 30, 2010 and October 31, 2009, there were53,000 and 62,000 options outstanding, respectively, to purchase shares ofcommon stock excluded from the calculation of diluted earnings per sharebecause of antidilution.  For the thirty-nine weeks ended October 30,2010 and October 31, 2009, there were 54,000 and 66,000 optionsoutstanding, respectively, to purchase shares of common stock excluded from thecalculation of diluted earnings per share because of antidilution.

 

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

 

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| ** **                                                        | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **October 30, 2010**        | ** ** | **October 31, 2009** | ** ** |
|                                                              |       |                                  |       |   |   |
| Basic:                                                            |       |                                  |       |   |   |
| Numerator                                                         |       |                                  |       |   |   |
| Net income                                                        |       | $                                     | 11,488     |   | $ | 8,466 |   |
| Net income allocated to  participating securities                 |       | —                                |       | (177 | ) |
| Net income attributable to  common stockholders-basic             |       | 11,488                                |       | 8,289 |   |
|                                                              |       |                                  |       |   |   |
| Denominator                                                       |       |                                  |       |   |   |
| Weighted average common  shares                                   |       | 14,497                                |       | 14,351 |   |
|                                                              |       |                                  |       |   |   |
| Net income attributable to  common stockholders per share-basic   |       | $                                     | 0.79       |   | $ | 0.58 |   |
|                                                              |       |                                  |       |   |   |
| Diluted:                                                          |       |                                  |       |   |   |
| Numerator                                                         |       |                                  |       |   |   |
| Net income                                                        |       | $                                     | 11,488     |   | $ | 8,466 |   |
| Net income allocated to  participating securities                 |       | —                                |       | (177 | ) |
| Net income attributable to  common stockholders-diluted           |       | 11,488                                |       | 8,289 |   |
|                                                              |       |                                  |       |   |   |
| Denominator                                                       |       |                                  |       |   |   |
| Denominator for basic  calculation                                |       | 14,497                                |       | 14,351 |   |
| Effect of dilutive  securities                                    |       | 21                                    |       | 32 |   |
| Denominator for diluted  calculation                              |       | 14,518                                |       | 14,383 |   |
|                                                              |       |                                  |       |   |   |
| Net income attributable to  common stockholders per share-diluted |       | $                                     | 0.79       |   | $ | 0.58 |   |

 
| ** **                                                               | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                               | ** ** | **October 30, 2010**     | ** ** | **October 31, 2009** | ** ** |
|                                                                     |       |                               |       |   |   |
| Basic:                                                                   |       |                               |       |   |   |
| Numerator                                                                |       |                               |       |   |   |
| Net (loss) income                                                        |       | $                                  | (394       | ) | $ | 606 |   |
| Net income allocated to  participating securities                        |       | —                             |       | (13 | ) |
| Net (loss) income  attributable to common stockholders-basic             |       | (394                               | )          | 593 |   |
|                                                                     |       |                               |       |   |   |
| Denominator                                                              |       |                               |       |   |   |
| Weighted average common  shares                                          |       | 14,519                             |       | 14,370 |   |
|                                                                     |       |                               |       |   |   |
| Net (loss) income  attributable to common stockholders per share-basic   |       | $                                  | (0.03      | ) | $ | 0.04 |   |
|                                                                     |       |                               |       |   |   |
| Diluted:                                                                 |       |                               |       |   |   |
| Numerator                                                                |       |                               |       |   |   |
| Net (loss) income                                                        |       | $                                  | (394       | ) | $ | 606 |   |
| Net income allocated to  participating securities                        |       | —                             |       | (13 | ) |
| Net (loss) income  attributable to common stockholders-diluted           |       | (394                               | )          | 593 |   |
|                                                                     |       |                               |       |   |   |
| Denominator                                                              |       |                               |       |   |   |
| Denominator for basic  calculation                                       |       | 14,519                             |       | 14,370 |   |
| Effect of dilutive  securities                                           |       | —                             |       | 39 |   |
| Denominator for diluted  calculation                                     |       | 14,519                             |       | 14,409 |   |
|                                                                     |       |                               |       |   |   |
| Net (loss) income  attributable to common stockholders per share-diluted |       | $                                  | (0.03      | ) | $ | 0.04 |   |

 

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5. FairValue Measurement

 

Fairvalue is defined 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. Fairvalue is established according to a hierarchy that prioritizes observable andunobservable inputs used to measure fair value into three broad levels, whichare described below:

 

Level1:  Unadjusted quoted prices in activemarkets that are accessible at the measurement date for assets or liabilities.The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2:  Observableprices that are based on inputs not quoted on active markets, but corroboratedby market data.

 

Level 3: Unobservable inputs are used when little or no market data is available.Level 3 inputs are given the lowest priority in the fair value hierarchy.

 

TheCompany held investments in municipal auction rate securities (“ARS”) issued bystudent loan funding organizations at the time the ARS market experienced adisruption in liquidity in February 2008. Since that time, all of the ARS have been redeemed at par value by theoriginal issuers and the Company’s investment banks, with the final redemptionsoccurring on June 30, 2010 in connection with the Company’s exercise of aput option offered by one of the investment banks.  There were no losses incurred as the resultof any of the ARS redemptions.

 

Thefollowing table provides a summary of activity for the Company’s ARS andrelated put option measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for the thirty-nine weeks endedOctober 30, 2010 (in thousands):

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

 

TheCompany’s short-term investment securities as of October 30, 2010 consistof pre-refunded municipal bonds which are bonds that have been refinanced bythe issuer and remain outstanding in the marketplace until a specific call dateis reached.  Pre-refunded municipal bondsare secured by U.S. Treasury securities placed in an irrevocable escrowaccount.  All of the Company’spre-refunded municipal bonds have call dates of less than one year, therefore,are classified as current assets.   As ofOctober 30, 2010, these available-for-sale securities have Level 1 fairvalues that are essentially equal to the original cost of $4,752,000.

 

6. RevolvingLine of Credit

 

On March 22, 2010, theCompany’s $20 million unsecured revolving credit facility with Bank of America was amended to extendthe expiration date to March 22, 2012. The facility has an unused commitment fee of 0.25% and loansunder the facility bear interest at either (a) a rate equal to the highestof (i) the Federal Funds Rate plus 0.50%, (ii) LIBOR plus 1.0% and(iii) Bank of America’s prime rate, plus an applicable margin; or(b) a rate equal to LIBOR plus an applicable margin.  The applicable margin is dependent on theCompany’s consolidated leverage ratio and ranges from 0.75% to 1.25% for loansbearing interest at the rate described under (a) above and from 1.75% to2.25% for loans bearing interest at the rate described under (b) above.The Company has had no borrowings under this facility.

 

7. OtherLong-Term Liabilities

 

Thecomponents of other long-term liabilities as of October 30, 2010 and January 30,2010 are as follows (in thousands):

 
| ** **                     | ** ** | **October 30,   2010** | ** ** | **January 30,   2010** | ** ** |
|--------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Deferred rent                  |       | $                                | 4,132      |                             | $          | 3,528 |   |
| Tenant improvement  allowances |       | 5,444                            |       | 5,600                            |       |
| Other                          |       | 846                              |       | 867                              |       |
|                           |       | $                                | 10,422     |                             | $          | 9,995 |   |

 

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8. Commitmentsand Contingencies

 

TheCompany from time to time is involved in various legal proceedings incidentalto the conduct of its business, including claims by customers, employees orformer employees.  While litigation is subject to uncertainties and theoutcome of any litigated matter is not predictable, the Company is not aware ofany legal proceedings pending or threatened against it that it expects to havea material adverse effect on its financial condition, results of operations orliquidity.

 

On November 3,2010, the Company executed an agreement with a supplier of automated materialhandling systems to equip the Company’s new distribution center in Roland,Oklahoma.  In addition to the sale ofmaterial handling equipment to the Company, the supplier will design, integrateand install the system and related equipment and provide training.  The Company’s commitment with respect to thisagreement is approximately $7 million.

 

9. RecentAccounting Pronouncements

 

In January 2010,the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “FairValue Measurements and Disclosures — Improving Disclosures about Fair ValueMeasurements” (ASU 2010-06).  Thisstandard requires new disclosures for significant transfers inand out of Levels 1 and 2 of the fair value hierarchy and the activitywithin Level 3 of the hierarchy, while also clarifying existing disclosuresregarding the level of disaggregation of assets or liabilities and thevaluation techniques and inputs used to measure fair value.  The standard is effective for interim and annualreporting periods beginning after December 15, 2009, with the exception ofthe new Level 3 activity disclosures, which are effective for interim andannual reporting periods beginning after December 15, 2010.  The adoption of the applicable provisions ofthis standard in the first quarter of fiscal 2010 did not have a materialimpact on the Company’s condensed consolidated financial statements and thefuture adoption of the Level 3 activity disclosures is not expected to have amaterial impact.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

**Forward-Looking Statements**

 

Exceptfor specific historical information, many of the matters discussed in thisForm 10-Q may express or imply projections of revenues or expenditures,statements of plans and objectives for future operations, growth orinitiatives, statements of future economic performance, or statements regardingthe outcome or impact of pending or threatened litigation. These, and similarstatements, are forward-looking statements concerning matters that involverisks, uncertainties and other factors that may cause the actual performance ofthe Company to differ materially from those expressed or implied by thesestatements. All forward-looking information should be evaluated in the contextof these risks, uncertainties and other factors. The words “believe,” “anticipate,”“project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,”“will likely result,” or “will continue” and similar words and expressionsgenerally identify forward-looking statements. The Company believes theassumptions underlying these forward-looking statements are reasonable;however, any of the assumptions could be inaccurate, and therefore, actualresults may differ materially from those projected in the forward-lookingstatements.

 

Thefactors that may result in actual results differing from such forward-lookinginformation include, but are not limited to: transportation and distributiondelays or interruptions; changes in freight rates; the Company’s ability tonegotiate effectively the cost and purchase of merchandise; inventory risks dueto shifts in market demand; the Company’s ability to gauge fashion trends andchanging consumer preferences; changes in consumer spending on apparel; changesin product mix; interruptions in suppliers’ businesses; interest rate fluctuations;a deterioration in general economic conditions caused by acts of war orterrorism or other factors; temporary changes in demand due to weatherpatterns; seasonality of the Company’s business; delays associated withbuilding, opening and operating new stores; delays associated with building,opening, expanding or converting new or existing distribution centers; andother factors described in the section titled “Item 1A. Risk Factors” andelsewhere in the Company’s Annual Report on Form 10-K for the fiscal yearended January 30, 2010 and in Part II, “Item 1A. Risk Factors” andelsewhere in the Company’s Quarterly Reports on Form 10-Q and anyamendments thereto and in the other documents the Company files with the SEC,including reports on Form 8-K.

 

Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of the date of this Form 10-Q. Except as may berequired by law, the Company undertakes no obligation to update or revisepublicly any forward-looking statements contained herein to reflect events orcircumstances occurring after the date of this Form 10-Q or to reflect theoccurrence of unanticipated events. Readers are advised, however, to read anyfurther disclosures the Company may make on related subjects in its publicdisclosures or documents filed with the SEC, including reports on Form 8-K.

 

**Overview**

 

Weare a rapidly growing, value-priced retailer of urban fashion apparel andaccessories for the entire family. Our merchandise offerings are designed toappeal to the preferences of fashion conscious consumers, particularlyAfrican-Americans. We operated 458 stores in both urban and rural markets in 27states as of October 30, 2010.

 

Wemeasure performance using key operating statistics. One of the main performancemeasures we use is comparable store sales growth. We define a comparable storeas a store that has been opened for an entire fiscal year. Therefore, a storewill not be considered a comparable store until its 13th month of operation atthe earliest or until its 24th month at the latest. As an example, storesopened in fiscal 2009 and fiscal 2010 are not considered comparable stores infiscal 2010. Relocated and expanded stores are included in the comparable storesales results. We also use other operating statistics, most notably averagesales per store, to measure our performance. As we typically occupy existingspace in established shopping centers rather than sites built specifically forour stores, store square footage (and therefore sales per square foot) variesby store. We focus on overall store sales volume as the critical driver ofprofitability. The average sales per store has increased over the years, as wehave increased comparable store sales and opened new stores that are generallylarger than our historical store base. Average sales per store increased from$0.8 million in fiscal 2000 to $1.5 million in fiscal 2009. In addition tosales, we measure gross profit as a percentage of sales and store operatingexpenses, with a particular focus on labor, as a percentage of sales. Theseresults translate into store level contribution, which we use to evaluateoverall performance of each individual store. Finally, we monitor corporateexpenses against budgeted amounts.  Allof the statistics discussed above are critical components of earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) which is consideredour most important operating statistic. Provided below is a reconciliation of EBITDA to net income for thethirty-nine and thirteen week periods ended October 30, 2010 and October 31,2009:

 

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| ** **                    | ** ** | **Thirty-nine Weeks Ended** | ** ** | **Thirteen Weeks Ended** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **October 30, 2010**        | ** ** | **October 31, 2009**     | ** ** | **October 30, 2010** | ** ** | **October 31, 2009** | ** ** |
| Net income (loss)             |       | $                                     | 11,488     |                               | $          | 8,466 |   | $ | (394 | ) | $ | 606 |   |
|                          |       |                                  |       |                               |       |   |   |   |   |
| Plus:                         |       |                                  |       |                               |       |   |   |   |   |
| Interest expense              |       | 17                                    |       | 86                                 |       | 8 |   | 17 |   |
| Income tax expense            |       | 6,024                                 |       | 4,400                              |       | — |   | 315 |   |
| Depreciation and amortization |       | 14,843                                |       | 13,679                             |       | 5,324 |   | 4,851 |   |
|                          |       |                                  |       |                               |       |   |   |   |   |
| Less:                         |       |                                  |       |                               |       |   |   |   |   |
| Interest income               |       | (140                                  | )          | (329                               | )          | (41 | ) | (85 | ) |
| Income tax benefit            |       | —                                |       | —                             |       | (459 | ) | — |   |
|                          |       |                                  |       |                               |       |   |   |   |   |
| EBITDA                        |       | $                                     | 32,232     |                               | $          | 26,302 |   | $ | 4,438 |   | $ | 5,704 |   |

 

**Accounting Periods**

 

Thefollowing discussion contains references to fiscal years 2010 and 2009, whichrepresent fiscal years ending or ended on January 29, 2011 (fiscal 2010)and January 30, 2010 (fiscal 2009), respectively. Fiscal 2010 and fiscal2009 both have 52-week accounting periods. This discussion and analysis shouldbe read with the unaudited condensed consolidated financial statements and thenotes thereto.

 

**Results of Operations**

 

Thefollowing discussion of the Company’s financial performance is based on theunaudited condensed consolidated financial statements set forth herein. Thenature of the Company’s business is seasonal. Historically, sales in the firstand fourth quarters have been higher than sales achieved in the second andthird quarters of the fiscal year. Expenses and, to a greater extent, operatingincome, vary by quarter. Results of a period shorter than a full year may notbe indicative of results expected for the entire year. Furthermore, theseasonal nature of the Company’s business may affect comparisons betweenperiods.

 

**Thirty-nine Weeks Ended October 30, 2010 and October 31,2009**

 

*Net Sales. * Netsales increased $68.4 million, or 17.9%, to $450.5 million in the thirty-nineweeks ended October 30, 2010 from $382.1 million in the thirty-nine weeksended October 31, 2009.  The increase in net sales was due primarilyto the opening of 68 new stores since last year’s third quarter, together witha 2.2% increase in comparable store sales, partially offset by the effect ofclosing two stores since last year’s third quarter.  Comparable stores include locations that havebeen relocated or expanded. There were thirteen stores relocated or expandedsince last year’s third quarter, all of which impacted comparable storesales.  Sales in comparable relocated andexpanded stores increased 5.2% in the first thirty-nine weeks of 2010, whilesales in all other comparable stores increased 1.9%.  The 2.2% overall increase in comparable storesales was due to a 2.9% increase in the number of customer transactions,partially offset by a lower average ticket. Comparable store sales changes bymajor merchandise class were as follows in the first thirty-nine weeks of2010:  Accessories +17%; Home +14%; Men’s-1%; Women’s -1%; and Children’s -2%.

 

Thenew stores opened in 2009 and 2010, net of the closed stores, accounted for$60.6 million of the increase in total sales, while the 2.2% sales increase inthe 352 comparable stores totaled $7.8 million.

 

*Gross Profit. *Gross profit increased $25.0 million, or 16.9%, to $172.4 million in the firstthirty-nine weeks of 2010 from $147.4 million in last year’s first thirty-nineweeks.  The increase in gross profit is a result of the increase in sales,partially offset by a decline in the gross margin to 38.3% from 38.6% in lastyear’s first thirty-nine weeks.  Thedecrease in gross margin was due to a decline of 40 basis points in the coremerchandise margin (initial mark-up, net of markdowns) and an increase infreight costs of 10 basis points, partially offset by a decrease of 20 basispoints in inventory shrinkage.

 

*Selling, General and Administrative Expenses. *Selling,general and administrative expenses increased $19.0 million, or 15.7%, to$140.1 million in the first thirty-nine weeks of 2010 from $121.1 million inthe same period of last year.  The increase in these expenses was dueprimarily to additional store level, distribution and corporate costs arisingfrom the opening of 68 new stores since last year’s third quarter.  As a percentage of sales, selling, generaland administrative expenses improved to 31.1% in the first thirty-nine weeks offiscal 2010 from 31.7% in the first thirty-nine weeks of fiscal 2009, due tolabor efficiencies and strong payroll control in the stores and distributioncenters, together with corporate payroll leverage arising from the increase insales.

 

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*Depreciationand Amortization. *Depreciation and amortization expense increased $1.1 million, or 8.5%,to $14.8 million in the first thirty-nine weeks of 2010 from $13.7 million inthe first thirty-nine weeks of 2009, as the result of capital expendituresincurred for new and relocated/expanded stores.

 

*Interest Income. *Interest income decreased to $0.1 million in the first thirty-nine weeks of2010 from $0.3 million in the same period of 2009 due to a declining interestrate environment.

 

*Interest Expense. *Interest expense decreased to $17,000 in the first thirty-nine weeks of 2010from $86,000 in the first thirty-nine weeks of 2009 due to the finalliquidation of our capital lease obligations.

 

*Income Tax Expense. *Income tax expense increased $1.6 million, or 36.9%, to $6.0 million in thisyear’s first thirty-nine weeks from $4.4 million in the first thirty-nine weeksof 2009 due to an increase in pretax income, together with a slight increase inthe effective income tax rate to 34.4% from 34.2%.

 

*Net Income. * Netincome increased 35.7% to $11.5 million in the first thirty-nine weeks of 2010from $8.5 million in the first thirty-nine weeks of 2009 due to the factorsdiscussed above.

 

**ThirteenWeeks Ended October 30, 2010 and October 31, 2009**

 

*Net Sales. * Netsales increased $12.6 million, or 10.0%, to $140.0 million in the thirteenweeks ended October 30, 2010 from $127.4 million in the thirteen weeksended October 31, 2009.  The increase in net sales was due primarilyto the opening of 68 new stores since last year’s third quarter, partiallyoffset by a 4.2% decrease in comparable store sales and the effect of closingtwo stores since last year’s third quarter. Comparable stores include locations that have been relocated orexpanded. There were thirteen stores relocated or expanded since last year’sthird quarter, all of which impacted comparable store sales.  Sales in comparable relocated and expandedstores decreased 0.3% in the third quarter of 2010, while sales in all othercomparable stores decreased 4.5%. Approximately 90% of the 4.2% overall decrease in comparable store saleswas due to a decrease in the average ticket, with the remainder resulting fromfewer customer transactions.   Comparablestore sales changes by major merchandise class were as follows in the thirdquarter of 2010:  Accessories +14%; Home+10%; Children’s -6%; Men’s -9%; and Women’s -10%.

 

Thenew stores opened in 2009 and 2010, net of closed stores, accounted for anincrease of $17.4 million in total sales, while the 4.2% sales decrease in the352 comparable stores totaled $4.8 million.

 

*Gross Profit. *Gross profit increased $4.1 million, or 8.5%, to $51.7 million in the thirdquarter of 2010 from $47.6 million in last year’s third quarter.  Theincrease in gross profit is a result of the increase in sales, partially offsetby a decline in the gross margin to 36.9% from 37.4% in last year’s thirdquarter.  The decrease in the grossmargin was due to a 70 basis points decline in the core merchandise margin(initial mark-up, net of markdowns), partially offset by reductions of 10 basispoints each in freight costs and shrinkage.

 

*Selling, General and Administrative Expenses. *Selling,general and administrative expenses increased $5.2 million, or 12.5%, to $47.2million in the third quarter of 2010 from $42.0 million in last year’s thirdquarter.  The increase in these expenses was due primarily to additionalstore level, distribution and corporate costs arising from the opening of 68new stores since last year’s third quarter. As a percentage of sales, selling, general and administrative expensesincreased to 33.7% in the third quarter of fiscal 2010 from 33.0% in the thirdquarter of fiscal 2009, due to the deleveraging effect on expenses as apercentage of sales when comparable store sales decline 4.2%.

 

*Depreciationand Amortization. *Depreciation and amortization expense increased $0.4 million, or 9.8%,to $5.3 million in the third quarter of 2010 from $4.9 million in the thirdquarter of 2009, as the result of capital expenditures incurred for new andrelocated/expanded stores.

 

*Interest Income. *Interest income decreased to $41,000 in the third quarter of 2010 from $85,000in the third quarter of 2009 due to a declining interest rate environment.

 

*Interest Expense. *Interest expense decreased to $8,000 in the third quarter of 2010 from $17,000in the third quarter of 2009 due to the final liquidation of our capital leaseobligations.

 

*Unrealized Gain on Investment Securities. *An unrealized gain of $57,000 on our investments inauction rate securities and a related put option was reflected in the thirdquarter of fiscal 2009, reversing a $57,000 impairment loss recorded in thefirst half of 2009.

 

*Income Tax (Benefit) Expense. * In the third quarter of 2010, an income tax benefit of $0.5 million wasrecorded due to a pretax loss in the quarter, while, in last year’s thirdquarter, income tax expense of $0.3 million was recorded due to pretax income.

 

*Net (Loss) Income. * Netloss was $394,000 in the third quarter of 2010 versus net income of $606,000 inthe third quarter of 2009 due to the factors discussed above.

 

**Liquidity and Capital Resources**

 

Ourcash requirements are primarily for working capital, expansion of ourdistribution infrastructure, opening of new stores, remodeling of our existingstores and the improvement of our information systems. Historically, we havemet these cash requirements from cash flow from operations, short-term tradecredit, borrowings under our revolving lines of credit, long-term debt, capitalleases, and cash proceeds from our 

 

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initialpublic offering in 2005.  We expect to be able to meet future cashrequirements with cash flow from operations, short-term trade credit, existingcash balances and, if necessary, borrowings under our revolving creditfacility.

 

*CurrentFinancial Condition.*As of October 30,2010, we had total cash and cash equivalents of $69.6 million compared withtotal cash and cash equivalents of $63.0 million as of January 30,2010. Inventory represented 39.3% of our total assets as of October 30,2010.  Management’s ability to manage ourinventory can have a significant impact on our cash flows from operationsduring a given interim period or fiscal year. In addition, inventory purchasescan be seasonal in nature, such as the purchase of warm-weather orChristmas-related merchandise.  Totalinventories at the end of the third quarter of 2010 were up $10.0 million, or9.5%, compared to the third quarter of fiscal 2009, while store selling squarefootage increased approximately 19% as of the end of the quarter.  The gap between the inventory increase andthe square footage increase reflects an effort on our part to maintainconservative inventory levels in this difficult sales environment.

 

*Cash Flows From Operating Activities*. Net cash provided by operating activities was $6.6 million in thefirst thirty-nine weeks of fiscal 2010 compared to $15.1 million in the sameperiod of fiscal 2009.  The main sourceof cash provided during the first thirty-nine weeks of fiscal 2010 was netincome adjusted for noncash expenses such as depreciation and amortization,loss on disposal of property and equipment, gain on insurance claims, deferredincome taxes and stock-based compensation expense, totaling $27.8 million(compared to $23.2 million in last year’s first thirty-nine weeks).  Other significant sources of cash in thefirst thirty-nine weeks of fiscal 2010 were (1) a $2.6 million increase inlayaway deposits (compared to $2.8 million in the first thirty-nine weeks offiscal 2009) due to the seasonality of layaway transactions which are low at the end of our fiscal year,because all balances have to be redeemed by customers or they are cancelled bythe middle of December each year, and (2) a $1.8 million increase in accrued expenses and other long-termliabilities (compared to $1.7 million in the first thirty-nine weeks of fiscal2009) due primarily to our store growth. Significant uses of cash included (1) a $14.4 million increase ininventory (compared to $19.1 million in the first thirty-nine weeks of fiscal2009) as the result of opening 57 new stores in the first thirty-nine weeks of2010, partially offset by two store closings, and (2) a $6.8 millionchange in income tax receivable/payable (compared to $2.6 million in the firstthirty-nine weeks of fiscal 2009) due to the timing of quarterly estimatedpayments.

 

*Cash Flows From Investing Activities.* Cash used in investing activities was $0.7 million in the firstthirty-nine weeks of fiscal 2010 compared to $15.5 million in the firstthirty-nine weeks of fiscal 2009. Redemptions of investment securities provided cash of $33.0 million inthe first thirty-nine weeks of 2010 and $1.6 million in the same period of2009, as our investment bank repurchased our remaining auction rate securitiesin June 2010 in connection with our exercise of a put option that had beenoffered to us in November 2008 after the auction rate securities marketbecame illiquid.  Cash used for purchasesof investment securities totaled $4.7 million in the first thirty-nine weeks of2010.  Cash used for purchases ofproperty and equipment totaled $29.0 million and $17.1 million in the firstthirty-nine weeks of fiscal 2010 and 2009, respectively, with the increaseresulting from the acquisition of a new distribution center in Roland, Oklahomaand the opening of 57 new stores in the first thirty-nine weeks of fiscal 2010compared with 38 in the first thirty-nine weeks of fiscal 2009.

 

*Cash Flows From Financing Activities.* Cash flows from financing activities were insignificant in the first thirty-nineweeks of both fiscal 2010 and 2009.

 

**Cash Requirements**

 

Ourprincipal sources of liquidity consist of: (i) cash and cash equivalents(which equaled $69.6 million as of October 30, 2010);(ii) short-term trade credit; (iii) cash generated from operations onan ongoing basis as we sell our merchandise inventory; and (iv) a $20million revolving credit facility. Trade credit represents a significant sourceof financing for inventory purchases and arises from customary payment termsand trade practices with our vendors.  Historically, our principalliquidity requirements have been for working capital and capital expenditureneeds.

 

Webelieve that our existing sources of liquidity will be sufficient to fund ouroperations and anticipated capital expenditures for at least the next12 months.

 

**Critical Accounting Policies**

 

Thepreparation of our condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. There have been no material changes to the CriticalAccounting Policies outlined in the Company’s Annual Report on Form 10-Kfor the year ended January 30, 2010.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk.**

 

Therehave been no material changes in our market risk during the thirty-nine weeksended October 30, 2010 compared to the disclosures in Part II, Item7A of our Annual Report on Form 10-K for the year ended January 30,2010, except that our risk related to the illiquid auction rate securitiesmarket was eliminated when our investment bank redeemed our remainingsecurities on June 30, 2010 in connection with our exercise of a putoption that had been offered to us by the investment bank in November 2008.

 

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**Item 4. Controls and Procedures.**

 

Wehave carried out an evaluation under the supervision and with the participationof management, including the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of October 30, 2010 pursuant to Rules 13a-15and 15d-15 of the Exchange Act. Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer each concluded that our disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation has been accumulated and communicated to our management, includingthe officers who certify our financial reports, as appropriate, to allow timelydecisions regarding the required disclosures.

 

Ourdisclosure controls and procedures are designed to provide reasonable assurancethat the controls and procedures will meet their objectives. Managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives.

 

Therewere no changes in our internal control over financial reporting that occurredduring the fiscal quarter ended October 30, 2010 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

Weare from time to time involved in various legal proceedings incidental to theconduct of our business, including claims by customers, employees or formeremployees. While litigation is subject to uncertainties and the outcome of anylitigated matter is not predictable, we are not aware of any legal proceedingspending or threatened against us that we expect to have a material adverseeffect on our financial condition, results of operations or liquidity.

 

**Item 1A. Risk Factors.**

 

Thereare no material changes to the Risk Factors described under the section “ITEM1A. RISK FACTORS” in the Company’s Annual Report on Form 10-K for thefiscal year ended January 30, 2010, except that our risk related to theilliquid auction rate securities market was eliminated when our investment bankredeemed our remaining securities on June 30, 2010 in connection with ourexercise of a put option that had been offered to us by the investment bank in November 2008.

 

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

 

Notapplicable.

 

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

 

Notapplicable.

 

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

 

**Item 5. Other Information.**

 

Not applicable.

 

**Item  6. Exhibits.**

 
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.* |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                              |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.* |
|   |   |                                                                                                                                                                                              |
| 32.1   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.* †                                                       |

 

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*                    Filedherewith.

 

†                    Pursuantto Securities and Exchange Commission Release No. 33-8238, thiscertification will be treated as “accompanying” this Quarterly Report onForm 10-Q and not “filed” as part of such report for purposes ofSection 18 of the Securities Exchange Act of 1934, or otherwise subject tothe liability of Section 18 of the Securities Exchange Act of 1934 andthis certification will not be deemed to be incorporated by reference into anyfiling under the Securities Act of 1933 or the Securities Exchange Act of 1934,except to the extent  that the registrantspecifically incorporates it by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, and theundersigned also has signed this report in his capacity as the Registrant’sChief Financial Officer (Principal Financial Officer).

 
|                         | CITI  TRENDS, INC. |
|------------------------------|-------------------------|
|                         |                    |   |
| Date:  December 6, 2010 |                    |   |
|                         |                    |   |
|                         | By:                     | /s/  Bruce D. Smith |
|                         | Name:                   | Bruce  D. Smith |
|                         | Title:                  | Executive  Vice President, Chief Financial Officer and Secretary |

 

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