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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 
| **x**                                               | ** ** | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act  of 1934**     |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                |       |                                                                                                     |
| **For the fiscal year ended January 30, 2010** |
|                                                |       |                                                                                                     |
| **Or**                                              |
|                                                |       |                                                                                                     |
| **o**                                               | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

**For the transition periodfrom                to                **

 

**Commission File Number: 000-51315**

 

**CITI TRENDS, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name of each exchange  on which registered** |
|----------------------------------------|------------|-------------------------------------------------------------------------|
| Common  Stock, $.01 Par Value          |       | NASDAQ  Stock Market                                                    |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

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

 

| Large  accelerated filer o                |   | Accelerated  filer  x        |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

 

State the aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter:$419,524,090 at July 31, 2009.

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date: Common Stock, par value $.01 per share, 14,856,268shares outstanding as of March 23, 2010.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III incorporatesinformation from the registrant’s definitive proxy statement, to be filed withthe Securities and Exchange Commission within 120 days after the close of theregistrant’s fiscal year covered by this Annual Report on Form 10-K, withrespect to the Annual Meeting of Stockholders to be held on May 26, 2010.

 

 

 

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**FORM 10-KREPORT INDEX**

 

Tableof Contents

 
| **10-K Part and Item No.** |                                                                                                                    |
|------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                                    |   |
| PART I                                    |                                                                                                                    |   |
| Item 1.                                   | Business                                                                                                                | 3 |
| Item 1A.                                  | Risk  Factors                                                                                                           | 9 |
| Item 1B.                                       | Unresolved  Staff Comments                                                                                              | 14 |
| Item 2.                                   | Properties                                                                                                              | 15 |
| Item 3.                                   | Legal Proceedings                                                                                                       | 16 |
| Item 4.                                   | (Removed and Reserved)                                                                                                  | 16 |
|                                           |                                                                                                                    |   |
| PART II                                   |                                                                                                                    |   |
| Item 5.                                   | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 16 |
| Item 6.                                   | Selected Financial  Data                                                                                                | 18 |
| Item 7.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 20 |
| Item 7A.                                  | Quantitative  and Qualitative Disclosure About Market Risk                                                              | 30 |
| Item 8.                                   | Financial  Statements and Supplementary Data                                                                            | 30 |
| Item 9.                                   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                   | 30 |
| Item 9A.                                  | Controls and  Procedures                                                                                                | 30 |
| Item 9B.                                  | Other  Information                                                                                                      | 31 |
|                                           |                                                                                                                    |   |
| PART III                                  |                                                                                                                    |   |
| Item 10.                                  | Directors,  Executive Officers and Corporate Governance                                                                 | 32 |
| Item 11.                                  | Executive  Compensation                                                                                                 | 32 |
| Item 12.                                  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | 32 |
| Item 13.                                  | Certain  Relationships and Related Transactions, and Director Independence                                              | 32 |
| Item 14.                                  | Principal  Accounting Fees and Services                                                                                 | 33 |
|                                           |                                                                                                                    |   |
| PART IV                                   |                                                                                                                    |   |
| Item 15.                                  | Exhibits,  Financial Statement Schedules                                                                                | 34 |

 

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**PART I**

 

*Some statements in, or incorporatedby reference into, this Annual Report on Form 10-K (this “Report”) ofCiti Trends, Inc. (“we”, “us”, or the “Company”) may constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”). All statements other than historical facts containedin this Report, including statements regarding our future financial position,business policy and plans and objectives and expectations of management forfuture operations, are forward-looking statements. The words “believe,” “may,” “could,”“estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “project” andsimilar expressions, as they relate to us, are intended to identifyforward-looking statements. We have based these forward-looking statementslargely on our current expectations and projections about future events,including, among other things: implementation of our growth strategy; ourability to anticipate and respond to fashion trends; competition in ourmarkets; consumer spending patterns; actions of our competitors or anchor tenantsin the strip shopping centers where our stores are located; and anticipatedfluctuations in our operating results.*

 

*These forward-looking statements aresubject to a number of risks, uncertainties and assumptions, including thosedescribed in Item 1A. Risk Factors and elsewhere in this Report and the otherdocuments we file with the Securities and Exchange Commission (“SEC”),including our reports on Form 8-K and Form 10-Q, and any amendmentsthereto. Because forward-looking statements are inherently subject to risks anduncertainties, some of which cannot be predicted or quantified, you should notrely upon forward-looking statements as predictions of future events. Theevents and circumstances reflected in the forward-looking statements may not beachieved or occur and actual results could differ materially from thoseprojected in the forward-looking statements. These forward-looking statementsspeak only as of the date of such statements. Except as required by applicablelaw, including the securities laws of the United States and the rules andregulations of the SEC, we do not plan to publicly update or revise anyforward-looking statements contained in this Report, whether as a result of anynew information, future events or otherwise.*

 

*Information is provided herein withrespect to our operations related to our fiscal years ended on January 30,2010 (“fiscal 2009”), January 31, 2009 (“fiscal 2008”) and February 2,2008 (“fiscal 2007”)*.

 

**ITEM1.          BUSINESS**

 

**Overview and History**

 

We are a rapidly growing, value-priced retailer ofurban fashion apparel and accessories for the entire family. We offer quality,branded apparel from nationally recognized brands, as well as private labelapparel and a limited assortment of home décor items. Our merchandise offeringsare designed to appeal to the preferences of fashion conscious consumers,particularly African-Americans. We believe that we provide merchandise atcompelling values. Our goal is to provide nationally recognized brandedmerchandise at 30% to 70% discounts to department and specialty stores’ regularprices. Our stores average approximately 10,400 square feet of selling spaceand are typically located in neighborhood shopping centers that are convenientto low- to moderate-income customers. Originally our stores were located in theSoutheast, and in recent years were expanded into the Mid-Atlantic and Midwestregions as well as the states of Texas and California. In fiscal 2009, weopened 49 new stores and closed three stores.  As of January 30,2010, we operated 403 stores in both urban and rural markets in 24 states.

 

Our predecessor, Allied Department Stores, was foundedin 1946 and grew into a chain of family apparel stores operating in theSoutheast. In 1999, the Company, then consisting of 85 stores, was acquired byHampshire Equity Partners II, L.P., a private equity firm. Following theacquisition by Hampshire Equity Partners II, L.P., management implementedseveral strategies to focus on the growing urban market and improve ouroperating and financial performance. After the successful implementation ofthese strategies and the successful growth of our chain from 85 stores to 212stores, we completed an initial public offering of our common stock on May 18,2005.

 

Our executive offices are located at 104 ColemanBoulevard, Savannah, Georgia 31408 and our telephone number is (912) 236-1561.Our Internet address is *http://www.cititrends.com*.The reference to our web site address in this Report does not constitute theincorporation by reference of the information contained at the web site in thisReport. We make available, free of charge through publication on our web site,copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports, as soon asreasonably practicable after we have filed such materials with, or furnishedsuch materials to, the SEC. In addition, you may read and copy anymaterials we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, N.E., Washington, D.C. 20549 or on the SEC’s web site at *http://www.sec.gov*, and youmay obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.

 

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**Company Strengths and Strategies**

 

Our goal is to be the leading value-priced retailer ofurban fashion apparel and accessories. We believe the following businessstrengths differentiate us from our competitors and are important to oursuccess:

 

*Focus on Urban Fashion Mix.* We focus our merchandise on urbanfashions, which we believe appeal to our core customers. We do not attempt todictate trends, but rather devote considerable effort to identifying emergingtrends and ensuring that our apparel assortment is considered timely andfashionable in the urban market. Our merchandising staff tests new emergingmerchandise trends before reordering and actively manages the mix of brands andfashion products in the stores to keep our offering fresh and minimizemarkdowns.

 

*Superior Value Proposition.* As a value-priced retailer, we seek tooffer top quality, fashionable merchandise at compelling prices. We seek toprovide nationally recognized brands at 30% to 70% discounts to department andspecialty stores’ regular prices. We also offer products under our proprietarybrands such as “Diva Blue,” “Red Ape,” “Vintage Harlem,” and “Lil Ms Hollywood.”These private brands enable us to expand our product selection, offer fashionmerchandise at lower prices and enhance our product offerings.

 

*Merchandise Mix that Appeals to theEntire Family.* Wemerchandise our stores to create a destination environment capable of meetingthe fashion needs of the entire value-conscious family. Each store offers awide variety of products for men and women, as well as children. Our storesfeature sportswear, dresses, outerwear, footwear, intimate apparel andaccessories, as well as a limited assortment of home décor items. We believethat the breadth of our merchandise distinguishes our stores from manycompetitors that offer urban apparel primarily for women, and reduces ourexposure to fashion trends and demand cycles in any single category.

 

*Strong and Flexible Sourcing Relationships.* We maintain strong sourcingrelationships with a large group of suppliers. We have purchased merchandisefrom approximately 1,100 vendors in the past 12 months. Purchasing iscontrolled by a 25-plus member buying team located at our Savannah, Georgiaheadquarters and our buying office in New York, New York. We purchasemerchandise through planned programs with vendors at reduced prices andopportunistically through close-outs, with the majority of our merchandisepurchased for the current season and a limited quantity held for sale in futureseasons. To foster vendor relationships, we pay vendors promptly and do not askfor typical retail concessions such as promotional and markdown allowances.

 

*Attractive Fashion Presentation andStore Environment.*We seek to provide a fashion-focused shopping environment that is similar to aspecialty apparel retailer, rather than a typical off-price store. Productsfrom nationally recognized brands are prominently displayed by brand, ratherthan by size, on dedicated, four-way fixtures featuring multiple sizes andstyles. The remaining merchandise is arranged on hanging racks. The stores arecarpeted and well-lit, with most featuring a sound system that plays urbanadult and urban contemporary music throughout the store. Nearly all of ourstores have either been opened or remodeled in the past eight years.

 

*Highly Profitable Store Model.* We operate a proven and efficient storemodel that delivers strong cash flow and store level return on investment. Welocate stores in high traffic strip shopping centers that are convenient tolow- and moderate-income neighborhoods. We generally utilize previouslyoccupied store sites which enables us to obtain attractive rents for our storesites. Similarly, advertising expenses are low as we do not rely onpromotion-driven sales but rather seek to build our reputation for valuethrough everyday low prices. At the same time, from an investment perspective,we seek to design stores that are inviting and easy to shop, while limitingstartup and fixturing costs. As a result, our stores have generated rapidpayback of investments, typically within 12 to 14 months.

 

**Product Merchandising and Pricing**

 

*Products.* Our merchandising strategy is to offerhigh quality, branded products at attractive prices for the entirevalue-conscious family. We seek to maintain a diverse assortment of firstquality, in-season merchandise that appeals to the distinctive tastes andpreferences of our core customers. Approximately 47% of our net sales are representedby nationally recognized brands. We also offer a wide variety of products fromless recognized brands and a lesser amount representing private label productsunder our proprietary brands such as “Diva Blue,” “Red Ape,” “Vintage Harlem,”and “Lil Ms Hollywood.” Our private brand products enable us to expand productselection, offer merchandise at lower prices and enhance our product offerings.

 

Our merchandise includes apparel, accessories and homedécor. Within apparel, we offer fashion sportswear for men, women and children,including offerings for newborns, infants, toddlers, boys and girls. We alsooffer accessories, which includes handbags, jewelry, footwear, belts, intimateapparel and sleepwear, as well as a limited assortment of home décor.

 

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The following table sets forth the merchandiseassortment by classification as a percentage of net sales for fiscal2009, 2008 and 2007.

 
| ** **      | ** ** | **Percentage of Net Sales** | ** ** |
|-----------------|------------|-----------------------------|------------|
| ** **      | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Women’s    |       | 34                          | %          | 35 | % | 35 | % |
| Children’s |       | 29                          | %          | 29 | % | 27 | % |
| Men’s      |       | 21                          | %          | 22 | % | 22 | % |
| Accessories     |       | 14                          | %          | 12 | % | 14 | % |
| Home décor |       | 2                           | %          | 2 | % | 2 | % |

 

*Pricing.* We purchase our merchandise atattractive prices and mark prices up less than department or specialty stores.We seek to provide nationally recognized brands at prices 30% to 70% belowregular retail prices available in department stores and specialty stores, andto provide a product offering that validates both our value and fashionpositioning to our consumers. We also consider the price-to-value relationshipsof our non-branded products to be strong. Our basic pricing strategy iseveryday low prices. The discount from the suggested retail price is usuallyreflected on the price tag. We review each department in our stores at leastmonthly for possible markdowns based on sales rates and fashion seasons topromote faster turnover of inventory and to accelerate the flow of currentmerchandise.

 

**Sourcing and Allocation**

 

The merchandising department oversees the sourcing,planning and allocation of merchandise to our stores, which allows us toutilize volume purchase discounts and maintain control over our inventory. Wesource our merchandise from approximately 1,100 vendors, consisting of domesticmanufacturers and importers. Our Chief Merchandising Officer supervises aplanning and allocation team consisting of nearly 30 associates, as well as abuying team, which is comprised of more than 25 merchandise managers, buyersand assistant buyers.

 

Our buyers have on average more than 20 years ofexperience in the retail business and have developed long-standingrelationships with many of our vendors, including those controlling thedistribution of branded apparel. Our buyers, who are based in Savannah and NewYork, travel regularly to the major United States apparel markets, visitingmajor manufacturers and attending national and regional apparel trade shows,including urban-focused trade shows.

 

Our buyers purchase merchandise in styles, sizes andquantities to meet inventory levels developed by the planning staff. The buyingstaff utilizes several purchasing techniques that enable us to offer toconsumers branded and non-branded fashion merchandise at everyday low prices.The majority of the nationally recognized branded products we sell arepurchased in-season and represent vendors’ excess inventories resulting fromover-production or retailer order cancellations. We generally purchase later inthe merchandising buying cycle than department and specialty stores. Thisallows us to take advantage of imbalances between retailers’ demands forspecific merchandise and manufacturers’ supply of that merchandise. We alsopurchase merchandise from some vendors in advance of the selling season atreduced prices and purchase merchandise on an opportunistic basis near the endof the selling season, which we then store for sale three to nine months later.Where possible, we seek to purchase items based on style or color in limitedquantities on a test basis with the right to reorder as needed. Finally, wepurchase private brand merchandise that we source to our specifications.

 

We allocate merchandise across our store baseaccording to store-level demand. The merchandising staff utilizes a centralizedmanagement system to monitor merchandise purchasing, planning and allocation inorder to maximize inventory turnover, identify and respond to changing productdemands and determine the timing of markdowns to our merchandise. The buyersalso regularly review the age and condition of the merchandise and manage boththe reordering and clearance processes. In addition, the merchandising teamcommunicates with regional, district and store managers to ascertain regionaland store-level conditions and to better ensure that our product mix meets ourconsumers’ demands in terms of quality, fashion, price and availability.

 

We accept payment from our customers for merchandiseat time of sale. Payments are made to us by cash, check, VisaTM or MastercardTM.We do not extend credit terms to our customers; however, we do offer a layawayservice.

 

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**Seasonality**

 

The nature of our business is seasonal. Historically,sales in the first and fourth quarters have been higher than sales achieved inthe second and third quarters of the fiscal year. Expenses, and to a greaterextent operating income, vary by quarter. Results of a period shorter than afull year may not be indicative of results expected for the entire year.Furthermore, the seasonal nature of our business may affect comparisonsbetween periods.

 

**Store Operations**

 

*Store Format.* The average selling space of ourexisting 403 stores is approximately 10,400 square feet, which allows us thespace and flexibility to departmentalize our stores and provide directedtraffic patterns. We arrange our stores in a racetrack format with women’ssportswear, our most attractive and fashion current merchandise, in the centerof each store and complementary categories adjacent to those items. Men’s andboy’s apparel is displayed on one side of the store, while dresses, footwearand accessories are displayed on the other side. Merchandise for infants,toddlers and girls is displayed along the back of the store. Impulse items,such as jewelry and sunglasses, are featured near the checkout area. Productsfrom nationally recognized brands are prominently displayed on four-way racksat the front of each department. The remaining merchandise is displayed onhanging racks and occasionally on table displays. Large hanging signs identifyeach category location. The unobstructed floor plan allows the customer to seevirtually all of the different product areas from the store entrance andprovides us the flexibility to easily expand and contract departments inresponse to consumer demand, seasonality and merchandise availability.Virtually all of our inventory is displayed on the selling floor. Prices areclearly marked and often have the comparative retail-selling price noted on theprice tag.

 

*Store Management.* Store operations are managed by ourSenior Vice President of Store Operations, six regional managers and 45district managers, each of whom typically manages five to twelve stores. Thetypical store is staffed with a store manager, two or three assistant managersand seven to eight part-time sales associates, all of whom rotate work days ona shift basis. Store managers and assistant store managers participate in abonus program based on achieving predetermined levels of sales and inventoryshrinkage. District managers participate in bonus programs based on achievingtargeted levels of sales, profits, inventory shrinkage and payroll costs.Regional managers participate in a bonus program based partly on a rollup ofthe district managers’ bonuses and partly on the Company’s profit performancein relation to budget. Sales associates are compensated on an hourly basis withincentives. Moreover, we recognize individual performance through internalpromotions and provide extensive opportunities for advancement, particularlygiven our rapid growth.

 

We place significant emphasis on loss prevention inorder to control inventory shrinkage. Initiatives include electronic tags onmost of our products, training and education of store personnel on lossprevention issues, digital video camera systems, alarm systems and motiondetectors in the stores. In certain stores, we use an outside service tovisually monitor the stores throughout the day using sophisticated camerasystems. We also capture extensive point-of-sale data and maintain systems thatmonitor returns, voids and employee sales, and produce trend and exceptionreports to assist in identifying shrinkage issues. We have a centralized lossprevention team that focuses exclusively on implementation of these initiativesand specifically on stores that have experienced above average levels ofshrinkage. We also maintain an independent, third party administered, toll-freeline for reporting shrinkage concerns and any other employee concerns.

 

*Employee Training.* Our employees are critical to achievingour goals, and we strive to hire employees with high energy levels andmotivation. We have well-established store operating policies and proceduresand an extensive 90-day in-store training program for new store managers andassistant managers. Sales associates also participate in a 30-day customerservice and store procedures training program, which is designed to enable themto assist customers in a friendly, helpful manner.

 

*Layaway Program.* We offer a layaway program that allowscustomers to purchase merchandise by initially paying a 20% deposit and a $2.00service charge. The customer then makes additional payments every two weeks andhas 60 days within which to complete the purchase. If the purchase is notcompleted, the customer receives a merchandise credit for amounts paid less are-stocking fee and service charge.

 

*Site Selection.* Cost-effective store locations are animportant part of our profitability model. Accordingly, we look for secondand third use store locations that offer attractive rents, but also meet ourdemographic and economic criteria. We have a dedicated real estatemanagement team responsible for new store site selection. In selecting alocation, we target both urban and rural markets. Demographic criteria used insite selection include concentrations of our core consumers. In addition, werequire convenient site accessibility, as well as strong co-tenants, such asfood stores, dollar stores, rent-to-own stores and other apparel stores.

 

Shortly after we sign a new store lease and completethe necessary leasehold improvements to the building, we prepare the store overa three to four week period by installing fixtures, signs, dressing rooms,checkout counters and cash register systems and merchandising the initialinventory.

 

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**Advertising and Marketing**

 

Our advertising goal is to build the “Citi Trends”brand and promote consumers’ association of the “Citi Trends” brand with value,quality, fashion and everyday low prices. We generally focus our advertisingefforts during the Easter, back-to-school and Christmas seasons through the useof commercials played on local television and hip-hop radio stations. Inaddition, in the fall of 2009, we began our first national televisioncommercials on the BET cable channel. We also do in-store advertising thatincludes window signs designated for special purposes, such as seasonal eventsand clearance periods, and taped audio advertisements commingled with in-storemusic programs. Signs change in color, quantity and theme every six to nineweeks. For store grand openings and significant remodels, we typically seek tocreate community awareness and consumer excitement through radio advertisingpreceding and during the grand opening and by creating an on-site event withlocal radio personalities broadcasting from the new location. We alsodistribute promotional items such as gift certificates and shopping sprees inconnection with our grand openings and significant remodels.

 

Our marketing efforts center on promoting our everydaylow prices and on demonstrating the strong price-to-value relationship of ourproducts to our consumers. We do not utilize promotional advertising.Merchandise is priced so that our competition rarely has lower prices. In thelimited situations where the competition offers the same merchandise at a lowerprice, we will match the price.

 

**Distribution**

 

All merchandise sold in our stores is shipped directlyfrom our distribution centers in Savannah, Georgia and Darlington, SouthCarolina. We generally ship merchandise from our distribution centers to ourstores daily, utilizing United Parcel Service, Inc. and FedEx Corporation.In addition to the distribution center in Savannah, we have a small merchandisestorage facility that is attached to our corporate office.  The Savannah facilities have a combinedsquare footage of approximately 240,000, including 55,000 square feet ofoffice space. To support our continued growth, we completed an expansion of theDarlington distribution center in 2008 which increased the size of the facilityfrom 286,000 square feet to 550,000 square feet. We expect to open anotherdistribution center in the southwestern United States in late 2010 or early2011 to support our growth plans.

 

**Information Technology and Systems**

 

We have information systems in place to support eachof our business functions, using an IBM i Series as the computer platform.We purchased our enterprise software from Island Pacific, a primary softwareprovider to the retail industry.  Thissoftware supports the following business functions: purchasing, purchase ordermanagement, price and markdown management, merchandise allocation, generalledger, accounts payable and sales audit. Our distribution center in Darlingtonis supported by software from Manhattan Associates which was installed in early2009.

 

Our stores use point-of-sale software fromDataVantage, a division of MICROS Systems, Inc., to run the stores’ cashregisters. The system uses bar code scanners at checkout to capture item sales.It also supports end-of-day processing and automatically transmits sales andtransaction data to Savannah soon after the close of business. Additionally,the software supports store time clock functions. To facilitate the markingdown and re-ticketing of merchandise, employees in the stores use hand-heldscanners that read the item UPC barcode and prepare new price tickets formerchandise. DataVantage software also enables us to sort, review and analyzestore transaction data to assist in loss prevention.

 

We believe that our information systems, with upgradesand updates over time, are adequate to support our operations for the foreseeablefuture.

 

**Growth Strategy**

 

Our growth strategy is to open stores in new andexisting markets, as well as to increase sales in existing stores. Addingstores in the markets we currently serve often enables us to benefit fromenhanced name recognition and achieves advertising and operating synergies. Infiscal 2007, we opened 42 new stores and entered the Tulsa, Oklahoma; Detroit,Michigan; Chicago, Illinois; and Milwaukee, Wisconsin markets. In fiscal 2008,we opened 39 new stores and entered the Philadelphia, Pennsylvania and KansasCity, Kansas markets. In fiscal 2009, we opened 49 new stores and entered theCalifornia and western Michigan markets. We expect to open approximately 55 new stores in fiscal 2010. Approximately90% of the new stores we intend to open in fiscal 2010 will be located instates in which we are currently located.

 

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**Competition**

 

The markets we serve are highly competitive. Theprincipal methods of competition in the retail business are fashion,assortment, pricing and presentation. We believe we have a competitiveadvantage in our offering of fashionable brands at everyday low prices. We competeagainst a diverse group of retailers, including national off-price retailers,mass merchants, smaller specialty retailers and dollar stores. The off-priceretail companies with which we compete include TJX Companies, Inc. (“TJXCompanies”), Ross Stores, Inc. (“Ross Stores”), The Cato Corporation (“Cato”),and Burlington Coat Factory Warehouse Corp. (“Burlington Coat Factory”).  In particular, TJX Companies’ “A.J. Wright”stores, Ross Stores’ “dd’s DISCOUNTS” stores, and Cato’s “It’s Fashion Metro”stores target lower to moderate income consumers. We believe our strategy ofappealing to African-American consumers and offering urban apparel productsallows us to compete successfully with these retailers. We also believe weoffer a more inviting store format than the off-price retailers, including ouruse of carpeted floors and more prominently displayed brands. We also competewith a group of smaller specialty retailers that only sell women’s products,such as Rainbow, Dots, Fashion Cents, It’s Fashion! and Simply Fashions. Ourmass merchant competitors include Wal-Mart, Target and Kmart. These chains donot focus on fashion apparel and, within their apparel offering, lack the urbanfocus that we believe differentiates our offering and appeals to our core customers.Similarly, while some of the dollar store chains offer apparel, they typicallyoffer a more limited selection focused on basic apparel needs. As a result, webelieve there is significant demand for a value retailer that addresses themarket of low- to moderate-income consumers generally and, particularly,African-American and other minority consumers who seek value-priced, urbanfashion apparel and accessories. See Item 1A. Risk Factors in this Report foradditional information.

 

**Intellectual Property**

 

We regard our trademarks and service marks as havingsignificant value and as being important to our marketing efforts. We haveregistered the “Citi Trends” trademark with the U.S. Patent and TrademarkOffice on the Principal Register as both a trademark for retail departmentstore services and as a trademark for clothing. We have also registered thefollowing trademarks with the U.S. Patent and Trademark Office on the PrincipalRegister: “Citi Club,” “Citi Steps,” “Citi Trends Fashion for Less,” “DivaBlue,” “Lil Citi Man,” “Lil Ms Hollywood,” “Urban Sophistication,” “RedApe,” “Satin in The Hood,” “Citi Scrubs,” and “Vintage Harlem.” Our policy isto pursue registration of our marks and to oppose vigorously infringement ofour marks.

 

**Employees**

 

As of January 30, 2010, we had approximately2,100 full-time and approximately 2,500 part-time employees. Of theseemployees, approximately 4,000 are employed in our stores and the remainder areemployed in our distribution centers and corporate office. We are not a partyto any collective bargaining agreements, and none of our employees isrepresented by a labor union. We believe our relations with our employees aregood.

 

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**ITEM1A.       RISK FACTORS**

 

*You should carefully consider thefollowing risk factors, together with the other information contained orincorporated by reference into this Report. The risks and uncertaintiesdescribed below are not the only ones we face.  Additional risks anduncertainties not presently known to us or that we deem to be currentlyimmaterial also may impair our business operations. The occurrence of any ofthe following risks could have a material adverse effect on our business,financial condition and results of operations.*

 

**Our success depends on our ability toanticipate, identify and respond rapidly to changes in consumers’ fashiontastes, and our failure to adequately evaluate fashion trends could have anadverse effect on our business, financial condition and results of operations.**

 

The apparel industry in general and our core customermarket in particular are subject to rapidly evolving fashion trends andshifting consumer demands. Accordingly, our success is heavily dependent on ourability to anticipate, identify and capitalize on emerging fashion trends,including products, styles and materials that will appeal to our targetconsumers. Our failure to anticipate, identify or react appropriately andtimely to changes in styles, trends, brand preferences or desired imagepreferences is likely to lead to lower demand for our merchandise, which couldcause, among other things, sales declines, excess inventories and highermarkdowns.

 

**If we are unsuccessful****incompeting with our retail apparel competitors, our market share could declineor our growth could be impaired and, as a result, our financial results couldsuffer.**

 

The retail apparel market is highly competitive withfew barriers to entry. We compete against a diverse group of retailers,including national off-price apparel chains such as TJX Companies, Ross Stores,Cato, and Burlington Coat Factory; mass merchants such as Wal-Mart, Target andKmart; smaller discount retail chains that only sell women’s products, such asRainbow, Dots, Fashion Cents, It’s Fashion!, and Simply Fashions; and generalmerchandise discount stores and dollar stores, which offer a variety ofproducts, including apparel, for the value-conscious consumer. We also competeagainst local off-price and specialty retail stores, regional retail chains,traditional department stores, web-based retail stores and other directretailers.

 

The level of competition we face from these retailersvaries depending on the product segment, as many of our competitors do notoffer apparel for the entire family. Our greatest competition is generally inwomen’s apparel. Many of our competitors are larger than us and havesubstantially greater resources than us and, as a result, may be able to adaptbetter to changing market conditions, exploit new opportunities and exertgreater pricing pressures on suppliers than us. Many of these retailers havebetter name recognition among consumers than us and purchase significantly moremerchandise from vendors. These retailers may be able to purchase brandedmerchandise that we cannot purchase because of their name recognition andrelationships with suppliers, or they may be able to purchase brandedmerchandise with better pricing concessions than us. Our local and regionalcompetitors have extensive knowledge of the consumer base and may be able togarner more loyalty from customers than us. If the consumer base we serve issatisfied with the selection, quality and price of our competitors’ products,consumers may decide not to shop in our stores. Additionally, if our existingcompetitors or other retailers decide to focus more on our core customers,particularly African-American consumers, we may have greater difficulty incompeting effectively, our business and results of operations could beadversely affected, and the market price of our common stock could suffer.

 

The retail industry periodically has experiencedconsolidation and other ownership changes. In the future, other United Statesor foreign retailers may consolidate, undergo restructurings orreorganizations, or realign their affiliations. Any of these developments couldresult in our competitors increasing their buying power or market visibility.These developments may cause us to lose market share and could have an adverseeffect on our sales and results of operations.

 

**We could experience a reduction insales and cash flows if we are unable to fulfill our current and futuremerchandising needs.**

 

We depend on oursuppliers for the continued availability and satisfactory quality of ourmerchandise. Most of our suppliers could discontinue selling to us at any time.Additionally, if the manufacturers or other owners of brands or trademarksterminate the license agreements under which some of our suppliers sell ourproducts, we may be unable to obtain replacement merchandise of comparablefashion appeal or quality, in the same quantities or at the same prices. Inaddition, a number of our suppliers are smaller, less capitalized companies andare more likely to be impacted by unfavorable general economic and marketconditions than larger and better capitalized companies. These smallersuppliers may not have sufficient liquidity during economic downturns toproperly fund their businesses, and their ability to supply their products tous could be negatively impacted. If we lose the services of one or more of oursignificant suppliers or one or more of them fail to meet our merchandisingneeds, we may be unable to obtain replacement merchandise in a timely manner.If our existing suppliers cannot meet our increased needs and we cannot locatealternative supply sources, we may be unable to obtain sufficient quantities ofthe most popular items of the nationally recognized brands at attractiveprices, which could negatively impact our sales and results of operations.

 

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**As an apparel retailer, we rely onnumerous third parties in the supply chain to produce and deliver the productsthat we sell, and our business may be negatively impacted by their failure tocomply with applicable law.**

 

We rely on numerous third parties to supply theproducts that we sell. Violations of law by our importers, manufacturers ordistributors could result in delays in shipments and receipt of goods or damageour reputation, thus causing our revenues to decline. In addition, merchandisewe sell in our stores is subject to regulatory standards set by variousgovernmental authorities with respect to quality and safety. Regulations andstandards in this area may change from time to time, and substantial additionalregulations and standards have been proposed. Issues with the quality and safetyof merchandise we sell in our stores, regardless of our fault, or customerconcerns about such issues, could result in damage to our reputation, lostsales, uninsured product liability claims or losses, merchandise recalls andincreased costs, which could have an adverse effect on our results ofoperations. Further, we are susceptible to the receipt of counterfeit brands orunlicensed goods. We could incur liability with manufacturers or other ownersof the brands or trademarked products if we inadvertently receive and sellcounterfeit brands or unlicensed goods and, therefore, it is important that weestablish relationships with reputable vendors to prevent the possibility thatwe inadvertently receive counterfeit brands or unlicensed goods. Although we havea quality assurance team to check merchandise in an effort to assure that wepurchase only authentic brands and licensed goods and are careful in selectingour vendors, we may receive products that we are prohibited from selling orincur liability for selling counterfeit brands or unlicensed goods, which couldadversely impact our results of operations.

 

**If our growth strategy is****unsuccessful,our financial condition and results of operations could suffer and the marketprice of our common stock could decline.**

 

Our ability to continue to increase our net sales andearnings depends, in large part, on opening new stores and operating the newand existing stores profitably. We opened 49, 39, and 42 new stores in fiscal2009, 2008 and 2007, respectively. We expect to open approximately 55 newstores in fiscal 2010. If we are unable to open all of these stores or operatethem profitably, we may not achieve our forecasted sales and earnings growthtargets. The success of our growth strategy is dependent upon, among otherthings, the identification of suitable markets and sites for store locations,the negotiation of acceptable lease terms, the hiring, training and retentionof competent sales personnel, the effective management of inventory to meet theneeds of new and existing stores on a timely basis, the expansion of ourinfrastructure to accommodate growth, and generating sufficient operating cashflows or securing adequate capital on commercially reasonable terms to fund ourexpansion plans. Additionally, growth of our store base will place increaseddemands on our operating, managerial and administrative resources and may leadto management and operating inefficiencies, including merchandising, personnel,distribution and integration problems. These demands and inefficiencies maycause deterioration in the financial performance of our individual stores and,therefore, our entire business.

 

**A significant disruption to ourdistribution process or southeastern retail locations could have an adverseeffect on our business, financial condition and results of operations.**

 

Our ability to distribute our merchandise to our storelocations in a timely manner is essential to the efficient and profitableoperation of our business. We have distribution centers located in Savannah,Georgia and Darlington, South Carolina. Any natural disaster or otherdisruption to the operation of either of these facilities due to fire,accidents, weather conditions or any other cause could damage a significantportion of our inventory and impair our ability to stock our stores adequately.

 

In addition, the southeastern United States, where ourdistribution centers and many of our stores are located, is vulnerable tosignificant damage or destruction from hurricanes and tropical storms. Althoughwe maintain insurance on our stores and other facilities, the economic effectsof a natural disaster that affects our distribution centers and/or asignificant number of our stores could increase our operating expenses, impairour cash flows and reduce our revenues.

 

**Our sales, inventory levels andearnings fluctuate on a seasonal basis, which makes our business moresusceptible to adverse events that occur during the first and fourth quarters.**

 

Our sales and earnings are significantly higher duringthe first and fourth quarters each year due to the importance of the springselling season, which includes Easter, and the fall selling season, whichincludes Christmas. Factors negatively affecting us during the first and fourthquarters, including adverse weather and unfavorable economic conditions, willhave a greater adverse effect on our financial condition than if our businesswas less seasonal.

 

In order to prepare for the spring and fall sellingseasons, we must order and keep in stock significantly more merchandise thanduring other parts of the year. This seasonality makes our business moresusceptible to the risk that our inventory will not satisfy actual consumerdemand. In addition, any unanticipated demand imbalances during these peakshopping seasons could require us to sell excess inventory at a substantialmarkdown or fail to satisfy our consumers. In either event, our sales and grossmargins may be lower than historical levels, which could have an adverse effecton our business, financial condition and results of operations.

 

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**We experience fluctuations andvariability in our comparable store sales and quarterly results of operationsand, as a result, the market price of our common stock may fluctuatesubstantially.**

 

Our comparable store sales and quarterly results havefluctuated significantly in the past based on a number of economic, seasonaland competitive factors, and we expect them to continue to fluctuate in thefuture. Since the beginning of fiscal 2005, our quarter-to-quarter comparablestore sales have ranged from a decrease of 12.4% to an increase of 25.0%. Themost significant fluctuations were due to the unusually high sales followingHurricanes Katrina, Rita and Wilma. In addition, we may be unable to maintainhistorical levels of comparable store sales as we execute our growth strategyand expand our business. This variability could cause our comparable storesales and quarterly results to fall below the expectations of securitiesanalysts or investors, which could result in a decline in the market price ofour common stock.

 

**Our sales could decline as a resultof general economic and other factors outside of our control, such as changesin consumer spending patterns and declines in employment levels.**

 

Downturns, or the expectation of a downturn, ingeneral economic conditions, including the effects of unemployment levels,interest rates, levels of consumer debt, inflation in food and energy prices,taxation, consumer confidence and other macroeconomic factors, could adverselyaffect consumer spending patterns, our sales and our results of operations. Thedeterioration in global economic conditions that began in 2008 may continue toadversely affect our business and could have an adverse impact on our majorsuppliers and landlords. Consumer confidence may also be affected by domesticand international political unrest, acts of war or terrorism, natural disastersor other significant events outside of our control, any of which could lead toa decrease in spending by consumers. Because apparel generally is adiscretionary purchase, declines in consumer spending patterns may have a morenegative effect on apparel retailers than some other retailers. Therefore, wemay not be able to maintain our historical rate of growth in revenues andearnings, or remain as profitable, if there is a continued decline in consumerspending patterns. In addition, since the majority of our stores are located inthe southeastern United States, our operations are more susceptible to regionalfactors than the operations of our more geographically diversified competitors.Therefore, any adverse economic conditions that have a disproportionate effecton the southeastern United States could have a greater negative effect on oursales and results of operations than on retailers with a more geographicallydiversified store base.

 

**If we fail to protect our trademarks,there could be a negative effect on our brand image and limitations on ourability to penetrate new markets.**

 

We believe that our “Citi Trends” trademark isintegral to our store design and our success in building consumer loyalty toour brand. We have registered this trademark with the U.S. Patent and TrademarkOffice. We have also registered, or applied for registration of, additionaltrademarks with the U.S. Patent and Trademark Office that we believe areimportant to our business. We cannot assure you that these registrations willprevent imitation of our name, merchandising concept, store design or privatelabel merchandise or the infringement of our other intellectual property rightsby others. Imitation of our name, concept, store design or merchandise in amanner that projects lesser quality or carries a negative connotation of ourbrand image could have an adverse effect on our business, financial conditionand results of operations.

 

In addition, we cannot assure you that others will nottry to block the manufacture or sale of our private label merchandise byclaiming that our merchandise violates their trademarks or other proprietaryrights since other entities may have rights to trademarks that contain the word“Citi” or may have rights in similar or competing marks for apparel and/oraccessories. Although we cannot currently estimate the likelihood of success ofany such lawsuit or ultimate resolution of such a conflict, such a controversycould have an adverse effect on our business, financial condition and resultsof operations.

 

**If we fail to implement and maintaineffective internal controls in our business, there could be an adverse effecton our business, financial condition, results of operations and stock price.**

 

Section 404 of the Sarbanes Oxley Act of 2002requires annual management assessments of the effectiveness of our internalcontrols over financial reporting and an audit of such controls by ourindependent registered public accounting firm. If we fail to maintain theadequacy of our internal controls, we may be unable to conclude on an ongoingbasis that we have effective internal controls over financial reporting.Moreover, effective internal controls, particularly those related to revenuerecognition and accounting for inventory/cost of sales, are necessary for us toproduce reliable financial reports and are important in our effort to preventfinancial fraud. If we cannot produce reliable financial reports or preventfraud, our business, financial condition and results of operations could be harmed,investors could lose confidence in our reported financial information, themarket price of our stock could decline significantly and we may be unable toobtain additional financing to operate and expand our business.

 

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**Adverse trade restrictions maydisrupt our supply of merchandise. We also face various risks because much ofour merchandise is imported from abroad.**

 

We purchase the products we sell directly fromapproximately 1,100 vendors, and a substantial portion of this merchandise ismanufactured outside of the United States and imported by our vendors fromcountries such as China and other areas of the Far East. The countries in whichour merchandise currently is manufactured or may be manufactured in the futurecould become subject to new trade restrictions imposed by the United States orother foreign governments. Trade restrictions, including increased customsrestrictions and tariffs or quotas against apparel items, as well as UnitedStates or foreign labor strikes, work stoppages or boycotts, couldincrease the cost or reduce the supply of apparel available to us and have anadverse effect on our business. In addition, our merchandise supply could beimpacted if our vendors’ imports become subject to existing or future dutiesand quotas, or if our vendors face increased competition from other companiesfor production facilities, import quota capacity and shipping capacity.

 

We also face a variety of other risks generallyassociated with relying on vendors that do business in foreign markets andimport merchandise from abroad, such as:

 

·                  political instability, natural disasters, or thethreat of terrorism, in particular in countries where our vendors sourcemerchandise;

 

·                  increases in merchandise costs due to raw materialprice inflation or changes in purchasing power caused by fluctuations incurrency exchange rates;

 

·                  enhanced security measures at United States andforeign ports, which could delay delivery of imports;

 

·                  imposition of new or supplemental duties, taxes, andother charges on imports;

 

·                  delayed receipt or non-delivery of goods due to thefailure of foreign-source suppliers to comply with import regulations;

 

·                  delayed receipt or non-delivery of goods due toorganized labor strikes or congestion at United States ports; and

 

·                  local business practice and political issues, includingissues relating to compliance with domestic or international labor standards.

 

The United States may impose new initiatives thatadversely affect the trading status of countries where apparel is manufactured.These initiatives may include retaliatory duties or other trade sanctions that,if enacted, would increase the cost of products imported from countries whereour vendors acquire merchandise.

 

**We may continue to experience market conditionsthat could adversely affect the valuation and liquidity of our investmentportfolio.**

 

As of January 30, 2010, we had $29.7 million($33.0 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. Thesesecurities are high-grade (at least AA-rated with one or more rating agencies)and approximately 76% are either guaranteed by the Department of Educationunder the Federal Family Education Loan Program (37%) or backed by insurancecompanies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation(7%). Historically, liquidity for investors in ARS was provided via an auctionprocess that reset the interest rate every 35 days, allowing investors toeither roll over their investments or sell them at par value. Beginning in February 2008,there was insufficient demand for these types of investments during theauctions and, as a result, these securities became illiquid. Although theauctions for the securities have failed, $23.0 million of our ARS have beenredeemed at par value by certain issuers and our investment banks since February 2008.  In addition, we have not experienced anydefaults and continue to earn and receive interest on all of the investmentsthat we still own.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  As of January 30, 2010, theRight was valued at $3.3 million.  Inaccepting the Right, we granted UBS the authority to sell or auction the ARS atpar value at any time up until the expiration date of the Right and releasedUBS from any claims relating to the marketing and sale of ARS.  We will continue to earn interest on the ARSuntil they are liquidated.  Theobligations of UBS under the Right are not secured by its assets and do notrequire UBS to obtain any financing to purchase the ARS.  UBS has disclaimed any assurance that it willhave sufficient financial resources to satisfy its obligations under theRight.  If UBS does not have sufficientfunding to buy back the ARS and no alternative buyers are located eitherthrough the auction process, issuer redemptions or other means, then we may notbe able to access cash by selling these securities without incurring a loss ofprincipal.

 

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**Failure to attract, train, assimilateand retain skilled personnel could have an adverse effect on our growthstrategy and our financial condition.**

 

Like most retailers, we experience significantemployee turnover rates, particularly among store sales associates andmanagers, and our continued growth will require us to hire and train even morenew personnel. We therefore must continually attract, hire and train newpersonnel to meet our staffing needs. We constantly compete for qualifiedpersonnel with companies in our industry and in other industries. A significantincrease in the turnover rate among our store sales associates and managerswould increase our recruiting and training costs and could cause us to beunable to service our customers effectively, thus reducing our ability tocontinue our growth and to operate our existing stores as profitably as we havein the past.

 

In addition, we rely heavilyon the experience and expertise of our senior management team and other keymanagement associates, and accordingly, the loss of their services could have amaterial adverse effect on our business strategy and results of operations.

 

**Changes in government regulationscould have an adverse effect on our business, financial condition and resultsof operations.**

 

New legal requirements,including the recently adopted health care legislation, could result in highercompliance costs.  While the Company isstill evaluating the impact of the healthcare legislation, these newregulations, as well as any related future changes, could increase expenses forthe Company and have an adverse effect on the Company’s financial condition andresults of operations.

 

**Increases in the minimum wage couldhave an adverse effect on our business, financial condition and results ofoperations.**

 

The Fair Minimum Wage Act of 2007 became law on May 25,2007. As a result, the federal minimum wage increased to $5.85 per hour in July 2007,then to $6.55 per hour in July 2008, and to $7.25 per hour in July 2009. Additionally, from time to time, legislative proposals are made to increase theminimum wage in certain individual states. Wage rates for many of our employeesare at or slightly above the minimum wage. As federal and/or state minimum wagerates increase, we may need to increase not only our employees’ wage rates thatare under the new minimum, but also the wages paid to our other hourlyemployees. Any increase in the cost of our labor could have an adverse effecton our operating costs, financial condition and results of operations.

 

**Any failure of our managementinformation systems or the inability of third parties to continue to upgradeand maintain our systems could have an adverse effect on our business,financial condition and results of operations.**

 

We depend on the accuracy, reliability and properfunctioning of our management information systems, including the systems usedto track our sales and facilitate inventory management. We also rely on ourmanagement information systems for merchandise planning, replenishment andmarkdowns, as well as other key business functions. These functions enhance ourability to optimize sales while limiting markdowns and reducing inventory riskthrough properly marking down slow-selling styles, reordering existing stylesand effectively distributing new inventory to our stores. We do not currentlyhave redundant systems for all functions performed by our managementinformation systems. Any interruption in these systems could impair our abilityto manage our inventory effectively, which could have an adverse effect on ourbusiness. To support our growth, we will need to expand our managementinformation systems, and our failure to link and maintain these systemsadequately could have an adverse effect on our business.

 

We depend on third-party suppliers to maintain andperiodically upgrade our management information systems, including the softwareprograms supporting our inventory management functions. If any of thesesuppliers is unable to continue to maintain and upgrade these software programsand/or if we are unable to convert to alternate systems in an efficient andtimely manner, it could result in an adverse effect on our business.

 

**Our ability to attract consumers toour stores depends on the success of the strip shopping centers and downtownbusiness districts where our stores are located.**

 

We locate our stores in strip shopping centers, streetfront locations and downtown business districts where we believe our consumersand potential consumers shop. The success of an individual store can depend onfavorable placement within a given strip shopping center or business district.We cannot control the development of alternative shopping destinations near ourexisting stores or the availability or cost of real estate within existing ornew shopping destinations. If our store locations fail to attract sufficientconsumer traffic or we are unable to locate replacement locations on termsacceptable to us, our business could suffer. If one or more of the anchortenants located in the strip shopping centers or business districts where ourstores are located close or leave, or if there is significant deterioration ofthe surrounding areas in which our stores are located, our business may beadversely affected.

 

**Our stock price is subject tovolatility.**

 

Our stock price is volatile. From our initial publicoffering in May 2005 through January 30, 2010, the trading price ofour common stock has ranged from $7.01 to $57.85 per share. As a result of thisvolatility, investors may not be able to sell their common stock at or abovetheir respective purchase prices. The market price for our common stock may beinfluenced by many factors, including:

 

·      actual or anticipated fluctuations in our operatingresults;

 

·      changes in securities analysts’ recommendations orestimates of our financial performance;

 

·      changes in market valuations or operating performanceof our competitors or companies similar to ours;

 

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·      announcements by us, our competitors or otherretailers;

 

·      additions and departures of key personnel;

 

·      changes in accounting principles;

 

·      the passage of legislation or other developmentsaffecting us or our industry;

 

·      the trading volume of our common stock in the publicmarket;

 

·      changes in economic or financial market conditions;

 

·      natural disasters, terrorist acts, acts of war orperiods of civil unrest; and

 

·      the realization of some or all of the risks describedin this section entitled “Risk Factors.”

 

In addition, the stock markets have experiencedsignificant price and trading volume fluctuations from time to time, and themarket prices of the equity securities of retailers have been extremelyvolatile and have recently experienced sharp price and trading volume changes.These broad market fluctuations may adversely affect the market price of ourcommon stock.

 

**Securities analysts may not continueto cover our common stock or they may issue negative reports, and this may havean adverse impact on the price of our common stock.**

 

The trading market for our common stock relies, inpart, on the research reports that financial analysts publish about our companyor our industry.  Public statements by these securities analysts mayaffect our stock price.  If any of the analysts who cover us downgradesthe rating of our common stock, our common stock price would likely decline. If any of these analysts ceases coverage of our common stock, we could losevisibility in the market, which in turn could cause our common stock price todecline.

 

**We do not currently intend to paydividends on our common stock.**

 

We have never declared or paid any cash dividends onour common stock and do not currently intend to do so for the foreseeablefuture.  In addition, under the terms ofour revolving credit facility, the payment of cash dividends is prohibited.

 

**Provisions in our certificate ofincorporation and by-laws and Delaware law may delay or prevent our acquisitionby a third party.**

 

Our second amended and restated certificate ofincorporation and our amended and restated by-laws contain several provisionsthat may make it more difficult for a third party to acquire control of uswithout the approval of our board of directors. These provisions include, amongother things, a classified board of directors, advance notice for raisingbusiness or making nominations at stockholder meetings and “blank check”preferred stock. Blank check preferred stock enables our board of directors,without stockholder approval, to designate and issue additional series ofpreferred stock with such dividend, liquidation, conversion, voting or otherrights, including convertible securities with no limitations on conversion, asour board of directors may determine, including rights to dividends andproceeds in a liquidation that are senior to the common stock.

 

We are also subject to several provisions of the DelawareGeneral Corporation Law that could delay, prevent or deter a merger,acquisition, tender offer, proxy contest or other transaction that mightotherwise result in our stockholders receiving a premium over the market pricefor their common stock or may otherwise be in the best interests of ourstockholders.

 
| **ITEM  1B.** |   | **UNRESOLVED  STAFF COMMENTS** |
|---------------|--------|--------------------------------|

 

None.

 

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| **ITEM  2.** |   | **PROPERTIES** |
|--------------|--------|----------------|

 

**Store Locations**

 

As of January 30, 2010, we operated 403 storeslocated in 24 states. Our stores average approximately 10,400 square feet ofselling space and are typically located in neighborhood strip shopping centersand downtown business districts that are convenient to low- to moderate-incomecustomers. Originally, our stores were located in the Southeast, but in recentyears we expanded into the Mid-Atlantic and Midwest regions and the states ofTexas and California.

 

We have no franchising relationships, and all of thestores are company operated.  All existing 403 stores, totalingapproximately 5.2 million total square feet and 4.2 million selling squarefeet, are leased under operating leases. Additionally, as of March 8,2010, we have signed leases for 26 new stores to be opened during fiscal 2010aggregating 289,000 total selling square feet. The typical store lease is forfive years with options to extend the lease term for three additional five-yearperiods. Nearly all store leases provide us the right to cancel following aninitial three-year period in the event the store does not meet pre-determinedsales levels. The table below sets forth the number of stores in each of the 24states in which we operated as of January 30, 2010:

 

**Alabama—26**

**Arkansas—7**

**California—5**

**Delaware—1**

**Florida—39**

**Georgia—56**

**Illinois—7**

**Indiana—7**

**Kansas—1**

**Kentucky—3**

**Louisiana—32**

**Maryland—5**

**Michigan—15**

**Mississippi—22**

**Missouri—4**

**North Carolina—37**

**Ohio—15**

**Oklahoma—2**

**Pennsylvania—2**

**South Carolina—41**

**Tennessee—15**

**Texas—42**

**Virginia—17**

**Wisconsin—2**

 

**Support Center Facilities**

 

We own an approximately 170,000 square-foot facilityin Savannah, Georgia, which serves as one of our two distribution centers. Weown another facility in Savannah totaling approximately 70,000 square feet,which serves as our headquarters and, to a lesser extent, as a merchandisestorage facility. We own an approximately 550,000 square-foot facility inDarlington, South Carolina, which serves as a distribution center. We expect toopen another distribution center in the southwestern United States in late 2010or early 2011 to support our growth plans. In addition, we currently lease an1,800 square-foot office in New York City which is used for buyer operationsand meetings with vendors.

 

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| **ITEM  3.** |   | **LEGAL  PROCEEDINGS** |
|--------------|--------|------------------------|

 

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

 
| **ITEM  4.** |   | **(Removed  and Reserved)** |
|--------------|--------|-----------------------------|

 

**PART II**

 
| **ITEM  5.** |   | **MARKET  FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF  EQUITY SECURITIES** |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------|

 

Our common stock is traded on The NASDAQ Stock Marketunder the symbol “CTRN”. The following table shows the high and low per shareprices of our common stock for the periods indicated.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2008**       |       |     |       |    |       |
| First Quarter  |       | 22.73    |       | 12.42   |       |
| Second Quarter |       | 28.12    |       | 17.72   |       |
| Third Quarter  |       | 25.88    |       | 11.33   |       |
| Fourth Quarter |       | 17.46    |       | 7.01    |       |
|           |       |     |       |    |       |
| **2009**       |       |     |       |    |       |
| First Quarter  |       | 25.40    |       | 9.40    |       |
| Second Quarter |       | 29.72    |       | 20.92   |       |
| Third Quarter  |       | 31.47    |       | 21.30   |       |
| Fourth Quarter |       | 31.77    |       | 25.49   |       |

 

On March 23, 2010,the last reported sale price of our common stock on The NASDAQ Stock Market was$34.63 per share. On March 23, 2010, there were 116 holders of record andapproximately 1,800 beneficial holders of our common stock.

 

We have never declared or paid any cash dividends onour common stock and do not intend to pay any cash dividends on our commonstock in the foreseeable future. In addition, under the terms of our revolvingcredit facility, the payment of cash dividends is prohibited.

 

**Recent Sales of UnregisteredSecurities.**

 

None.

 

**Purchases of Equity Securities by theIssuer and Affiliated Purchasers.**

 

None.

 

**Equity Compensation Plan Information.**

 

See Item 12 of this Report.

 

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**Stock Performance Graph**

 

Set forth below is a line graph comparing the lastfifty-six months percentage change in the cumulative total stockholder returnon shares of our common stock against (i) the cumulative total return ofcompanies listed on The NASDAQ Stock Market and (ii) the cumulative totalreturn of the NASDAQ Retail Trade Index. The period compared commences May 18,2005, the date on which our common stock began trading on The NASDAQ StockMarket, and ends January 30, 2010. This graph assumes that $100 wasinvested on May 18, 2005 in our common stock and in each of the marketindex and the industry index, and that all cash distributions were reinvested.Our common stock price performance shown on the graph is not indicative offuture price performance.

 

**COMPARISONOF 56 MONTH CUMULATIVE TOTAL RETURN***

AmongCiti Trends, Inc., The NASDAQ Composite Index

AndThe NASDAQ Retail Trade Index

 

 

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*$100invested on 5/18/05 in stock or 4/30/05 in index, including reinvestment ofdividends. Fiscal year ending January 31.

 
| **Total  Return Analysis**  | ** ** | **5/18/05** | ** ** | **1/06**   | ** ** | **1/07**   | ** ** | **1/08**   | ** ** | **1/09**   | ** ** | **1/10**   | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Citi  Trends, Inc.** | ** ** | **100.00**  | ** ** | **292.99** | ** ** | **251.02** | ** ** | **87.07**  | ** ** | **60.70**  | ** ** | **198.28** | ** ** |
| **NASDAQ  Composite**       | ** ** | **100.00**  | ** ** | **118.83** | ** ** | **130.79** | ** ** | **125.22** | ** ** | **77.27**  | ** ** | **112.53** | ** ** |
| **NASDAQ  Retail Trade**    | ** ** | **100.00**  | ** ** | **120.99** | ** ** | **116.26** | ** ** | **112.11** | ** ** | **69.09**  | ** ** | **121.26** | ** ** |

 

17

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| **ITEM  6.** |   | **SELECTED  FINANCIAL DATA** |
|--------------|--------|------------------------------|

 

**SelectedFinancial and Operating Data**

 

The following table provides selected consolidatedfinancial and operating data for each of the fiscal years in the five-yearperiod ended January 30, 2010, including: (a) consolidated statementof income data for each such period, (b) additional operating data foreach such period and (c) consolidated balance sheet data as of the end ofeach such period. The consolidated statement of income data for the fiscalyears ended January 30, 2010, January 31, 2009 and February 2,2008 and the consolidated balance sheet data as of January 30, 2010 and January 31,2009 are derived from our audited consolidated financial statements included inItem 8 that have been audited by KPMG LLP, an independent registered publicaccounting firm. The statement of income data for the fiscal years ended February 3,2007 and January 28, 2006 and the balance sheet data as of February 2,2008, February 3, 2007 and January 28, 2006 are derived from ouraudited financial statements that are not included in this Report. The selectedconsolidated financial and operating data set forth below should be read inconjunction with, and are qualified in their entirety by reference to, thesection entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in Item 7 and our consolidatedfinancial statements and related notes set forth in the financial pages ofthis Report. Historical results are not necessarily indicative of results to beexpected for any future period.

 
| ** **                                                         | ** ** | **Fiscal Year Ended (1)**                                           | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|                                                               |       | **January 30,  2010**                                                         | ** ** | **January 31,  2009** | ** ** | **February 2,  2008** | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** |   |
| ** **                                                         | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
| Statement  of Income Data:                                         |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net  sales                                                         |       | $                                                                                  | 551,869    |   | $ | 488,202 |   | $ | 437,515 |   | $ | 381,918 |   | $ | 289,804 |   |
| Cost  of sales                                                     |       | 338,898                                                                            |       | 301,867 |   | 278,783 |   | 235,744 |   | 178,953 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Gross  profit                                                      |       | 212,971                                                                            |       | 186,335 |   | 158,732 |   | 146,174 |   | 110,851 |   |
| Selling,  general and administrative expenses                      |       | 165,166                                                                            |       | 147,009 |   | 127,470 |   | 107,535 |   | 83,559 |   |
| Depreciation  and amortization                                     |       | 18,431                                                                             |       | 16,261 |   | 12,583 |   | 8,326 |   | 6,087 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Income  from operations                                            |       | 29,374                                                                             |       | 23,065 |   | 18,679 |   | 30,313 |   | 21,205 |   |
| Interest,  net                                                     |       | 312                                                                                |       | 2,188 |   | 1,914 |   | 1,655 |   | 546 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Income  before income tax expense                                  |       | 29,686                                                                             |       | 25,253 |   | 20,593 |   | 31,968 |   | 21,751 |   |
| Income  tax expense                                                |       | 9,969                                                                              |       | 7,870 |   | 6,379 |   | 10,617 |   | 7,551 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net  income                                                        |       | $                                                                                  | 19,717     |   | $ | 17,383 |   | $ | 14,214 |   | $ | 21,351 |   | $ | 14,200 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net  income per common share:                                      |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                              |       | $                                                                                  | 1.36       |   | $ | 1.21 |   | $ | 1.02 |   | $ | 1.57 |   | $ | 1.21 |   |
| Diluted                                                            |       | $                                                                                  | 1.36       |   | $ | 1.20 |   | $ | 1.00 |   | $ | 1.51 |   | $ | 1.08 |   |
| Weighted  average shares used to compute net income per share (2): |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                              |       | 14,363,894                                                                         |       | 14,131,077 |   | 13,946,342 |   | 13,574,718 |   | 11,746,866 |   |
| Diluted                                                            |       | 14,395,605                                                                         |       | 14,268,788 |   | 14,223,229 |   | 14,138,063 |   | 13,148,602 |   |
| Additional  Operating Data:                                        |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Number  of stores:                                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Opened  during period                                              |       | 49                                                                                 |       | 39 |   | 42 |   | 42 |   | 36 |   |
| Closed  during period                                              |       | 3                                                                                  |       | 1 |   | 0 |   | 0 |   | 1 |   |
| Open  at end of period                                             |       | 403                                                                                |       | 357 |   | 319 |   | 277 |   | 235 |   |
| Selling  square footage at end of period                           |       | 4,205,046                                                                          |       | 3,654,378 |   | 3,168,866 |   | 2,628,539 |   | 2,123,684 |   |
| Comparable  store sales increase (3)                               |       | 0.6                                                                                | %          | 0.0 | % | 1.0 | %(4) | 8.2 | %(4) | 16.7 | %(5) |
| Average  sales per store (6)                                       |       | $                                                                                  | 1,452      |   | $ | 1,444 |   | $ | 1,468 |   | $ | 1,492 |   | $ | 1,332 |   |
|                                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Balance  Sheet Data:                                               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                                         |       | $                                                                                  | 62,993     |   | $ | 33,516 |   | $ | 6,203 |   | $ | 7,707 |   | $ | 3,995 |   |
| Short-term  investments                                            |       | 33,025                                                                             |       | — |   | 56,165 |   | 65,956 |   | 54,458 |   |
| Long-term  investments                                             |       | —                                                                             |       | 43,825 |   | — |   | — |   | — |   |
| Total  assets                                                      |       | 279,986                                                                            |       | 240,789 |   | 210,177 |   | 192,107 |   | 142,205 |   |
| Total  liabilities                                                 |       | 98,643                                                                             |       | 82,582 |   | 72,030 |   | 73,898 |   | 58,456 |   |
| Total  stockholders’ equity                                   |       | 181,343                                                                            |       | 158,207 |   | 138,147 |   | 118,209 |   | 83,749 |   |

 

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| (1)    |   | Our fiscal year ends on the Saturday closest to  January 31 of each year. The years ended January 30, 2010,  January 31, 2009, February 2, 2008, February 3, 2007 and  January 28, 2006 are referred to as fiscal 2009, 2008, 2007, 2006 and  2005, respectively. Fiscal 2006 is comprised of 53 weeks.  Fiscal years  2009, 2008, 2007and 2005 are each comprised of 52 weeks. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (2)    |   | Reflects 26 for 1 stock split completed in  May 2005.                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (3)    |   | Stores included in the comparable store sales  calculation for any period are those stores that were opened prior to the  beginning of the preceding fiscal year and were still open at the end of such  period. Relocated stores and expanded stores are included in the comparable  store sales results.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (4)    |   | The Company is reporting comparable store sales on a  comparable store and comparable weeks basis; for fiscal 2007, the 52  weeks ended February 2, 2008 were compared to the 52 weeks ended  February 3, 2007; for fiscal 2006, the 53 weeks ended February 3,  2007 were compared to the 53 weeks ended February 4, 2006.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5)    |   | This data includes the positive impact of  post-hurricane sales as a result of Hurricanes Katrina, Rita and Wilma during  the months of September 2005 through January 2006.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| (6)    |   | Average sales per store is defined as net sales  divided by the average of stores open at the end of the prior fiscal year and  stores open at the end of the current fiscal year.                                                                                                                                                                                                                                 |

 

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| **ITEM  7.** |   | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|--------|-------------------------------------------------------------------------------------------------|

 

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with the section entitled “Selected Financial and OperatingData” and our audited consolidated financial statements and the respectiverelated notes included elsewhere in this Annual Report on Form 10-K. Thisdiscussion may contain forward-looking statements that involve risks anduncertainties. As a result of many factors, such as those set forth under thesection entitled “Risk Factors” and elsewhere in this Report, our actualresults may differ materially from those anticipated in theseforward-looking statements.*

 

**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 conscious consumers,particularly African-Americans. Originally our stores were located in theSoutheast, and in recent years we expanded into the Mid-Atlantic and Midwestregions and the states of Texas and California. We operate 403 stores in bothurban and rural markets in 24 states.

 

We are pursuing an aggressive store growth strategyand believe that the addition of new stores will be the primary source offuture growth. In fiscal 2009 we opened 49 new stores, entering the Californiaand western Michigan markets for the first time. We expect to openapproximately 55 new stores in fiscal 2010. Approximately 90% of the new storeswe intend to open in fiscal 2010 will be located in states that we currentlyserve.

 

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 were 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 (and thereforesales per square foot) varies by store. We focus on overall store sales volumeas the critical driver of profitability. The average sales per store hasincreased over the years, as we have increased comparable store sales andopened new stores that are generally larger than our historical store base.Average sales per store have increased from $0.8 million in fiscal 2000 to$1.5 million in fiscal 2009. In addition to sales, we measure gross profit as apercentage of sales and store operating expenses, with a particular focus onlabor, as a percentage of sales. These results translate into store levelcontribution, which we use to evaluate overall performance of each individualstore. Finally, we monitor corporate expenses against budgeted amounts.  All of the statistics discussed above arecritical components of earnings before interest, taxes, depreciation andamortization (“EBITDA”) which is considered our most important operatingstatistic.

 

**Basis of the Presentation**

 

Net sales consist of store sales and layaway fees, netof returns by customers. Cost of sales consists of the cost of products we selland associated freight costs. Selling, general and administrative expenses arecomprised of store costs, including payroll and occupancy costs, corporate anddistribution center costs and advertising costs. We operate on a 52- or 53-weekfiscal year, which ends on the Saturday closest to January 31. Each of ourfiscal quarters consists of four 13-week periods, with an extra week added tothe fourth quarter every five to six years.  The years ended January 30,2010, January 31, 2009, February 2, 2008, February 3, 2007 and January 28,2006 are referred to as fiscal 2009, 2008, 2007, 2006 and 2005, respectively.Fiscal year 2006 is comprised of 53 weeks. Fiscal years 2009, 2008, 2007and 2005 are each comprised of 52 weeks.

 

**Results of Operations**

 

The following discussion of our financial performanceis based on the consolidated financial statements set forth in the financial pages ofthis Report. The nature of our 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,the seasonal nature of our business may affect comparisons betweenperiods.

 

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***Net Sales and Additional Operating Data***

*** ***

The following table sets forth, for the periodsindicated, selected consolidated statement of income data expressed both indollars and as a percentage of net sales:

 
| ** **                                    |   | **Fiscal Year Ended**      |    |
|-----------------------------------------------|--------|--------------------------------------|---------|
| ** **                                    |   | **January 30,********2010**     |    | **January 31,********2009** |   | **February 2,********2008** |   |
| ** **                                    |   | **(dollars in thousands)** |    |
| **Statement of Income Data**                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                    |   | $                                    | 551,869 |   | 100.0 | % | $ | 488,202 |   | 100.0 | % | $ | 437,515 |   | 100.0 | % |
| Cost  of sales                                |   | 338,898                              |    | 61.4 | % | 301,867 |   | 61.8 | % | 278,783 |   | 63.7 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                 |   | 212,971                              |    | 38.6 | % | 186,335 |   | 38.2 | % | 158,732 |   | 36.3 | % |
| Selling,  general and administrative expenses |   | 165,166                              |    | 29.9 | % | 147,009 |   | 30.1 | % | 127,470 |   | 29.1 | % |
| Depreciation  and amortization                |   | 18,431                               |    | 3.3 | % | 16,261 |   | 3.3 | % | 12,583 |   | 2.9 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Income  from operations                       |   | 29,374                               |    | 5.3 | % | 23,065 |   | 4.7 | % | 18,679 |   | 4.3 | % |
| Interest  income                              |   | 404                                  |    | 0.1 | % | 2,495 |   | 0.5 | % | 2,383 |   | 0.5 | % |
| Interest  expense                             |   | (92                                  | )       | (0.0 | )% | (307 | ) | (0.0 | )% | (469 | ) | (0.1 | )% |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Income  before income tax expense             |   | 29,686                               |    | 5.4 | % | 25,253 |   | 5.2 | % | 20,593 |   | 4.7 | % |
| Income  tax expense                           |   | 9,969                                |    | 1.8 | % | 7,870 |   | 1.6 | % | 6,379 |   | 1.5 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Net  income                                   |   | $                                    | 19,717  |   | 3.6 | % | $ | 17,383 |   | 3.6 | % | $ | 14,214 |   | 3.2 | % |

 

The following table provides information, for theyears indicated, about the number of total stores open at the beginning of theyear, stores opened and closed during each year, total stores open at the endof each year and comparable store sales for the years:

 
| ** **                            | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **January 30,  2010**      | ** ** | **January 31,  2009** | ** ** | **February 2,  2008** | ** ** |
| ** **                            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  stores open, beginning of year |       | 357                             |       | 319 |   | 277 |   |
| New  stores                           |       | 49                              |       | 39 |   | 42 |   |
| Closed  stores                        |       | (3                              | )          | (1 | ) | 0 |   |
|                                  |       |                            |       |   |   |   |   |
| Total  stores open, end of year       |       | 403                             |       | 357 |   | 319 |   |
|                                  |       |                            |       |   |   |   |   |
| Comparable  store sales increase (1)  |       | 0.6                             | %          | 0.0 | % | 1.0 | %(2) |

 

----

(1)             Stores included in the comparable store salescalculation for any year are those stores that were opened prior to thebeginning of the preceding fiscal year and were still open at the end of suchyear. Relocated stores and expanded stores are included in the comparable storesales results.

 

(2)             The Company is reporting comparable store sales on acomparable store and comparable weeks basis. For fiscal 2007, the 52 weeksended February 2, 2008 are compared to the 52 weeks ended February 3,2007.

 

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***Fiscal 2009Compared to Fiscal 2008***

 

*Net Sales.* Net sales increased $63.7 million,or 13.0%, to $551.9 million in fiscal 2009 from $488.2 million infiscal 2008.  The increase in net saleswas due primarily to 49 new store openings in fiscal 2009 and 39 new store openingsin fiscal 2008 for which there was not a full year of sales in fiscal 2008,partially offset by the closing of three stores in fiscal 2009 and one store infiscal 2008.  Additionally, comparablestore sales were up 0.6% in fiscal 2009. The 49 stores opened in fiscal2009 accounted for $36.0 million of the increase in sales, the 39 storesopened in fiscal 2008 accounted for $26.5 million of the increase, and the315 comparable stores contributed $3.1 million in additional sales, while theclosed stores had the effect of reducing sales by $1.9 million. Comparablestores include locations that have been relocated or expanded.  There were 11 stores relocated or expanded infiscal 2009 and 9 stores relocated or expanded in fiscal 2008.  Sales in these comparable relocated andexpanded stores increased 9.3% in fiscal 2009, while sales in all othercomparable stores decreased less than 0.1%.

 

Approximately 70% of the 0.6% improvement incomparable store sales was due to an increase in the number of customertransactions, with the remainder due to a higher average customerpurchase.  Comparable store sales changes by major merchandise class wereas follows:  Accessories +11%; Home +6%;Children’s +2%; Men’s -2%; and Women’s -2%.

 

*Gross Profit.* Gross profit increased$26.7 million, or 14.3%, to $213.0 million in fiscal 2009 from$186.3 million in fiscal 2008. The increase in gross profit is a result ofthe increase in sales, together with an improvement in the gross margin to38.6% in fiscal 2009 from 38.2% in fiscal 2008. This increase in gross marginresulted from inventory shrinkage as a percentage of sales being 40 basispoints lower due to steps taken to better control inventory 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.

 

*Selling, General and AdministrativeExpenses.*Selling, general and administrative expenses increased $18.2 million, or12.4%, to $165.2 million in fiscal 2009 from $147.0 million in fiscal2008. The increase in these expenses was due primarily to additional storelevel, distribution and corporate costs arising from the opening of 49 newstores in fiscal 2009 and 39 new stores in fiscal 2008. Selling, general andadministrative expenses as a percentage of net sales decreased to 29.9% infiscal 2009 from 30.1% in fiscal 2008. Typically, it is difficult for us to achieve such expense leverage whencomparable store sales increase at a rate as low as 0.6%, because most expensecomponents have inflation in excess of that level. However, expenses weretightly controlled in 2009 in expectation of a slow sales environment.  As a result, the 12.4% increase in expenseswas less than the 13.0% increase in net sales and the 15.1% increase in storeselling square footage.

 

*Depreciation and Amortization.*Depreciation and amortization expenseincreased $2.1 million, or 13.3%, to $18.4 million in fiscal 2009 from $16.3million in fiscal 2008, as the result of capital expenditures incurred for newand relocated/expanded stores and the completion of the expansion of theDarlington distribution center in early 2008.

 

*Interest Income.* Interest income decreased to $0.4million in fiscal 2009 from $2.5 million in fiscal 2008 due to a declininginterest rate environment which affected our returns on auction rate securitiesas well as cash and cash equivalents.

 

*Interest Expense*. Interest expense decreased to $0.1million in fiscal 2009 from $0.3 million in fiscal 2008 due to the normaldecline in the interest portion of payments on our capital lease obligations asthe principal portion of such obligations was reduced.

 

*IncomeTax Expense.*Income tax expense increased $2.1 million, or 26.7%, to $10.0 million in fiscal2009 from $7.9 million in fiscal 2008 due to higher pretax earnings infiscal 2009 and an increase in the effective income tax rate to 33.6% in fiscal2009 from 31.2% in fiscal 2008.  Theincrease in the tax rate was due to having less tax-free interest income infiscal 2009, as discussed above.

 

*NetIncome.* Netincome increased 13.4% to $19.7 million in fiscal 2009 from$17.4 million in fiscal 2008 due to the factors discussed above.

 

***Fiscal 2008Compared to Fiscal 2007***

 

*Net Sales.* Net sales increased $50.7 million,or 11.6%, to $488.2 million in fiscal 2008 from $437.5 million infiscal 2007. The increase in net sales was due to 39 new store openings infiscal 2008 and 42 new store openings in fiscal 2007 for which there was not afull year of sales in fiscal 2007, partially offset by the closing of one storein fiscal 2008.  Comparable store saleswere up less than 0.1% in fiscal 2008. The 39 stores opened in fiscal 2008accounted for $30.2 million of the increase in sales, the 42 stores openedin fiscal 2007 accounted for $20.7 million of the increase, and the 276comparable stores contributed $0.3 million in additional sales, while theclosed store had the effect of reducing sales by $0.5 million. Comparablestores include locations that have been relocated or expanded.  There were 9 stores relocated or expanded infiscal 2008 and 12 stores relocated or expanded in fiscal 2007.  Sales in these comparable relocated andexpanded stores increased 6.2% in fiscal 2008, while sales in all othercomparable stores decreased 0.6%.

 

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The negligible increase in comparable store salesincluded a 1.1% increase in the average customer purchase, offset by a similardecrease in the number of customer transactions.  Comparable store saleschanges by major merchandise class were as follows:  Children’s +8%; Home +5%; Men’s -2%; Women’s-3%; and Accessories -8%.

 

*Gross Profit.* Gross profit increased$27.6 million, or 17.4%, to $186.3 million in fiscal 2008 from$158.7 million in fiscal 2007. The increase in gross profit is a result ofthe increase in sales, together with an improvement in the gross margin to38.2% in fiscal 2008 from 36.3% in fiscal 2007. This increase in gross marginresulted primarily from merchandise markdowns being approximately 140 basispoints lower as a percentage of sales due to improved management of inventorylevels.  In addition, gross marginbenefited from inventory shrinkage being approximately 40 basis points lowerdue to steps taken to better control inventory shrinkage, including, areduction in the span of control given to our district managers in order toincrease the level of supervision, a greater focus on problem stores by thestore operations and loss prevention departments, the addition of sophisticatedsurveillance systems in high shrinkage stores, and lower inventory levels.

 

*Selling, General and AdministrativeExpenses.*Selling, general and administrative expenses increased $19.5 million, or15.3%, to $147.0 million in fiscal 2008 from $127.5 million in fiscal2007. The increase in these expenses was due primarily to additional storelevel, distribution and corporate costs arising from the opening of 39 newstores in fiscal 2008 and 42 new stores in fiscal 2007. Selling, general andadministrative expenses as a percentage of net sales increased to 30.1% infiscal 2008 from 29.1% in fiscal 2007, due primarily to the deleveraging effectthat occurs on expenses as a percentage of sales when comparable store salesincrease at a rate that is lower than the rate of inflation onexpenses. In particular, payroll-related costs increased 80 basis pointsdue to this deleveraging effect, together with higher incentive compensationexpense resulting from better results in relation to goals, and an increase instore supervision costs in connection with a reduction in the span of controlgiven to our district managers. These increases in the expense percentage werepartially offset by approximately $0.6 million of expenses in fiscal 2007related to a secondary stock offering and stock registration of which theCompany received no proceeds.

 

*Depreciation and Amortization.*Depreciation and amortization expenseincreased $3.7 million, or 29.2%, to $16.3 million in fiscal 2008 from $12.6million in fiscal 2007, as the result of capital expenditures incurred for newand relocated/expanded stores and the expansion of the Darlington distributioncenter.

 

*Interest Income.* Interest income increased to $2.5 millionin fiscal 2008 from $2.4 million in fiscal 2007 due primarily to higherinterest rates earned on our investments in auction rate securities once theauctions of such securities began to fail in February 2008 and due to anincrease in market rates for a short period of time during the banking crisisin the third quarter.

 

*Interest Expense*. Interest expense decreased to $0.3million in fiscal 2008 from $0.5 million in fiscal 2007 due to the normaldecline in the interest portion of payments on our capital lease obligations asthe principal portion of such obligations was reduced.

 

*Income Tax Expense.* Income tax expense increased $1.5million, or 23.4%, to $7.9 million in fiscal 2008 from $6.4 million infiscal 2007 due primarily to higher pretax earnings in fiscal 2008. Theeffective income tax rates in fiscal 2008 and fiscal 2007 were virtuallyunchanged at 31.2% and 31.0%, respectively.

 

*Net Income.* Net income increased 22.3% to$17.4 million in fiscal 2008 from $14.2 million in fiscal 2007 due tothe factors discussed above.

 

**Liquidity and Capital Resources**

 

Our cash requirements are primarily for workingcapital, expansion of our distribution infrastructure, opening of new stores,remodeling of our existing stores and the improvement of our information systems.Historically, we have met these cash requirements from cash flow fromoperations, short-term trade credit, borrowings under our revolving lines ofcredit, long-term debt and capital leases, and cash proceeds from our initialpublic offering.  We expect to be able to meet future cash requirementswith cash flow from operations, short-term trade credit, existing cash balancesand, if necessary, borrowings under our revolving credit facility (describedbelow). In fiscal 2009, there was no need to borrow under the credit facility,including during the seasonal build of inventory in advance of the Christmasseason. Due to our strong cash and cash equivalents position at January 30,2010 ($63.0 million), we believe that we will likely not have to borrow underthe credit facility during fiscal 2010.

 

**Discussion of Cash Flows**

 

***Fiscal 2009Compared to Fiscal 2008***

 

As of January 30, 2010, we had total cash andcash equivalents of $63.0 million, compared with $33.5 million as of January 31,2009. The most significant factors in the increase in our cash and cashequivalents position during fiscal 2009 were positive cash flow from operationsand sales/redemptions of investment securities, partially offset by capitalexpenditures.

 

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Inventory represented 36.0% of our total assets as of January 30,2010, compared with 35.8% as of January 31, 2009.  Management’s ability to manage our inventorycan have a significant impact on our cash flows from operations during a giveninterim period or fiscal year.  Inaddition, inventory purchases can be seasonal in nature, such as the purchaseof warm-weather or Christmas-related merchandise.

 

*Cash Flows Provided by OperatingActivities*. Netcash provided by operating activities was $42.8 million in fiscal 2009compared with $39.6 million in fiscal 2008. The main source of cash duringfiscal 2009 was net income, adjusted for noncash expenses such as depreciationand amortization, deferred income taxes, loss on disposal of property andequipment, and stock-based compensation expense, totaling $39.8 million(compared with $35.4 million in fiscal 2008). In addition, cash provided by operating activities benefited from (1) accountspayable increasing $10.4 million (compared with $8.7 million in fiscal 2008)due to an increase in inventory and an improvement in inventory turnover infiscal 2009 which resulted in more of our inventory still being in accountspayable at year end; (2) income tax payable increasing $2.9 million(compared with $0.7 million in fiscal 2008) due to higher pretax income and ahigher effective tax rate in fiscal 2009; (3) accrued expenses and otherlong-term liabilities increasing $2.6 million (compared with $1.7 million infiscal 2008) which represents a 13.1% increase, relatively consistent with theCompany’s growth during 2009; and (4) accrued compensation increasing $2.0million (compared with $2.3 million in fiscal 2008) due to the Company’s growthand a higher bonus accrual resulting from improved performance in relation toour budget in fiscal 2009.  The onlysignificant use of cash was inventory which increased $14.6 million (comparedwith $3.8 million in fiscal 2008). Approximately 75% of the increase in inventory was in new stores, whilethe remainder was in comparable stores and the distribution centers.  There was more inventory in comparable storesdue to a shift of sales near the end of fiscal 2009 from late January toearly February, causing inventories on the last day of the year to be higherthan normal.  This shift in sales was aresult of later income tax refunds, which often spur spending by our customers,and the last weekend of fiscal 2009 experiencing sales declines due toweather-related store closings and a shift in the timing of the first of themonth around the end of the fiscal year.

 

*Cash Flows Used in InvestingActivities.* Cashused in investing activities was $12.8 million in fiscal 2009 compared with$11.4 million in fiscal 2008.  Cashused for the purchase of property and equipment was $23.6 million during fiscal2009 and $23.0 million in fiscal 2008, with fiscal 2009 including capitalexpenditures for more new stores (49 vs. 39) and fiscal 2008 including thefinal portion of the costs related to completing the expansion of theDarlington, South Carolina distribution center which began in fiscal 2007.  Sales/redemptions of municipal auction ratesecurities, net of purchases, provided cash of $10.8 million and $11.7 millionin fiscal 2009 and 2008, respectively.

 

*Cash Flows Used in FinancingActivities.* Cashused in financing activities was $0.5 million in fiscal 2009 and$0.9 million in fiscal 2008. Cash used in financing activities consistedof payments on capital lease obligations totaling $1.4 million and $1.6 millionin fiscal 2009 and 2008, respectively, partially offset by cash provided inconnection with stock option exercises and the related tax benefits.

 

Until required for otherpurposes, we maintain cash and cash equivalents in deposit or money marketaccounts.

 

***Fiscal 2008Compared to Fiscal 2007***

 

As of January 31, 2009, we had total cash andcash equivalents of $33.5 million compared with total cash and cashequivalents of $6.2 million as of February 2, 2008. The mostsignificant factors in the increase in our net liquidity position during fiscal2008 were positive cash flow from operations and net sales/redemptions ofinvestment securities, partially offset by capital expenditures.

 

Inventory represented 35.8% of our total assets as of January 31,2009, compared with 39.2% as of February 2, 2008. Management’s ability tomanage our inventory can have a significant impact on our cash flows fromoperations during a given interim period or fiscal year. In addition, inventorypurchases can be seasonal in nature, such as the purchase of warm-weather orChristmas-related merchandise.

 

*Cash Flows Provided by OperatingActivities*. Netcash provided by operating activities was $39.6 million in fiscal 2008compared to $16.6 million in fiscal 2007. The main source of cash during fiscal2008 was net income, adjusted for noncash expenses such as depreciation andamortization, deferred income taxes, loss on disposal of property andequipment, and stock-based compensation expense, totaling $35.4 million(compared with $27.0 million in fiscal 2007). In addition, cash provided by operating activities benefited fromaccounts payable increasing $8.7 million (compared with a decrease of $3.3million in fiscal 2007), despite inventory increasing only $3.8 million, due toimproved inventory turnover which caused a greater percentage of inventorypurchases to be included in accounts payable as of the end of fiscal 2008. Theonly significant use of cash, other than inventory, was a $4.1 million increasein prepaid and other current assets (compared with $1.1 million in fiscal 2007)due to (1) an increase in receivables from landlords for tenantimprovement reimbursements, as the result of an effort by us to take on more ofthe construction work for new store leasehold improvements, in order to bettercontrol the projects, in return for reimbursements from the landlords, and (2) normalincreases in credit card receivables, prepaid rent and prepaid insurance due tothe Company’s growth.

 

*Cash Flows Used in InvestingActivities.* Cashused in investing activities was $11.4 million in fiscal 2008 comparedwith $20.3 million in fiscal 2007. Cash used for the purchase of propertyand equipment was $7.1 million lower during fiscal 2008 than in 

 

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fiscal 2007 due primarily to the larger portion of thecapital expenditures related to the expansion of the Darlington, South Carolinadistribution center occurring in fiscal 2007. In addition, fiscal 2007 capital expenditures included the purchase ofour corporate headquarters/inventory storage facility in Savannah, Georgia thathad previously been leased. Sales/redemptions of municipal auction ratesecurities, net of purchases, provided cash of $11.7 million and $9.8 millionin fiscal 2008 and 2007, respectively.

 

*Cash Flows (Used in)/Provided byFinancing Activities.* Cash used in financing activities was $0.9 million in fiscal 2008 andcash provided by financing activities was $2.2 million in fiscal 2007.Cash used in financing activities consisted of payments on capital leaseobligations totaling $1.6 million and $1.8 million in fiscal 2008 and 2007,respectively.  In addition, cash totaling$1.0 million was used in fiscal 2008 to settle a stock option exercise.  Cash provided by financing activitiesconsisted primarily of the tax benefit from stock option exercises of $1.2million in 2008 and $3.5 million in fiscal 2007.

 

**Liquidity Sources, Requirements andContractual Cash Requirements and Commitments**

 

Our principal sources of liquidity consist of: (i) cashand cash equivalents (which equaled $63.0 million as of January 30,2010); (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 January 30, 2010, we had $29.7 million($33.0 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. Thesesecurities are high-grade (at least AA-rated with one or more rating agencies)and approximately 76% are either guaranteed by the Department of Educationunder the Federal Family Education Loan Program (37%) or backed by insurancecompanies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation(7%). Historically, liquidity for investors in ARS was provided via an auctionprocess that reset the interest rate every 35 days, allowing investors toeither roll over their investments or sell them at par value. Beginning in February 2008,there was insufficient demand for these types of investments during theauctions and, as a result, these securities became illiquid. Although theauctions for the securities have failed, $23.0 million of our ARS have beenredeemed at par value by certain issuers and our investment banks since February 2008.In addition, we have not experienced any defaults and continue to earn andreceive 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.  As of January 30, 2010, theRight was valued at $3.3 million.  Inaccepting the Right, we granted UBS the authority to sell or auction the ARS atpar value at any time up until the expiration date of the Right and releasedUBS from any claims relating to the marketing and sale of ARS.  We will continue to earn interest on the ARSuntil they are liquidated.  Theobligations of UBS under the Right are not secured by its assets and do notrequire UBS to obtain any financing to purchase the ARS.  UBS has disclaimed any assurance that it willhave sufficient financial resources to satisfy its obligations under theRight.  If UBS does not have sufficientfunding to buy back the ARS and no alternative buyers are located either throughthe auction process, issuer redemptions or other means, then we may not be ableto access cash by selling these securities without incurring a loss ofprincipal.

 

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

 

We anticipate that capital expenditures will beapproximately $45 million to $50 million in fiscal 2010,approximately one-half of which is expected to relate to the Company’s nextdistribution center in the southwestern United States.  Most of the other expenditures will relate tothe capital costs associated with approximately 55 new stores that we plan toopen in fiscal 2010. We plan to finance these capital expenditures with cashflow from operations and existing cash balances.

 

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The following table discloses aggregate informationabout our contractual obligations as of January 30, 2010 and the periodsin which payments are due:

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                   | ** ** |
| Contractual  obligations:           |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases (1)                |       | $                                         | 94,654     |   | $ | 27,093 |   | $ | 42,828 |   | $ | 19,739 |   | $ | 4,994 |   |
| Purchase obligations                |       | 82,081                                    |       | 82,081 |   | — |   | — |   | — |   |
| Total contractual cash  obligations |       | $                                         | 176,735    |   | $ | 109,174 |   | $ | 42,828 |   | $ | 19,739 |   | $ | 4,994 |   |

 

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(1)          Represents fixed minimum rents in stores and does notinclude incremental rents which are computed as a percentage of net sales. Forexample, in fiscal 2009 incremental percentage rent was approximately $1.5million, which represented 5.4% of total rent expense.

 

*Indebtedness.* OnMarch 25, 2009, we amended our credit facility with Bank of America toextend the expiration date to March 24, 2010 and to lower the commitmentfrom $35 million to $20 million, reflecting our cash position and the fact thatwe previously had not had any borrowings under the facility.  In addition, changes were made to the pricingof the facility, including an increase in the unused commitment fee from 0.15%to 0.25% and an amendment of the interest rates. Loans under the amendedfacility bear interest at either (a) a rate equal to the highest of (i) theFederal Funds Rate plus 0.50%, (ii) LIBOR plus 1.0% and (iii) Bank ofAmerica’s prime rate, plus an applicable margin; or (b) a rate equal toLIBOR plus an applicable margin. The applicable margin is dependent on ourconsolidated leverage ratio and ranges from 0.75% to 1.25% for loans bearinginterest at the rate described under (a) above and from 1.75% to 2.25% forloans bearing interest at the rate described under (b) above. Under theterms of the credit facility, the payment of cash dividends is prohibited andthere is one financial covenant (consolidated leverage ratio). On March 22,2010, the facility was amended to extend the expiration date to March 22,2012. We have had no borrowings under the facility.

 

*Operating Leases.* We lease our stores under operatingleases, which generally have an initial term of five years with renewaloptions. The typical store lease requires a combination of both fixed monthlyrents and contingent rents computed as a percentage of net sales after a certainsales threshold has been met. For fiscal 2009, rent expense was$28.2 million compared with $23.1 million in fiscal 2008 (including$1.5 million and $1.6 million of percentage rent, respectively, in fiscal 2009and 2008).

 

*Purchase Obligations.* As of January 30, 2010, we hadpurchase obligations of $82.1 million, all of which were for less than oneyear. These purchase obligations primarily consist of outstanding merchandiseorders.

 

**Off-Balance Sheet Arrangements**

 

Other than the store operating leases described above,we do not have any off-balance sheet arrangements.

 

**Outstanding Stock Options**

 

As of January 30, 2010, we had outstanding vestedoptions to purchase 111,990 shares of common stock at a weighted averageexercise price of $22.59 per share and outstanding unvested options to purchase11,738 shares of common stock at a weighted average price of $41.14 per share.The per share value of each share of common stock underlying the vested andunvested options, based on the difference between the exercise price per optionand the estimated fair market value of the shares at the dates of the grant ofthe options (also referred to as intrinsic value), ranges from $0 to $1.25 pershare. Based on the closing price of our common stock of $31.13 per share on January 29,2010, the intrinsic value of the options outstanding on January 30, 2010was $1,414,000, substantially all of which related to vested options.

 

**Critical Accounting Policies andEstimates**

 

The preparation of our consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. We believethe following critical 

 

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accounting policies describe the more significantjudgments and estimates used in the preparation of the consolidated financialstatements:

 

***Revenue Recognition***

 

While the recognition of revenue is predominantlyderived from routine retail transactions and does not involve significantjudgment, revenue recognition represents an important accounting policy ofours. We recognize retail sales net of sales taxes at the time the customertakes possession of and pays for merchandise, less an allowance for returns. Weallow customers to return merchandise for up to thirty days after the dateof sale and we reduce revenues for each fiscal year using a combination ofactual and estimated return information for the returns in the thirty daysafter the year ends. As of January 30, 2010, the provision for returns was$224,000. Revenue from layaway sales is recognized when the customer has paidfor and received the merchandise. If the merchandise is not fully paid forwithin sixty days, the customer is given a store credit for merchandisepayments made, less a re-stocking fee and a layaway service charge. Layawayservice charges, which are non-refundable, are recognized in revenue whencollected. Gift cards were introduced in 45 stores in late fiscal 2009, with arollout to all other stores expected to occur in 2010. Proceeds from the saleof gift cards are deferred until the customers use the cards to purchasemerchandise. No amounts have yet been amortized into income for gift cards notexpected to be redeemed (“breakage”) due to the lack of time that has lapsedsince cards began being sold under the recently implemented program. All salesare from cash, check or major credit card company transactions. We do not offercompany-sponsored customer credit accounts. There were no material changes inthe estimates or assumptions related to revenue recognition during fiscal 2009.

 

***Inventory***

 

Inventory is stated atthe lower of cost (first-in, first-out basis) or market as determined by theretail inventory method for store inventory and the average cost method fordistribution center inventory. Under the retail inventory method, the costvalue of inventory and gross margins are determined by calculating acost-to-retail ratio and applying it to the retail value of inventory. Inherentin the retail inventory calculation are certain significant managementjudgments and estimates, including, among others, merchandise markups,markdowns and shrinkage, which impact the ending inventory valuation at cost aswell as resulting gross margins. Merchandise markdowns are reflected in theinventory valuation when the price of an item is lowered in the stores. As aresult, we believe the retail inventory method results in a more conservativeinventory valuation than other accounting methods. We estimate and record anallowance for shrinkage for the period between the last physical count and thebalance sheet date. The estimate of shrinkage can be affected by changes inactual shrinkage trends. Inventory shrinkage as a percentage of sales hasranged from 1.1% to 1.9% during fiscal years 2007 through 2009. Many retailershave arrangements with vendors that provide for rebates and allowances undercertain conditions, which ultimately affect the value of the inventory. We donot generally enter into such arrangements with our vendors. There were nomaterial changes in the estimates or assumptions related to the valuation ofinventory during fiscal 2009.

 

***Property andEquipment, net***

 

We have a significant investment in property andequipment stated at cost less accumulated depreciation and amortization.Equipment under capital leases is stated at the present value of the requiredminimum lease payments. Depreciation and amortization are computed using thestraight-line method over the lesser of the estimated useful lives (primarilythree to five years for computer equipment and furniture, fixtures andequipment, five years for leasehold improvements, seven years for majorpurchased software systems, and fifteen to twenty years for buildings andbuilding improvements) of the related assets or the relevant lease term. Anyreduction in these estimated useful lives would result in a higher annual depreciationexpense for the related assets. There were no material changes in the estimatesor assumptions related to the valuation and classification of property andequipment during fiscal 2009.

 

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***Impairment ofLong-Lived Assets***

 

We continually evaluate whether events and changes incircumstances warrant revised estimates of the useful lives or recognition ofan impairment loss for long-lived assets. If facts and circumstances indicatethat a long-lived asset, including property and equipment, may be impaired, thecarrying value is reviewed. If this review indicates that the carrying value ofthe asset will not be recovered as determined based on projected undiscountedcash flows related to the asset over its remaining life, the carrying value ofthe asset is reduced to its estimated fair value. Impairment losses charged todepreciation expense totaled approximately $0.1 million in fiscal 2009. Therewere no impairment losses recognized in fiscal 2008 or 2007. Impairment lossesin the future are dependent on a number of factors such as site selection andgeneral economic trends, and thus could be significantly different fromhistorical results. To the extent our estimates for net sales, gross profit andstore expenses are not realized, future assessments of recoverability couldresult in impairment charges. There were no material changes in the estimatesor assumptions related to impairment of long-lived assets during fiscal 2009.

 

***Fair ValueMeasurements***

 

Fair value is defined as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the principal or most advantageousmarket at the measurement date. Fair value is established according to ahierarchy that prioritizes observable and unobservable inputs used to measurefair value into three broad levels, which are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at themeasurement date for assets or liabilities. The fair value hierarchy gives thehighest priority to Level 1 inputs.

 

Level 2:  Observable prices that are based on inputsnot quoted on active markets, but corroborated by market data.

 

Level 3:  Unobservable inputs are used when little orno market data is available. Level 3 inputs are given the lowest priority inthe fair value hierarchy.

 

As of January 30, 2010, we had $29.7 million ($33.0million at par value) of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. The ARS are classified as tradingsecurities in current assets as of January 30, 2010 and are reflected atestimated fair value. These securities are high-grade (at least AA-rated withone or more rating agencies) and approximately 76% are either guaranteed by theDepartment of Education under the Federal Family Education Loan Program (37%)or backed by insurance companies, AMBAC Assurance Corporation (32%) or MBIAInsurance Corporation (7%). Historically, liquidity for investors in ARS wasprovided via an auction process that reset the interest rate every 35 days,allowing investors to either roll over their investments or sell them at parvalue. Beginning in February 2008, there was insufficient demand for thesetypes of investments during the auctions and, as a result, these securitiesbecame illiquid. Although the auctions for the securities have failed, $23.0million of our ARS have been redeemed at par value by certain issuers and ourinvestment banks since February 2008. In addition, we have not experienced any defaults and continue to earnand receive interest on all of the investments that we still own.

 

There was insufficient observable market informationavailable as of January 30, 2010 to determine the fair value of ARS heldby us. Accordingly, we estimated Level 3 fair values for these securities basedon assumptions that market participants would use in their estimates of fairvalue. These assumptions included, among other things, discounted cash flowprojections, the timing of expected future successful auctions or redemptions,collateralization of the underlying securities and the creditworthiness of theissuers and insurance companies.  Basedon this Level 3 valuation, we valued the ARS investments at $29.7 million as ofJanuary 30, 2010, representing a $3.3 million decline from par value.

 

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.

 

TheRight represents a put option and is recognized as an instrument separate fromthe ARS.  We elected to account for thisRight at its fair value of $3.3 million using a discounted cash flow approach that includesestimates of interest rates and the credit risk associated with UBS.  This valuation is based on unobservableinputs, therefore, represents a Level 3 fair value.  We expect that subsequent changes in thevalue of the Right will largely offset the subsequent fair value movements ofthe ARS, subject to the continued expected performance by UBS of itsobligations under the Right.

 

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***InsuranceLiabilities***

 

We are largely self-insured for workers’ compensationcosts and employee medical claims.  Ourself-insurance liabilities are based on the total estimated costs of claimsfiled and estimates of claims incurred but not reported, less amounts paidagainst such claims.  We use current andhistorical claims data, together with information from actuarial studies, indeveloping our estimates.  The insuranceliabilities we record are primarily influenced by the frequency and severity ofclaims and the Company’s growth.  If theunderlying facts and circumstances related to the claims change, then we may berequired to record more or less expense which could be material in relation toour results of operations.  There were nomaterial changes in the estimates or assumptions related to insuranceliabilities during fiscal 2009, except that estimates for workers’ compensationcosts were required for the entire year in fiscal 2009 versus just two monthsin fiscal 2008 due to the conversion in late fiscal 2008 of our insurancepolicy to a much higher level of self-insurance.

 

***Stock-BasedCompensation***

 

Compensation expense associated with all nonvestedrestricted stock and stock options is recognized based on an estimate of thegrant-date fair value of each equity award. The fair values of grants ofnonvested restricted stock are estimated based on the closing stock price onthe grant date while the fair values of stock option awards are estimated ateach grant date using the Black-Scholes Merton option pricing model. Therewere no grants of options in fiscal 2009. If factors change and we employdifferent assumptions in future periods, the stock-based compensation expensemay differ significantly from the amount recorded in the current period. Therewere no material changes in the estimates or assumptions used to determinestock-based compensation during fiscal 2009.

 

***Operating Leases***

 

We lease all of our store properties and account forthe leases as operating leases*.*Many lease agreements contain tenant improvement allowances, rent holidays,rent escalation clauses and/or contingent rent provisions. For purposes ofrecognizing incentives and minimum rent expense on a straight-line basis overthe terms of the leases, we use the date of initial possession to beginamortization, which is generally when we enter the space and begin to makeimprovements in preparation of intended use.

 

For scheduled rentescalation clauses during the lease terms or for rental payments commencing “rentholidays” at a date other than the date of initial occupancy, we record minimumrent expense on a straight-line basis over the terms of the leases. Tenantimprovement allowances are included in accrued expenses (current portion) andother long-term liabilities (noncurrent portion) and are amortized over thelease term. Changes in the balances of tenant improvement allowances areincluded as a component of operating activities in the consolidated statementsof cash flows.

 

Certain leases provide for contingent rents that arenot measurable at inception. These contingent rents are primarily based on apercentage of net sales that are in excess of a predetermined level. Theseamounts are excluded from minimum rent and are included in the determination oftotal rent expense when it is probable that the expense has been incurred andthe amount is reasonably estimable. There were no material changes in theestimates or assumptions related to operating leases during fiscal 2009.

 

***Accounting forIncome Taxes***

 

We account for income taxes under the asset andliability method. The computation of income taxes is subject to estimation dueto the judgment required and the uncertainty related to the recoverability ofdeferred tax assets or the outcome of tax audits. We adjust our income taxprovision in the period it is determined that actual results will differ fromour estimates. Tax law and rate changes are reflected in the income taxprovision in the year in which such changes are enacted. There were no materialchanges in the estimates or assumptions related to income taxes during fiscal2009.

 

The above listing is not intended to be acomprehensive list of all our accounting policies. In many cases the accountingtreatment of a particular transaction is specifically dictated by U.S.generally accepted accounting principles, with no need for management’sjudgment in their application. There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.

 

**Recent Accounting Pronouncements**

 

See note 2 to ourconsolidated financial statements included in this Report for recently issuedaccounting standards, including the expected dates of adoption and estimatedeffects on our consolidated financial statements.

 

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| **ITEM  7A.** |   | **QUANTITATIVE  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK** |
|---------------|--------|----------------------------------------------------------------|

 

We are exposed to financial market risks related tochanges in interest rates earned on our investments. We cannot predict marketfluctuations in interest rates. As a result, future results may differmaterially from estimated results due to changes in interest rates. Ahypothetical 100 basis point change in prevailing market interest rates wouldnot have materially impacted our financial position, results of operations orcash flows for fiscal 2009. We do not engage in financial transactions fortrading or speculative purposes and have not entered into any interest ratehedging contracts. Interest rates on our credit facility did not impact us infiscal 2009 because we did not borrow during the year.

 

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 incurrency exchange rates could affect our purchasing power with vendors thatimport merchandise to sell to us. We have not entered into forward contracts tohedge against fluctuations in foreign currency prices.

 

As of January 30, 2010, we had $29.7 million($33.0 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. Thesesecurities are high-grade (at least AA-rated with one or more rating agencies)and approximately 76% are either guaranteed by the Department of Educationunder the Federal Family Education Loan Program (37%) or backed by insurancecompanies, AMBAC Assurance Corporation (32%) or MBIA Insurance Corporation(7%). Historically, liquidity for investors in ARS was provided via an auctionprocess that reset the interest rate every 35 days, allowing investors toeither roll over their investments or sell them at par value. Beginning in February 2008,there was insufficient demand for these types of investments during theauctions and, as a result, these securities became illiquid. Although theauctions for the securities have failed, $23.0 million of our ARS have beenredeemed at par value by certain issuers and our investment banks since February 2008.  In addition, we have not experienced anydefaults and continue to earn and receive interest on all of the investmentsthat we still own.

 

In November 2008, we accepted an offer (the “Right”)from UBS AG (“UBS”) allowing us to sell at par value our remaining ARS to UBSat anytime during a two-year period from June 30, 2010 through July 2,2012.  As of January 30, 2010, theRight was valued at $3.3 million.  Inaccepting the Right, we granted UBS the authority to sell or auction the ARS atpar value at any time up until the expiration date of the Right and releasedUBS from any claims relating to the marketing and sale of ARS.  We will continue to earn interest on the ARSuntil they are liquidated.  Theobligations of UBS under the Right are not secured by its assets and do notrequire UBS to obtain any financing to purchase the ARS.  UBS has disclaimed any assurance that it willhave sufficient financial resources to satisfy its obligations under 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 we may not be able toaccess cash by selling these securities without incurring a loss of principal.

 
| **ITEM  8.** |   | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA** |
|--------------|--------|--------------------------------------------------|

 

The financial statements required by this item and thereport of the independent accountant thereon required by Item 14(a)(2) appearbeginning on page F-2 of this Report.  See accompanying Index to theconsolidated financial statements on page F-1. The supplementary financialdata required by Item 302 of Regulation S-K appears in note 12 to theconsolidated financial statements.

 
| **ITEM  9.** |   | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|--------------|--------|-------------------------------------------------------------------------------------------|

 

Not applicable.

 
| **ITEM  9A.** |   | **CONTROLS  AND PROCEDURES** |
|---------------|--------|------------------------------|

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation under the supervision andwith the participation of management, including the Chief Executive Officer andthe Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of the end of the period coveredby this Report pursuant to Rules 13a-15 and 15d-15 of the Exchange Act.Based on that evaluation, the Chief Executive Officer and the Chief FinancialOfficer each concluded that our disclosure controls and procedures areeffective to provide reasonable assurance that information required to bedisclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information has beenaccumulated and communicated to our management, including the officers whocertify our financial reports, as appropriate, to allow timely decisionsregarding the required disclosures.

 

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

 

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Changesin Internal Control Over Financial Reporting

 

There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended January 30,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

Management’s Report on Internal Control Over FinancialReporting

 

For the Report of Management on Internal Control overFinancial Reporting and the report of our independent registered publicaccounting firm on Internal Control over Financial Reporting, see Item 8,Financial Statements and Supplementary Data.

 
| **ITEM  9B.** |   | **OTHER  INFORMATION** |
|---------------|--------|------------------------|

 

None.

 

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**PART III**

 
| **ITEM  10.** |   | **DIRECTORS, EXECUTIVE OFFICERS AND  CORPORATE GOVERNANCE** |
|---------------|--------|-------------------------------------------------------------|

 

The information required by this Item with respect toour executive officers and directors, compliance by our directors, executiveofficers and certain beneficial owners of our common stock with Section 16(a) ofthe Exchange Act, the committees of our Board of Directors, our Audit CommitteeFinancial Expert and our Code of Ethics is incorporated herein by reference toinformation under the captions entitled “Board of Directors and Committees ofthe Board of Directors,” “Executive Officers,” and “Section 16(a) BeneficialOwnership Reporting Compliance”  in our definitive proxy statement (to befiled hereafter) in connection with our 2010 Annual Meeting of Stockholders andpossibly elsewhere in the proxy statement (or will be filed by amendment tothis Report).

 
| **ITEM  11.** |   | **EXECUTIVE COMPENSATION** |
|---------------|--------|----------------------------|

 

The information required by this Item is incorporatedherein by reference to information under the captions entitled “ExecutiveCompensation,” “Board of Directors and Committees of the Board of Directors”and “Compensation Committee Report” in our definitive proxy statement (to befiled hereafter) in connection with our 2010 Annual Meeting of Stockholders andpossibly elsewhere in the proxy statement (or will be filed by amendment tothis Report).

 
| **ITEM  12.** |   | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|---------------|--------|-----------------------------------------------------------------------------------------------------|

 

The information required by this Item with respect toownership of our common stock is incorporated herein by reference to theinformation under the caption entitled “Security Ownership of CertainBeneficial Owners and Management” in our definitive proxy statement (to befiled hereafter) in connection with our 2010 Annual Meeting of Stockholders andpossibly elsewhere in the proxy statement (or will be filed by amendment tothis Report).

 

**Equity Compensation Plan Information**.  The following table representsthose securities authorized for issuance as of January 30, 2010 under ourexisting equity compensation plans.

 
| **Plan category**                                      | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights (1)  (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights (2)  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a)) (3) (c)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       | 432,759                                                                                                     |       | $                                                                                           | 24.35      |                                                                                                                                                               | 739,645    |   |
| Equity compensation  plans not approved by security holders |       | —                                                                                                      |       | —                                                                                      |       | —                                                                                                                                                             |       |
| Total                                                       |       | 432,759                                                                                                     |       | $                                                                                           | 24.35      |                                                                                                                                                               | 739,645    |   |

 

----

| (1)    |   | Includes 31,798 outstanding options issued under the  1999 Allied Fashion Stock Option Plan.  This plan was replaced in  May 2005 by the Citi Trends, Inc. 2005 Long-Term Incentive Plan  (the “Incentive Plan”), which provides for the issuance of up to 1,300,000  shares of common stock upon the exercise of stock options or as awards of  nonvested restricted stock and other performance awards. Also, includes  91,930 outstanding options and 309,031 nonvested restricted stock grants  issued under the Incentive Plan. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | The weighted average exercise price is for options  only and does not include nonvested restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | Consists of shares available for awards of options,  nonvested restricted stock and other performance awards under the Incentive  Plan.                                                                                                                                                                                                                                                                                                                                                                                                                       |

 
| **ITEM  13.** |   | **CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
|---------------|--------|--------------------------------------------------------------------------------|

 

The information required by this Item is incorporatedherein by reference to the information under the captions entitled “CertainRelationships and Related Party Transactions” and “Board of Directors andCommittees of the Board of Directors” in our definitive 

 

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proxy statement (to be filed hereafter) in connectionwith our 2010 Annual Meeting of Stockholders and possibly elsewhere in theproxy statement (or will be filed by amendment to this Report).

 
| **ITEM  14.** |   | **PRINCIPAL ACCOUNTING FEES AND  SERVICES** |
|---------------|--------|---------------------------------------------|

 

The information required by this Item is incorporatedherein by reference to the information under the caption entitled “Ratificationof Independent Registered Public Accounting Firm” in our definitive proxystatement (to be filed hereafter) in connection with our 2010 Annual Meeting ofStockholders and possibly elsewhere in the proxy statement (or will be filed byamendment to this Report).

 

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**PART IV**

 
| **ITEM  15.** |   | **EXHIBITS, FINANCIAL STATEMENT  SCHEDULES** |
|---------------|--------|----------------------------------------------|

 

(a)(1)       FinancialStatements

 

See accompanying Financial Statements beginning on page F-1.

 

(a)(2)       FinancialStatement Schedules

 

All schedules for which provision is made in theapplicable accounting regulations of the SEC are not required under the relatedinstructions, are inapplicable or the information is included in the FinancialStatements, and therefore, have been omitted.

 

(a)(3)       Exhibits

 

**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Second Amended and  Restated Certificate of Incorporation, as amended by the Certificate of  Amendment dated June 22, 2006 (incorporated by reference to  Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended July 29, 2006)                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| 3.2                  |       | Amended and Restated  By-laws (incorporated by reference to Exhibit 4.2 to the Company’s  Registration Statement on Form S-8 (File No. 333-125611) filed with  the SEC on June 8, 2005)                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| 4.1                  |       | Specimen certificate  for shares of common stock, $.01 par value (incorporated by reference to  Exhibit 4.1 to Amendment No. 2 to the Company’s Registration  Statement on Form S-1 (File No. 333-123028) filed with the SEC on  April 29, 2005)                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.1                |       | Amended and Restated  Employment Agreement by and between R. Edward Anderson and Citi  Trends, Inc., dated as of December 30, 2005 (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed with the SEC on December 30, 2005)                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | Lease Agreement, dated  as of September 30, 2004, by and between Meyer Warehouse, LLC, as  landlord, and Citi Trends, Inc., as tenant (incorporated by reference to  Exhibit 10.9 to the Company’s Registration Statement on Form S-1  (File No. 333-123028) filed with the SEC on February 28, 2005) |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| 10.3                 |       | $3.0 Million Loan  Agreement between Citi Trends, Inc. and Bank of America dated  June 16, 2006 (incorporated by reference to Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  July 29, 2006)                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| 10.4                 |       | Amendment No. 1  dated August 28, 2006 to $3.0 Million Loan Agreement between Citi Trends, Inc.  and Bank of America dated June 16, 2006 (incorporated by reference to  Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the  year ended February 3, 2007)                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.5                |       | Allied  Fashion, Inc. Amended and Restated 1999 Stock Option Plan (as previously  amended and restated effective as of June 17, 2004) (incorporated by  reference to Exhibit 2.2 to the Company’s Registration Statement on  Form S-8 (File No. 333-125611) filed with the SEC on June 8,  2005)      |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.6                |       | Amendment to the 1999  Allied Fashion Inc. Stock Option Plan (as previously amended and restated  effective as of June 17, 2004) (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended October 28, 2006)                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.7                |       | Citi Trends, Inc.  2005 Amended and Restated Long-Term Incentive Plan (incorporated by reference  to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended August 2, 2008)                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.8                |       | Form of Restricted  Stock Award Agreement for Employees (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended August 2, 2008)                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                     |
| *10.9                |       | Form of Restricted  Stock Award Agreement for Directors (incorporated by reference to  Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the  year ended February 3, 2007)                                                                                                                          |

 

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| *10.10 |   | Form of Stock  Option Agreement for Employees (incorporated by reference to  Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the  year ended February 3, 2007)                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.11 |   | Form of Stock  Option Agreement for Directors (incorporated by reference to  Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the  year ended February 3, 2007)                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.12 |   | Offer Letter to Ivy  Council dated December 6, 2006 (incorporated by reference to  Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the  year ended February 2, 2008)                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.13 |   | Offer Letter to Bruce  D. Smith dated April 2, 2007 (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 5, 2007)                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.14 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and Bruce D.  Smith dated April  2, 2007 (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 5, 2007)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.15  |   | Credit Agreement dated  March 26, 2008 among Citi Trends, Inc., as Borrower, the  Subsidiaries of the Borrower identified therein, as the Guarantors, and Bank  of America, N.A., as Lender (incorporated by reference to Exhibit 10.25  to the Company’s Annual Report on Form 10-K for the year ended  February 2, 2008) |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.16 |   | Employment Agreement  between the Company and Elizabeth Feher dated April 2, 2008  (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended May 3, 2008)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.17 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and Elizabeth  Feher dated April 2, 2008 (incorporated by reference to  Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 3, 2008)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.18  |   | UBS Offer Letter dated  October 8, 2008, together with Acceptance Form of Citi  Trends, Inc. (incorporated by reference to Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  November 1, 2008)                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.19 |   | Employment Agreement  between the Company and R. David Alexander, Jr. dated December 5,  2008 (incorporated by reference to Exhibit 10.26 to the Company’s Annual  Report on Form 10-K for the year ended January 31, 2009)                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.20 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and R. David  Alexander, Jr. dated December 5, 2008 (incorporated by reference to  Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the  year ended January 31, 2009)                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.21  |   | First Amendment to  Credit Agreement, dated as of March 25, 2009, by and between Citi  Trends, Inc. and Bank of America, N.A. (incorporated by reference to  Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the  year ended January 31, 2009)                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.22 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and R. Edward  Anderson dated March 25, 2009 (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009)                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.23 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and R. David  Alexander, Jr. dated March 25, 2009 (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009)                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.24 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and Elizabeth  R. Feher dated March 25, 2009 (incorporated by reference to  Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009)                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| *10.25 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and Bruce D.  Smith dated March 25, 2009 (incorporated by reference to  Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009)                                                                  |

 

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| *10.26 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and Ivy D.  Council dated March 25, 2009 (incorporated by reference to  Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.27 |   | Employment Non-Compete,  Non-Solicit and Confidentiality Agreement between the Company and James A.  Dunn dated March 25, 2009 (incorporated by reference to  Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 2, 2009)  |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.28 |   | Severance Agreement  between the Company and R. Edward Anderson dated March 25, 2009  (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended May 2, 2009)                                            |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.29 |   | Severance Agreement  between the Company and R. David Alexander, Jr. dated March 25,  2009 (incorporated by reference to Exhibit 10.8 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended May 2, 2009)                                  |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.30 |   | Severance Agreement  between the Company and Elizabeth R. Feher dated March 25, 2009  (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended May 2, 2009)                                            |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.31 |   | Severance Agreement  between the Company and Bruce D. Smith dated March 25, 2009  (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended May 2, 2009)                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.32 |   | Severance Agreement  between the Company and Ivy D. Council dated March 25, 2009  (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended May 2, 2009)                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.33 |   | Severance Agreement  between the Company and James A. Dunn dated March 25, 2009 (incorporated  by reference to Exhibit 10.12 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended May 2, 2009)                                                |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.34 |   | Citi Trends, Inc.  Annual Incentive Bonus Plan (incorporated by reference to Exhibit 10.1  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  August 1, 2009)                                                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.35 |   | Form of Restricted  Stock Award Agreement for Employees (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2009)                                                                    |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.36 |   | Form of Restricted  Stock Award Agreement for Directors (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2009)                                                                    |
|   |   |                                                                                                                                                                                                                                                                                    |
| *10.37 |   | Second Amendment to  Credit Agreement, dated as of March 22, 2010, by and between Citi  Trends, Inc. and Bank of America, N.A.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                    |
| 21.1   |   | Subsidiary of the  Registrant                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of KPMG LLP                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.1   |   | Certification of R.  David Alexander, Jr., President and Chief Executive Officer, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Certification of Bruce  D. Smith, Chief Financial Officer, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.1   |   | Certification of R.  David Alexander, Jr., President and Chief Executive Officer, pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                             |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.2   |   | Certification of Bruce  D. Smith, Chief Financial Officer, 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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| * | Indicates management  contract or compensatory plan or arrangement. |
|---|---------------------------------------------------------------------|

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   |                |   | CITI TRENDS, INC.                                                     |   |                                                                                                |
|--------|---------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|   |                |   | (Registrant)                                                          |   |                                                                                                |
|   |                |   |                                                                  |   |                                                                                                |
| Date   | April 14, 2010 | By     | /s/ R. David Alexander, Jr.                                      |   | /s/ Bruce D. Smith                                                                                  |
|   |                |   | R. David Alexander, Jr.                                          |   | Bruce D. Smith                                                                                      |
|   |                |   | President and Chief Executive  Officer (Principal Executive  Officer) |   | Executive Vice President and Chief  Financial Officer (Principal  Financial and Accounting Officer) |

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the registrant and in the capacities and on the dates indicated.

 

 

| **Signature**                    | ** ** | **Title**                                    | ** ** | **Date**            |
|----------------------------------|------------|----------------------------------------------|------------|---------------------|
|                             |       |                                         |       |                |
| /s/ R. David Alexander, Jr. |       | President and Chief Executive Officer        |       | April 14, 2010 |
| R. David Alexander, Jr.     |       | (Principal Executive Officer) and Director   |       |                |
|                             |       |                                         |       |                |
|                             |       |                                         |       |                |
| /s/ Bruce D. Smith               |       | Executive Vice President and                 |       | April 14, 2010 |
| Bruce D. Smith                   |       | Chief Financial Officer                      |       |                |
|                             |       | (Principal Financial and Accounting Officer) |       |                |
|                             |       |                                         |       |                |
| /s/ R. Edward Anderson           |       | Chairman of the Board of Directors           |       | April 14, 2010 |
| R. Edward Anderson               |       |                                         |       |                |
|                             |       |                                         |       |                |
| /s/ Brian P. Carney              |       | Director                                     |       | April 14, 2010 |
| Brian P. Carney                  |       |                                         |       |                |
|                             |       |                                         |       |                |
| /s/ Lawrence E. Hyatt            |       | Director                                     |       | April 14, 2010 |
| Lawrence E. Hyatt                |       |                                         |       |                |
|                             |       |                                         |       |                |
| /s/ John S. Lupo                 |       | Director                                     |       | April 14, 2010 |
| John S. Lupo                     |       |                                         |       |                |
|                             |       |                                         |       |                |
| /s/ Patricia M. Luzier           |       | Director                                     |       | April 14, 2010 |
| Patricia M. Luzier               |       |                                         |       |                |

 

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**CitiTrends, Inc.Index to Consolidated Financial Statements**

 

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THEYEARS ENDED JANUARY 30, 2010, JANUARY 31, 2009 AND FEBRUARY 2, 2008

 
| Management’s  Annual Report on Internal Control Over Financial Reporting                                                                     | F-2    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                              |   |
| Reports  of Independent Registered Public Accounting Firm                                                                                         | F-3    |
|                                                                                                                                              |   |
| Consolidated Balance  Sheets as of January 30, 2010 and January 31, 2009                                                                | F-5    |
|                                                                                                                                              |   |
| Consolidated  Statements of Income for the Years Ended January 30, 2010,  January 31, 2009 and February 2, 2008                    | F-6    |
|                                                                                                                                              |   |
| Consolidated  Statements of Cash Flows for the Years Ended January 30, 2010,  January 31, 2009 and February 2, 2008                | F-7    |
|                                                                                                                                              |   |
| Consolidated Statements of Stockholders’ Equity  for the Years Ended January 30, 2010, January 31, 2009 and February 2,  2008 | F-8    |
|                                                                                                                                              |   |
| Notes to  Consolidated Financial Statements for the Years Ended January 30, 2010,  January 31, 2009 and February 2, 2008           | F-9    |

 

F-1

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**MANAGEMENT’SANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of consolidated financial statementsfor external purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and presentation.

 

Under the supervision and with the participation ofmanagement, including our chief executive officer and chief financial officer,we assessed the effectiveness of our internal control over financial reportingas of January 30, 2010, based on the criteria described in *Internal Control—Integrated Framework,*issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”). Based on this assessment, our management concluded that our internalcontrol over financial reporting was effective based on those criteria as of January 30,2010.

 

Our independent registered public accounting firm,KPMG LLP, audited the effectiveness of our internal control over financialreporting as of January 30, 2010, as stated in their attestation reportwhich is included herein.

 

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**Report of IndependentRegistered Public Accounting Firm**

** **

The Board of Directorsand Stockholders

Citi Trends, Inc.:

 

We have audited the accompanying consolidated balancesheets of Citi Trends, Inc. and subsidiary (the Company) as of January 30,2010 and January 31, 2009, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for each of the years ended January 30,2010, January 31, 2009, and February 2, 2008. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Citi Trends, Inc. and subsidiary as of January 30, 2010and January 31, 2009, and the results of their operations and their cashflows for each of the fiscal years ended January 30, 2010, January 31,2009, and February 2, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), Citi Trends, Inc.’sinternal control over financial reporting as of January 30, 2010, based oncriteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated April 13,2010 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

As discussed in note 2 to the financial statements,the Company has changed its method of accounting for fair value measurementseffective February 3, 2008 due to the adoption of SFAS No. 157, *Fair Value Measurements,*(included in FASB ASC 820-*Fair Value Measurements and Disclosures*)**and as discussed in note 7 to theconsolidated financial statements, the Company has changed its method ofaccounting for uncertainties in income taxes effective February 4, 2007due to the adoption of Financial Accounting Standards Board Interpretation No. 48-*Accounting for Uncertainty in IncomeTaxes-an interpretation of FAS 109,*(included in FASB ASC 740- *IncomeTaxes*).

 

 
| (signed) KPMG  LLP           |
|------------------------------|
|                         |
|                         |
| April 13, 2010          |
| Jacksonville, Florida        |
| Certified Public Accountants |

 

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**Report of IndependentRegistered Public Accounting Firm**

** **

The Board of Directorsand Stockholders

Citi Trends, Inc.:

 

We have audited Citi Trends, Inc.’s (the Company)internal control over financial reporting as of January 30, 2010, based oncriteria established in*Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Annual Report On InternalControl Over Financial Reporting.** **Our responsibility is to expressan opinion on the Company’s internal control over financial reporting based onour audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudit also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audit provides a reasonable basis forour opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion, Citi Trends, Inc. maintained, inall material respects, effective internal control over financial reporting asof January 30, 2010, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Citi Trends, Inc. as of January 30,2010 and January 31, 2009, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for each of the fiscal years endedJanuary 30, 2010, January 31, 2009, and February 2, 2008, andour report dated April 13, 2010 expressed an unqualified opinion on thoseconsolidated financial statements.

 

(signed) KPMG LLP

 

April 13, 2010

Jacksonville, Florida

Certified Public Accountants

 

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Table of Contents

 

**Citi Trends, Inc.**

**ConsolidatedBalance Sheets**

**January 30, 2010 and January 31, 2009**

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

 
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                                              |       |                       |       |                       |       |
| Current assets:                                                                                                                                                                                                                                                                                         |       |                       |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                               |       | $                          | 62,993     |                       | $          | 33,516 |   |
| Short-term investment securities                                                                                                                                                                                                                                                                        |       | 33,025                     |       | —                     |       |
| Inventory                                                                                                                                                                                                                                                                                               |       | 100,874                    |       | 86,259                     |       |
| Prepaid and other current assets                                                                                                                                                                                                                                                                        |       | 10,409                     |       | 10,625                     |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                      |       | 4,518                      |       | 3,447                      |       |
| Total current assets                                                                                                                                                                                                                                                                                    |       | 211,819                    |       | 133,847                    |       |
| Property and equipment, net                                                                                                                                                                                                                                                                             |       | 63,791                     |       | 58,861                     |       |
| Long-term investment securities                                                                                                                                                                                                                                                                         |       | —                     |       | 43,825                     |       |
| Goodwill                                                                                                                                                                                                                                                                                                |       | 1,371                      |       | 1,371                      |       |
| Deferred tax asset                                                                                                                                                                                                                                                                                      |       | 2,488                      |       | 2,480                      |       |
| Other assets                                                                                                                                                                                                                                                                                            |       | 517                        |       | 405                        |       |
| Total assets                                                                                                                                                                                                                                                                                            |       | $                          | 279,986    |                       | $          | 240,789 |   |
|                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                          |       |                       |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                                                                        |       | $                          | 62,706     |                       | $          | 52,295 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                        |       | 12,773                     |       | 11,478                     |       |
| Accrued compensation                                                                                                                                                                                                                                                                                    |       | 9,500                      |       | 7,514                      |       |
| Current portion of capital lease obligations                                                                                                                                                                                                                                                            |       | —                     |       | 1,403                      |       |
| Income tax payable                                                                                                                                                                                                                                                                                      |       | 3,024                      |       | 682                        |       |
| Layaway deposits                                                                                                                                                                                                                                                                                        |       | 645                        |       | 564                        |       |
| Total current liabilities                                                                                                                                                                                                                                                                               |       | 88,648                     |       | 73,936                     |       |
| Other long-term liabilities                                                                                                                                                                                                                                                                             |       | 9,995                      |       | 8,646                      |       |
| Total liabilities                                                                                                                                                                                                                                                                                       |       | 98,643                     |       | 82,582                     |       |
|                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Stockholders’ Equity:                                                                                                                                                                                                                                                                              |       |                       |       |                       |       |
| Common stock, $0.01 par value. Authorized  32,000,000 shares; 14,899,577 shares issued as of January 30, 2010 and  14,698,852 shares issued as of January 31, 2009; 14,733,827 shares  outstanding as of January 30, 2010 and 14,533,102 shares outstanding as  of January 31, 2009 |       | 146                        |       | 145                        |       |
| Paid in capital                                                                                                                                                                                                                                                                                         |       | 74,368                     |       | 70,950                     |       |
| Retained earnings                                                                                                                                                                                                                                                                                       |       | 106,994                    |       | 87,277                     |       |
| Treasury stock, at cost; 165,750 shares as of  January 30, 2010 and January 31, 2009                                                                                                                                                                                                          |       | (165                       | )          | (165                       | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                         |       | 181,343                    |       | 158,207                    |       |
|                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Commitments and contingencies (note 10)                                                                                                                                                                                                                                                                 |       |                       |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                         |       | $                          | 279,986    |                       | $          | 240,789 |   |

 

See accompanying notes to consolidated financialstatements

 

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Table of Contents

 

**Citi Trends, Inc.**

**Consolidated Statements of Income**

**Years Ended January 30,2010, January 31, 2009, and February 2, 2008**

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

 
| ** **                                     | ** ** | **Fiscal 2009** | ** ** | **Fiscal 2008** | ** ** | **Fiscal 2007** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| Net  sales                                     |       | $                    | 551,869    |                 | $          | 488,202              |       | $ | 437,515 |   |
| Cost  of sales                                 |       | 338,898              |       | 301,867              |       | 278,783              |       |
| Gross  profit                                  |       | 212,971              |       | 186,335              |       | 158,732              |       |
| Selling,  general and administrative expenses  |       | 165,166              |       | 147,009              |       | 127,470              |       |
| Depreciation  and amortization                 |       | 18,431               |       | 16,261               |       | 12,583               |       |
| Income  from operations                        |       | 29,374               |       | 23,065               |       | 18,679               |       |
| Interest  income                               |       | 404                  |       | 2,495                |       | 2,383                |       |
| Interest  expense                              |       | (92                  | )          | (307                 | )          | (469                 | )          |
| Income  before income tax expense              |       | 29,686               |       | 25,253               |       | 20,593               |       |
| Income  tax expense                            |       | 9,969                |       | 7,870                |       | 6,379                |       |
| Net  income                                    |       | $                    | 19,717     |                 | $          | 17,383               |       | $ | 14,214 |   |
|                                           |       |                 |       |                 |       |                 |       |
| Basic  net income per common share             |       | $                    | 1.36       |                 | $          | 1.21                 |       | $ | 1.02 |   |
| Diluted  net income per common share           |       | $                    | 1.36       |                 | $          | 1.20                 |       | $ | 1.00 |   |
|                                           |       |                 |       |                 |       |                 |       |
| Net  income attributable to common shares      |       |                 |       |                 |       |                 |       |
| Basic                                          |       | $                    | 19,540     |                 | $          | 17,162               |       | $ | 14,160 |   |
| Diluted                                        |       | $                    | 19,541     |                 | $          | 17,164               |       | $ | 14,162 |   |
|                                           |       |                 |       |                 |       |                 |       |
| Weighted  average number of shares outstanding |       |                 |       |                 |       |                 |       |
| Basic                                          |       | 14,364               |       | 14,131               |       | 13,946               |       |
| Diluted                                        |       | 14,396               |       | 14,269               |       | 14,223               |       |

 

See accompanying notes to consolidated financialstatements

 

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Table of Contents

 

**Citi Trends, Inc.**

**Consolidated Statements of Cash Flows**

**Years Ended January 30,2010, January 31, 2009, and February 2, 2008**

**(inthousands)**

 
| ** **                                                                               | ** ** | **Fiscal 2009** | ** ** | **Fiscal 2008** | ** ** | **Fiscal 2007** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| Operating  activities:                                                                   |       |                 |       |                 |       |                 |       |
| Net  income                                                                              |       | $                    | 19,717     |                 | $          | 17,383               |       | $ | 14,214 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:       |       |                 |       |                 |       |                 |       |
| Depreciation  and amortization                                                           |       | 18,431               |       | 16,261               |       | 12,583               |       |
| Deferred  income taxes                                                                   |       | (1,079               | )          | (333                 | )          | (1,401               | )          |
| Loss  on disposal of property and equipment                                              |       | 260                  |       | 110                  |       | 59                   |       |
| Noncash  stock-based compensation expense                                                |       | 2,495                |       | 2,024                |       | 1,496                |       |
| Excess  tax benefits from stock-based payment arrangements                               |       | (570                 | )          | (1,218               | )          | (3,516               | )          |
| Changes  in assets and liabilities:                                                      |       |                 |       |                 |       |                 |       |
| Inventory                                                                                |       | (14,615              | )          | (3,839               | )          | (9,060               | )          |
| Prepaid  and other current assets                                                        |       | 216                  |       | (4,072               | )          | (1,078               | )          |
| Other  assets                                                                            |       | (112                 | )          | (76                  | )          | (51                  | )          |
| Accounts  payable                                                                        |       | 10,411               |       | 8,729                |       | (3,328               | )          |
| Accrued  expenses and other long-term liabilities                                        |       | 2,644                |       | 1,658                |       | 3,813                |       |
| Accrued  compensation                                                                    |       | 1,986                |       | 2,289                |       | (969                 | )          |
| Income  tax payable                                                                      |       | 2,912                |       | 745                  |       | 3,820                |       |
| Layaway  deposits                                                                        |       | 81                   |       | (71                  | )          | 59                   |       |
| Net  cash provided by operating activities                                               |       | 42,777               |       | 39,590               |       | 16,641               |       |
|                                                                                     |       |                 |       |                 |       |                 |       |
| Investing  activities:                                                                   |       |                 |       |                 |       |                 |       |
| Purchases  of investment securities                                                      |       | —               |       | (4,000               | )          | (33,989              | )          |
| Sales/redemptions  of investment securities                                              |       | 10,800               |       | 15,675               |       | 43,780               |       |
| Purchases  of property and equipment                                                     |       | (23,621              | )          | (23,025              | )          | (30,095              | )          |
| Net  cash used in investing activities                                                   |       | (12,821              | )          | (11,350              | )          | (20,304              | )          |
|                                                                                     |       |                 |       |                 |       |                 |       |
| Financing  activities:                                                                   |       |                 |       |                 |       |                 |       |
| Excess  tax benefits from stock-based payment arrangements                               |       | 570                  |       | 1,218                |       | 3,516                |       |
| Repayments  on long-term debt and capital lease obligations                              |       | (1,403               | )          | (1,580               | )          | (1,768               | )          |
| Cash  used to settle equity instruments granted under stock-based payment  arrangements  |       | (489                 | )          | (1,040               | )          | —               |       |
| Proceeds  from the exercise of stock options                                             |       | 843                  |       | 475                  |       | 411                  |       |
| Net  cash (used in) provided by financing activities                                     |       | (479                 | )          | (927                 | )          | 2,159                |       |
| Net  increase (decrease) in cash and cash equivalents                                    |       | 29,477               |       | 27,313               |       | (1,504               | )          |
|                                                                                     |       |                 |       |                 |       |                 |       |
| Cash  and cash equivalents:                                                              |       |                 |       |                 |       |                 |       |
| Beginning  of period                                                                     |       | 33,516               |       | 6,203                |       | 7,707                |       |
| End  of period                                                                           |       | $                    | 62,993     |                 | $          | 33,516               |       | $ | 6,203 |   |
|                                                                                     |       |                 |       |                 |       |                 |       |
| Supplemental  disclosures of cash flow information:                                      |       |                 |       |                 |       |                 |       |
| Cash  paid for interest                                                                  |       | $                    | 72         |                 | $          | 285                  |       | $ | 446 |   |
| Cash  paid for income taxes                                                              |       | $                    | 8,136      |                 | $          | 7,458                |       | $ | 3,961 |   |
| Supplemental  disclosures of noncash financing and investing activities:                 |       |                 |       |                 |       |                 |       |
| Paid  in capital for the exercise of stock options satisfied by the surrender of  shares |       | $                    | —     |                 | $          | 43                   |       | $ | 45 |   |
| Cumulative  effect of adopting new accounting pronouncement for uncertain tax positions  |       | $                    | —     |                 | $          | —               |       | $ | 301 |   |

 

See accompanying notes toconsolidated financial statements

 

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Table ofContents

 

**Citi Trends, Inc.**

**Consolidated Statements of Stockholders’ Equity**

**Years Ended January 30, 2010, January 31, 2009, andFebruary 2, 2008**

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

 
| ** **                                                                              | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**  | ** ** | **Earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances—February 3,  2007                                                    |       | 13,972,437            |       | $                | 140        |         | $          | 62,855                  |       | $          | 55,379     |   | 165,750 |   | $ | (165 | ) | $ | 118,209 |   |
| Cumulative effect of  adopting new accounting pronouncement for uncertain tax positions |       |                  |       |             |       |         |       | 301                     |       |       |       |   |   | 301 |   |
| Exercise of stock  options                                                              |       | 228,563               |       | 2                |       | 454          |       |                    |       |       |       |   |   | 456 |   |
| Tax benefit of stock  options exercised                                                 |       |                  |       |             |       | 3,516        |       |                    |       |       |       |   |   | 3,516 |   |
| Issuance of nonvested  shares to employees and directors under incentive plan           |       | 69,866                |       |             |       |         |       |                    |       |       |       |   |   | — |   |
| Forfeiture of nonvested  shares by employees and directors                              |       | (5,395                | )          |             |       |         |       |                    |       |       |       |   |   | — |   |
| Stock-based compensation  expense                                                       |       |                  |       |             |       | 1,496        |       |                    |       |       |       |   |   | 1,496 |   |
| Net share settlement of  options                                                        |       |                  |       |             |       | (45          | )          |                    |       |       |       |   |   | (45 | ) |
| Net income                                                                              |       |                  |       |             |       |         |       | 14,214                  |       |       |       |   |   | 14,214 |   |
| Balances—February 2,  2008                                                    |       | 14,265,471            |       | 142              |       | 68,276       |       | 69,894                  |       | 165,750    |       | (165 | ) | 138,147 |   |
| Exercise of stock  options                                                              |       | 246,823               |       | 3                |       | 515          |       |                    |       |       |       |   |   | 518 |   |
| Tax benefit of stock  options exercised                                                 |       |                  |       |             |       | 1,218        |       |                    |       |       |       |   |   | 1,218 |   |
| Issuance of nonvested  shares to employees and directors under incentive plan           |       | 212,751               |       |             |       |         |       |                    |       |       |       |   |   | — |   |
| Forfeiture of nonvested  shares by employees and directors                              |       | (20,929               | )          |             |       |         |       |                    |       |       |       |   |   | — |   |
| Stock-based compensation  expense                                                       |       |                  |       |             |       | 2,024        |       |                    |       |       |       |   |   | 2,024 |   |
| Net share settlement of  options                                                        |       |                  |       |             |       | (1,003       | )          |                    |       |       |       |   |   | (1,003 | ) |
| Net share settlement of  nonvested shares                                               |       | (5,264                | )          |             |       | (80          | )          |                    |       |       |       |   |   | (80 | ) |
| Net income                                                                              |       |                  |       |             |       |         |       | 17,383                  |       |       |       |   |   | 17,383 |   |
| Balances—January 31,  2009                                                    |       | 14,698,852            |       | 145              |       | 70,950       |       | 87,277                  |       | 165,750    |       | (165 | ) | 158,207 |   |
| Exercise of stock  options                                                              |       | 79,197                |       | 1                |       | 842          |       |                    |       |       |       |   |   | 843 |   |
| Tax benefit of stock  options exercised                                                 |       |                  |       |             |       | 570          |       |                    |       |       |       |   |   | 570 |   |
| Issuance of nonvested  shares to employees and directors under incentive plan           |       | 159,998               |       |             |       |         |       |                    |       |       |       |   |   | — |   |
| Forfeiture of nonvested  shares by employees and directors                              |       | (18,274               | )          |             |       |         |       |                    |       |       |       |   |   | — |   |
| Stock-based compensation  expense                                                       |       |                  |       |             |       | 2,495        |       |                    |       |       |       |   |   | 2,495 |   |
| Net share settlement of  nonvested shares                                               |       | (20,196               | )          |             |       | (489         | )          |                    |       |       |       |   |   | (489 | ) |
| Net income                                                                              |       |                  |       |             |       |         |       | 19,717                  |       |       |       |   |   | 19,717 |   |
| Balances—January 30,  2010                                                    |       | 14,899,577            |       | $                | 146        |         | $          | 74,368                  |       | $          | 106,994    |   | 165,750 |   | $ | (165 | ) | $ | 181,343 |   |

 

See accompanying notes to consolidated financialstatements

 

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Table of Contents

 

**CitiTrends, Inc.**

**Notesto Consolidated Financial Statements**

**January 30,2010, January 31, 2009 and February 2, 2008**

 

**(1)     Organization and Business**

 

Citi Trends, Inc. and its subsidiary (the “Company”)operate as a rapidly growing, value-priced retailer of urban fashion appareland accessories for the entire family. As of January 30, 2010, the Companyoperated 403 stores in 24 states.

 

**(2)     Summary of Significant Accounting Policies**

 

*(a)  Principles ofConsolidation*

 

The consolidated financialstatements include the accounts of the Company and its wholly owned subsidiary.All intercompany transactions and balances have been eliminated inconsolidation.

 

*(b)  Fiscal Year*

 

The Company’s fiscal year ends on the Saturday closestto January 31 of each year. The years ended January 30, 2010, January 31,2009, and February 2, 2008 are referred to as fiscal 2009, fiscal 2008 andfiscal 2007, respectively, in the accompanying consolidated financialstatements. Each of these three fiscal years is comprised of 52 weeks.

 

*(c)  Cash and Cash Equivalents*

 

For purposes of the consolidated balance sheets andconsolidated statements of cash flows, the Company considers all highly liquidinvestments with maturities at date of purchase of three months or less to becash equivalents.

 

*(d)   InvestmentSecurities*

 

The Company’s investment securities are carried atfair value and consist of investments in municipal auction rate securities (“ARS”)issued by student loan funding organizations. During the fourth quarter offiscal 2008, the Company reclassified the ARS from available-for-sale totrading securities.  Unrealized gains andlosses, net of deferred income taxes (benefits), on investments the Companydesignates as available-for-sale are excluded from earnings and are credited orcharged directly to other comprehensive income, a separate component ofstockholders’ equity. If any unrealized losses are deemed other than temporary,such unrealized losses are recognized as realized losses. Investments that theCompany designates as trading securities are reported at fair value, withunrealized gains or losses resulting from changes in fair value recognized inthe consolidated statements of income. See Note 4 for further detailed discussion.

 

*(e)  Inventory*

 

Inventory is stated at the lower of cost (first-in,first-out basis) or market as determined by the retail inventory method forstore inventory and the average cost method for distribution center inventory.Under the retail inventory method, the cost value of inventory and grossmargins are determined by calculating a cost-to-retail ratio and applying it tothe retail value of inventory. Merchandise markdowns are reflected in theinventory valuation when the retail price of an item is lowered in the stores.Inventory is recorded net of an allowance for shrinkage based on the mostrecent physical inventory counts.

 

*(f)   Property andEquipment, net*

 

Property and equipment, net are stated at cost lessaccumulated depreciation and amortization. Equipment under capital leases isstated at the present value of the required minimum lease payments.Depreciation and amortization are computed using the straight-line method overthe lesser of the estimated useful lives (primarily three to five years forcomputer equipment and furniture, fixtures and equipment, five years forleasehold improvements, seven years for major purchased software systems, andfifteen to twenty years for buildings and building improvements) of the relatedassets or the relevant lease term.

 

*(g)    Goodwill*

 

Goodwill represents the excess of the purchase priceover the fair value of assets acquired.  Goodwill acquired in a purchasebusiness combination and determined to have an indefinite useful life is notamortized, but instead tested for impairment at least annually. The Companyperformed this analysis at the end of fiscal 2009 and fiscal 2008 and noimpairment was indicated for either year.

 

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*(h)  Impairment of Long-LivedAssets*

 

If facts and circumstances indicate that a long-livedasset, including property and equipment, may be impaired, the carrying value isreviewed. If this review indicates that the carrying value of the asset willnot be recovered as determined based on projected undiscounted cash flowsrelated to the asset over its remaining life, the carrying value of the assetis reduced to its estimated fair value. Impairment losses charged todepreciation expense totaled approximately $0.1 million in fiscal 2009. Therewere no impairment losses recognized in fiscal 2008 or 2007. Impairment lossesin the future are dependent on a number of factors such as site selection andgeneral economic trends, and thus could be significantly different fromhistorical results. To the extent the Company’s estimates for net sales, grossprofit and store expenses are not realized, future assessments ofrecoverability could result in impairment charges.

 

*(i)  Insurance Liabilities*

 

The Company is largely self-insured for workers’compensation costs and employee medical claims. Self-insurance liabilities are based on the total estimated costs ofclaims filed and estimates of claims incurred but not reported, less amountspaid against such claims.  Current andhistorical claims data, together with information from actuarial studies, areused in developing the estimates.  Theinsurance liabilities that are recorded are primarily influenced by thefrequency and severity of claims and the Company’s growth.  If the underlying facts and circumstancesrelated to the claims change, then the Company may be required to record moreor less expense which could be material in relation to results of operations.

 

*(j)  Stock-Based Compensation*

 

The Company recognizes compensation expense associatedwith all nonvested restricted stock and stock options based on an estimate ofthe grant-date fair value of each equity award. Grants of nonvested restrictedstock are valued based on the stock price on the grant date, while the fairvalues of options issued are estimated at each grant date using theBlack-Scholes Merton option pricing model. See Note 9 for additionalinformation on the Company’s stock-based compensation plans.

 

*(k)   Revenue Recognition*

 

Revenue from retail sales net of sales taxes isrecognized at the time the customer takes possession of and pays formerchandise, less an allowance for returns. The Company allows customers toreturn merchandise for up to thirty days after the date of sale and the Companyreduces revenues for each fiscal year using a combination of actual andestimated return information for the returns in the thirty days after the yearends. The provision for returns was $224,000 and $258,000 as of January 30,2010 and January 31, 2009, respectively. Revenue from layaway sales isrecognized when the customer has paid for and received the merchandise. If themerchandise is not fully paid for within sixty days, the customer is given astore credit for merchandise payments made, less a re-stocking fee and alayaway service charge. Layaway service charges, which are non-refundable, arerecognized in revenue when collected. Gift cards were introduced in 45 storesin late fiscal 2009, with a rollout to all other stores expected to occur in2010. Proceeds from the sale of gift cards are deferred until the customers usethe cards to purchase merchandise.  Noamounts have yet been amortized into income for gift cards not expected to beredeemed (“breakage”) due to the lack of time that has lapsed since cards beganbeing sold under the recently implemented program. All sales are from cash,check or major credit card company transactions. The Company does not offercompany-sponsored customer credit accounts.

 

*(l)    Cost of Sales*

 

Cost of sales includes the cost of inventory soldduring the period and transportation costs, including inbound freight andfreight from the distribution centers to the stores, net of discounts andallowances. Distribution center costs, store occupancy expenses and advertisingexpenses are not considered components of cost of sales and are included aspart of selling, general and administrative expenses.

 

*(m)  Earnings per Share*

 

Basic earnings per common share amounts are calculatedusing the weighted average number of common shares outstanding for the period.Diluted earnings per common share amounts are calculated using the weightedaverage number of common shares outstanding plus the additional dilution forall potentially dilutive securities, such as nonvested restricted stock and stockoptions.

 

The following table provides a reconciliation of thenumber of average common shares outstanding used to calculate basic earningsper share to the number of common shares and common stock equivalentsoutstanding used in calculating diluted earnings per share for fiscal 2009,2008 and 2007:

 

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| ** **                                                                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Average number of  common shares outstanding                              |       | 14,363,894 |       | 14,131,077 |       | 13,946,342 |       |
| Incremental shares from  assumed exercises of stock options               |       | 31,711     |       | 137,711    |       | 276,887    |       |
| Average number of  common shares and common stock equivalents outstanding |       | 14,395,605 |       | 14,268,788 |       | 14,223,229 |       |

 

The dilutive effect of stock-based compensationarrangements are accounted for using the treasury stock method.  Thismethod assumes that the proceeds the Company receives from the exercise ofstock options are used to repurchase common shares in the market.  TheCompany includes as assumed proceeds the amount of compensation cost attributedto future services and not yet recognized, and the amount of tax benefits, ifany, that would be credited to additional paid-in capital assuming exercise ofoutstanding options and vesting of nonvested restricted stock.  For fiscal2009, 2008 and 2007, respectively, there were 65,000, 95,000 and 61,000 optionsoutstanding to purchase shares of common stock excluded from the calculation ofdiluted earnings per share because of antidilution.  There were no shares of nonvested restrictedstock included in the calculation of diluted earnings per share for fiscal2009, 2008 and 2007, because of antidilution.

 

On February 1, 2009, the Company changed itsmethod of computing earnings per share as required by the newly issuedFinancial Accounting Standards Board (“FASB”) Staff Position Emerging IssuesTask Force (“EITF”) 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions are ParticipatingSecurities* (“FSP EITF 03-6-1”). This EITF was subsequently codified under the FASB Accounting StandardsCodification, as issued in June 2009, into FASB ASC Topic 260-10, *Earnings Per Share. *Thispronouncement addresses determinations as to whether instruments granted inshare-based payment transactions are participating securities prior to vestingand, therefore, need to be included in the earnings allocation in computingearnings per share under the required two-class method.  Nonvested restricted stock awards granted toemployees and non-employee directors contained nonforfeitable dividend rightsprior to October 31, 2009, when amendments agreed to between the Companyand its associates became effective. Such amendments resulted in the dividend rights being forfeitable in theevent an associate leaves the employ of the Company prior to the vesting of therestricted stock awards.  Accordingly,such awards were considered participating securities through the third quarterof fiscal 2009; however, they are not treated as participating securities afterOctober 31, 2009.  We have preparedour current and prior period earnings per share computations to exclude netincome allocated to nonvested share awards containing nonforfeitable dividendrights through October 31, 2009. The effect of retrospectively adjustingnet income per share for fiscal 2008 was to reduce previously reported basicnet income per common share from $1.23 to $1.21 and to reduce diluted netincome per common share from $1.22 to $1.20. There was no change in the previouslyreported net income per common share for fiscal 2007.

 

*(n)  Advertising*

 

The Company expenses advertising as incurred.Advertising expense for fiscal 2009, 2008 and 2007 was $2.6 million, $2.5million and $2.5 million, respectively.

 

*(o) Operating Leases*

 

The Company leases all of its store properties andaccounts for the leases as operating leases. Many lease agreements containtenant improvement allowances, rent holidays, rent escalation clauses and/orcontingent rent provisions. For purposes of recognizing incentives and minimumrent expense on a straight-line basis over the terms of the leases, the Companyuses the date of initial possession to begin amortization, which is generallywhen the Company enters the space and begins to make improvements inpreparation of intended use.

 

For scheduled rent escalation clauses during the leaseterms or for rental payments commencing “rent holidays” at a date other thanthe date of initial occupancy, the Company records minimum rent expense on astraight-line basis over the terms of the leases. Tenant improvement allowancesare included in accrued expenses (current portion) and other long-termliabilities (noncurrent portion) and are amortized over the lease term. Changesin the balances of tenant improvement allowances are included as a component ofoperating activities in the consolidated statements of cash flows.

 

Certain leases provide for contingent rents that arenot measurable at inception. These contingent rents are primarily based on apercentage of net sales that are in excess of a predetermined level. Theseamounts are excluded from minimum rent and are included in the determination oftotal rent expense when it is probable that the expense has been incurred andthe amount is reasonably estimable.

 

The Company is required to recognize a liability forthe fair value of a conditional asset retirement obligation when incurred ifthe liability’s fair value can be reasonably estimated. As of January 30,2010 and January 31, 2009, the Company included a liability of $550,000and $482,000, respectively, in other long-term liabilities, representingestimated expenses that would be incurred upon the termination of the Company’soperating leases*.*

 

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*(p)  Store Opening and ClosingCosts*

 

New and relocated store opening period costs arecharged directly to expense when incurred. When the Company decides to close orrelocate a store, the Company records an expense for the present value ofexpected future rent payments, net of sublease income, if any, in the periodthat a store closes or relocates. All store opening and closing costs areincluded in selling, general and administrative expenses on the consolidatedstatements of income.

 

*(q)  Income Taxes*

 

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

*(r)  Use of Estimates*

 

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.

 

*(s)   Business ReportingSegments*

 

The Company is a value-priced retailer of urbanfashion apparel and accessories for the entire family. The Company’s executiveofficers review performance and the allocation of resources on a store by storebasis. Because the Company operates one business activity and the level ofreview by the Company’s executive officers is on a store by store basis, theCompany has determined that its operations are within one reportable segment.Accordingly, financial information on industry segments is not applicable. Allsales and assets are located within the United States.

 

*(t)   Recent AccountingPronouncements*

 

In June 2009, theFASB Accounting Standards Codification (the “Codification”) was approved as thesingle source of authoritative nongovernmental generally accepted accountingprinciples (“GAAP”). All existing accounting standard documents, such as FASB,American Institute of Certified Public Accountants, Emerging Issues Task Forceand other related literature, excluding guidance from the Securities andExchange Commission (“SEC”), have been superseded by the Codification. Allother non-grandfathered, non-SEC accounting literature not included in theCodification has become nonauthoritative. The Codification did not change GAAP,but instead introduced a new structure that combines all authoritativestandards into a comprehensive, topically organized online database. TheCodification is effective for interim or annual periods ending after September 15,2009 and impacts the Company’s consolidated financial statements as allreferences to authoritative accounting literature are referenced in accordancewith the Codification. There have been no changes to the content of the Company’sconsolidated financial statements as a result of implementing the Codificationduring fiscal 2009.

 

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

 

As discussed above in this Note 2, the Company adoptedFSP EITF 03-6-1 (now part of FASB ASC Topic 260, *Earnings PerShare*) on February 1, 2009. Implementation of FSP EITF 03-6-1 has changed the way the Companycalculates earnings per share and all prior period earnings per shareinformation has been adjusted retrospectively.

 

The Company adopted the methods of fair value asdescribed in SFAS No. 157, *Fair ValueMeasurements,*for financialassets and liabilities on February 3, 2008 and for non-financial assetsand liabilities on February 1, 2009 and has incorporated the related staffpositions and interpretations, including FSP SFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly,*which was issued in April 2009*.* As of

 

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June 2009, this guidance became part of FASB ASCTopic 820, *Fair Value Measurements and Disclosures,*whichdefines fair value, establishes a framework for measuring fair value, andrequires additional disclosures about fair value measurements.  The adoption of the standard did not have amaterial impact on the Company’s consolidated financial statements.

 

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 provideinterim disclosures about the fair value of all financial instruments withinthe scope of SFAS No. 107 and to include disclosures related to themethods and significant 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 consolidatedfinancial statements.  As of June 2009,this guidance became part of FASB ASC Topic 825, *FinancialInstruments.*

 

**(3)     Property and Equipment, net**

 

The components ofproperty and equipment as of January 30, 2010 and January 31, 2009are as follows (in thousands):

 
| ** **                                 | ** ** | **January 30,** | ** ** | **January 31,** | ** ** |
|--------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Land                                       |       | $                    | 855        |                 | $          | 858 |   |
| Buildings                                  |       | 15,548               |       | 15,295               |       |
| Leashold  improvements                     |       | 47,204               |       | 37,681               |       |
| Furniture,  fixtures and equipment         |       | 57,160               |       | 47,525               |       |
| Computer  equipment                        |       | 17,100               |       | 15,433               |       |
| Construction  in progress                  |       | 2,171                |       | 194                  |       |
|                                       |       | 140,038              |       | 116,986              |       |
| Accumulated  depreciation and amortization |       | (76,247              | )          | (58,125              | )          |
|                                       |       | $                    | 63,791     |                 | $          | 58,861 |   |

 

Technology equipment held under capital leases becamefully amortized in fiscal 2009 upon termination of the related lease agreements.As of January 31, 2009, technology equipment held under capital leases andrelated accumulated depreciation was $8.4 million and $7.1 million,respectively.

 

**(4)     Fair Value Measurements**

 

Fair value is defined as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the principal or most advantageousmarket at the measurement date. Fair value is established according to ahierarchy that prioritizes observable and unobservable inputs used to measurefair value into three broad levels, which are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at themeasurement date for assets or liabilities. The fair value hierarchy gives thehighest priority to Level 1 inputs.

 

Level 2:  Observable prices that are based on inputsnot quoted on active markets, but corroborated by market data.

 

Level 3:  Unobservable inputs are used when little orno market data is available. Level 3 inputs are given the lowest priority inthe fair value hierarchy.

 

As of January 30, 2010, the Company had $29.7million ($33.0 million at par value) of investments in municipal auction ratesecurities (“ARS”) issued by student loan funding organizations. The ARS areclassified as trading securities in current assets as of January 30, 2010and are reflected at estimated fair value. These securities are high-grade (atleast AA-rated with one or more rating agencies) and approximately 76% areeither guaranteed by the Department of Education under the Federal FamilyEducation Loan Program (37%) or backed by insurance companies, AMBAC AssuranceCorporation (32%) or MBIA Insurance Corporation (7%). Historically, liquidityfor investors in ARS was provided via an auction process that reset theinterest rate every 35 days, allowing investors to either roll over theirinvestments or sell them at par value. Beginning in February 2008, therewas insufficient demand for these types of investments during the auctions and,as a result, these securities became illiquid. Although the auctions for thesecurities have failed, $23.0 million of the Company’s ARS have been redeemedat par value by certain issuers and the Company’s investment banks since February 2008.  In addition, the Company has not experiencedany defaults and continues to earn and receive interest on all of theinvestments still owned by the Company.

 

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There was insufficient observable market informationavailable as of January 30, 2010 to determine the fair value of theCompany’s ARS. Accordingly, the Company estimated Level 3 fair values for thesesecurities based on assumptions that market participants would use in theirestimates of fair value. These assumptions included, among other things,discounted cash flow projections, the timing of expected future successfulauctions or redemptions, collateralization of the underlying securities and thecreditworthiness of the issuers and insurance companies.  Based on this Level 3 valuation, the ARSinvestments were valued at $29.7 million as of January 30, 2010, representinga $3.3 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 using a discounted cash flow approach that includes estimates ofinterest rates and the credit risk associated with UBS.  The Right was valued at $3.3 million as of January 30,2010. This valuation was based on unobservable inputs, therefore, represented aLevel 3 fair value.  The Company expectsthat subsequent changes in the value of the Right will largely offset thesubsequent fair value movements of the ARS, subject to the continued expectedperformance by UBS of its obligations under the Right. Prior to the acceptanceof the Right, the ARS were classified as available-for-sale securities.  Upon acceptance of the Right to sell the ARS,the ARS were reclassified to trading securities.  As of January 30, 2010, the ARS and theRight were classified as current assets due to the expectation that liquiditywill occur during the next twelve months through the Company’s exercise of theRight. As of January 31, 2009, the ARS and the Right were classified asnoncurrent assets.

 

The following table provides a summary of changes infair value of the Company’s investment securities for the years ended January 30,2010 and January 31, 2009 (in thousands):

** **
| ** **                                                       | ** ** | ** **  | ** ** | **Level 3**                    | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **Level 2** | ** ** | **Put Option  Related to ARS** | ** ** | **Auction Rate  Securities** | ** ** |
| Balance  as of February 2, 2008                             |       | $           | 56,165     |                           | $          | — |   | $ | — |   |
| Transfer  from Level 2 to Level 3                                |       | (56,665     | )          | —                         |       | 56,665 |   |
| Sales/redemptions  of investment securities                      |       | (3,500      | )          | —                         |       | (12,175 | ) |
| Purchases  of investment securities                              |       | 4,000       |       | —                         |       | — |   |
| Unrealized  losses included in earnings                          |       | —      |       | —                         |       | (4,901 | ) |
| Recognition  of put option in earnings                           |       | —      |       | 4,901                          |       | — |   |
| Reclassification  of interest receivable to other current assets |       | —      |       | —                         |       | (665 | ) |
| Balance  as of January 31, 2009                             |       | —      |       | 4,901                          |       | 38,924 |   |
| Unrealized  (losses) gains included in earnings                  |       | —      |       | (347                           | )          | 347 |   |
| Sales/redemptions  of investment securities                      |       | —      |       | (1,247                         | )          | (9,553 | ) |
| Balance  as of January 30, 2010                             |       | $           | —     |                           | $          | 3,307 |   | $ | 29,718 |   |

 

**(5)     Revolving Lines of Credit**

 

On March 25, 2009, acredit facility with Bank of America was amended to extend the expiration dateto March 24, 2010 and to lower the commitment from $35 million to $20million, reflecting the Company’s cash position and the fact that there hadbeen no borrowings under the facility. In addition, changes were made to the pricing of the facility, includingan increase in the unused commitment fee from 0.15% to 0.25% and an amendmentof the interest rates.Loans under the facility bear interest at either (a) a rate equal to thehighest of (i) the Federal Funds Rate plus 0.50%, (ii) LIBOR plus1.0% 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 marginis dependent on the Company’s consolidated leverage ratio and ranges from 0.75%to 1.25% for loans bearing interest at the rate described under (a) aboveand from 1.75% to 2.25% for loans bearing interest at the rate described under (b) above.Under the terms of the credit facility, the payment of cash dividends isprohibited, and there is one financial covenant (consolidated leverage ratio).On March 22, 2010, the facility was amended to extend the expiration dateto March 22, 2012. The Company has had no borrowings under the facility.

 

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**(6)     Capital Lease Obligations**

 

The Company’s capital lease obligations matured andwere liquidated in 2009. As of January 31, 2009, capital lease obligationsconsisted of the following (in thousands):

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **2009**             | ** ** |
| Capital lease  obligations issued to finance purchase of technology equipment; payable in  monthly installments averaging approximately $124 in 2009, with a maturity  date of December 2009; interest rate of 11.3%; secured by technology equipment |       | $                    | 1,403      |   |
| Less current portion of  capital lease obligations                                                                                                                                                                                                         |       | 1,403                |       |
| Noncurrent portion of  capital lease obligations                                                                                                                                                                                                           |       | $                    | —     |   |

 

**(7)     Income Taxes**

 

Income tax expense for fiscal 2009, 2008 and 2007consists of the following (in thousands):

 
| ** **                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                  |       |     |       |     |       |     |       |
| Federal                   |       | $        | 9,474      |     | $          | 7,258    |       | $ | 6,667 |   |
| State                     |       | 1,574    |       | 945      |       | 1,113    |       |
| Total current             |       | 11,048   |       | 8,203    |       | 7,780    |       |
| Deferred:                 |       |     |       |     |       |     |       |
| Federal                   |       | (676     | )          | (190     | )          | (1,080   | )          |
| State                     |       | (403     | )          | (143     | )          | (321     | )          |
| Total deferred            |       | (1,079   | )          | (333     | )          | (1,401   | )          |
| Total income tax  expense |       | $        | 9,969      |     | $          | 7,870    |       | $ | 6,379 |   |

 

Income tax expense computed using the federalstatutory rate is reconciled to the reported income tax expense as follows forfiscal 2009, 2008 and 2007 (in thousands):

 
| ** **                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory rate applied  to income before income taxes |       | $        | 10,390     |     | $          | 8,839    |       | $ | 7,208 |   |
| State income taxes, net  of federal benefit           |       | 1,140    |       | 960      |       | 910      |       |
| State tax credits                                     |       | (379     | )          | (439     | )          | (395     | )          |
| Secondary offering  expense                           |       | —   |       | —   |       | 211      |       |
| Tax exempt interest                                   |       | (128     | )          | (811     | )          | (834     | )          |
| General business  credits                             |       | (1,028   | )          | (786     | )          | (697     | )          |
| Other                                                 |       | (26      | )          | 107      |       | (24      | )          |
| Income tax expense                                    |       | $        | 9,969      |     | $          | 7,870    |       | $ | 6,379 |   |

 

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The components of deferred tax assets and deferred taxliabilities as of January 30, 2010 and January 31, 2009 are asfollows (in thousands):

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                   |       |     |       |     |       |
| Deferred rent  amortization            |       | $        | 1,706      |     | $          | 1,526 |   |
| Inventory  capitalization              |       | 1,991    |       | 1,807    |       |
| Book and tax  depreciation differences |       | 911      |       | 1,412    |       |
| Vacation liability                     |       | 592      |       | 459      |       |
| State tax credits                      |       | 762      |       | 591      |       |
| Stock compensation                     |       | 1,412    |       | 980      |       |
| Insurance liabilities                  |       | 320      |       | —   |       |
| Other                                  |       | 273      |       | 100      |       |
| Total deferred tax  assets             |       | 7,967    |       | 6,875    |       |
|                                   |       |     |       |     |       |
| Deferred tax  liabilities:             |       |     |       |     |       |
| Prepaid expenses                       |       | (595     | )          | (622     | )          |
| Goodwill                               |       | (366     | )          | (326     | )          |
| Total deferred tax  liabilities        |       | (961     | )          | (948     | )          |
| Net deferred tax asset                 |       | $        | 7,006      |     | $          | 5,927 |   |

 

In 2006, the FASB issued accounting guidance that clarifiedthe accounting and disclosure for uncertain tax positions.  This guidance requires that each tax positionbe reviewed and assessed with recognition and measurement of the tax benefitbased on a “more-likely-than-not” standard with respect to the ultimateoutcome, regardless of whether this assessment is favorable orunfavorable.  The Company performed a review and assessment of all taxpositions and during fiscal year 2007 recorded a net benefit to retainedearnings and a decrease to current liabilities of $301,000 in accordance withthis guidance.  The Company files incometax returns in U.S. federal and state jurisdictions where it does business andis subject to examinations by the IRS and other taxing authorities.  As ofJanuary 30, 2010, there were no benefits taken on the Company’s income taxreturns that do not qualify for financial statement recognition.   If a tax position does not meet the minimumstatutory threshold to avoid payment of penalties and interest, a company isrequired to recognize an expense for the amount of the interest and penalty inthe period in which the company claims or expects to claim the position on itstax return.  For financial statement purposes, companies are allowed toelect whether to classify such charges as either income tax expense or anotherexpense classification.  Should such expense be incurred in the future,the Company will classify such interest as a component of interest expense andpenalties as a component of income tax expense.

 

In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. The ultimate realizationof deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment. Based upon the level of historical taxable income andprojections for future taxable income over the periods in which the deferredtax assets are deductible and income tax credits may be utilized, managementbelieves it is more likely than not that the Company will realize the benefitsof these deductible differences.  Income tax credits generated but not yetutilized by the Company may be carried forward for periods ranging from 10 to15 years. As such, a valuation allowance for deferred tax assets was not considerednecessary as of January 30, 2010 or January 31, 2009. The Company has$1,221,000 of tax credit carryforwards for one state, available for use through2023. The Company files income tax returns with the U.S. federal government andvarious state jurisdictions. With a few exceptions, the Company is no longersubject to U.S. federal and state income tax examinations by tax authoritiesfor years prior to fiscal 2006.

 

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**(8)     Other Long-Term Liabilities**

 

The components of other long-term liabilities as of January 30,2010 and January 31, 2009 are as follows (in thousands):

 
| ** **                     | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Deferred  rent                 |       | $                          | 3,528      |                       | $          | 3,012 |   |
| Tenant  improvement allowances |       | 5,600                      |       | 5,153                      |       |
| Other                          |       | 867                        |       | 481                        |       |
|                           |       | $                          | 9,995      |                       | $          | 8,646 |   |

 

**(9)     Stockholders’ Equity**

 

*SecondaryOffering*

 

On June 18, 2007, the Company completed asecondary offering of shares of the Company’s common stock by certain of itsstockholders that was priced at $37.92 per share.  The offering consisted of 2,455,250 shares ofthe Company’s common stock.  All of the shares were sold by stockholdersof the Company and, as a result, the Company did not receive any of theproceeds from the offering.  In connection with the offering, certain ofthe Company’s stockholders exercised options which were then sold in theoffering for which the Company received approximately $50,000.  TheCompany incurred expenses in fiscal 2007 in connection with the secondaryoffering of approximately $600,000.

 

*Stock-BasedCompensation*

 

On March 8, 2005, the Company adopted the 2005Citi Trends, Inc. Long-Term Incentive Plan, (the “Incentive Plan”),which became effective upon the consummation of the Company’s initial publicoffering in May 2005.   The Incentive Plan superseded and replacedthe 1999 Allied Fashion Stock Option Plan (the “1999 Plan”).  The 1999Plan provided for the grant of incentive and nonqualified options to keyemployees and directors. The Board of Directors determined the exercise priceof the option grants.  The option grants generally vested in equalinstallments over four years from the date of grant and are generallyexercisable up to ten years from the date of grant, which is the contractuallife of the options. The Company authorized up to 1,950,000 shares of commonstock for issuance under the 1999 Plan. In August 2006, the 1999 Plan wasamended to permit the exercise price of stock options to be satisfied throughnet share settlements.

 

The Incentive Plan provides for the grant of incentiveand nonqualified options, nonvested restricted stock and other forms ofstock-based compensation to key employees and directors.  The Board ofDirectors determines the exercise prices of the option grants which aregenerally equal to the closing market price of the Company’s stock on the dateof grant.  Option grants generally vest in equal installments over fouryears from the date of grant for employees and over one to three years fordirectors and are generally exercisable up to ten years from the date ofgrant.  Under the Incentive Plan, the Company may issue up to1,300,000 shares of common stock upon the exercise of stock options and otherequity incentive awards.  In August 2006, the Incentive Plan wasamended to permit the exercise price of stock options to be satisfied throughnet share settlements, and in May 2008, the Incentive Plan was amended topermit the lapsing of restrictions on restricted stock at any time in the eventof a change in control of the Company.

 

Compensation expenseassociated with stock options is based on an estimate of the fair value of eachoption award on the date of grant using the Black-Scholes Merton option pricingmodel, which uses the assumptions noted in the following table. Expectedvolatility is based on estimated future volatility of the Company’s commonstock price. Having completed its initial public offering in May 2005, theCompany has limited historical data regarding the price of its publicly tradedshares.  To estimate future volatility of the Company’s stock price, thestock price volatility of similar entities for which shares have been publiclytraded for a period of seven years or more was measured (seven years is usedbecause the weighted average expected life of the Company’s stock options isbetween six and seven years). The Company uses historical data to estimateforfeitures used in the model. The expected term of options granted is based onthe “simplified method” for “plain vanilla” options.  The simplifiedmethod (available for entities which do not have sufficient historical exercisedata available for making a refined estimate of expected term) assumes a 10year contractual term with vesting at a rate of 25% per year. Accordingly,expected term = ((vesting term + original contractual term)/2). The risk-freeinterest rate for the periods which corresponds with the expected life of theoption is based on the U.S. Treasury yield curve for the vesting period ineffect at the time of grant.  No optionswere granted in fiscal 2009, 2008 or 2007.

 

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A summary of the status of stock options under theCompany’s stock option plans and changes during fiscal 2009 is presented in thetable below:

 
| ** **                                              | ** ** | **2009**    | ** ** |
|---------------------------------------------------------|------------|-------------|------------|
| ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **  | ** ** | **Wtd. Avg.** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                                              | ** ** | ** **  | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                                              | ** ** | **Options** | ** ** | **Price** | ** ** | **Term (Years)** | ** ** | **Value** | ** ** |
|                                                    |       |        |       |   |   |   |   |   |   |
| Outstanding as of  January 31, 2009                |       | 208,850     |       | $ | 19.38 |   | 5.8 |   | $ | 391,632 |   |
| Granted                                                 |       | —      |       | — |   | — |   | — |   |
| Exercised                                               |       | (79,197     | )          | 10.65 |   | 4.4 |   | — |   |
| Net shares settled                                      |       | —      |       | — |   | — |   | — |   |
| Forfeited                                               |       | (5,925      | )          | 32.33 |   | 6.0 |   | — |   |
|                                                    |       |        |       |   |   |   |   |   |   |
| Outstanding as of January 30,  2010                |       | 123,728     |       | $ | 24.35 |   | 4.9 |   | $ | 1,413,944 |   |
|                                                    |       |        |       |   |   |   |   |   |   |
| Vested or expected to  vest as of January 30, 2010 |       | 123,728     |       | $ | 24.35 |   | 4.9 |   | $ | 1,413,944 |   |
|                                                    |       |        |       |   |   |   |   |   |   |
| Exercisable as of  January 30, 2010                |       | 111,990     |       | $ | 22.59 |   | 4.8 |   | $ | 1,413,873 |   |

 

As of January 30, 2010, the range of exerciseprices was $0.38 to $44.03.  As of January 31, 2009, the range ofexercise prices and weighted-average remaining contractual life of outstandingoptions was $0.38 to $44.03 and 5.8 years, respectively.  As of February 2,2008, the range of exercise prices and weighted-average remaining contractuallife of outstanding options was $0.38 to $44.03 and 5.0 years, respectively.

 

Cash received from options exercised totaled $843,000,$475,000 and $411,000 in fiscal 2009, 2008 and 2007, respectively.  Theintrinsic value of options exercised was $1,176,000, $4,578,000 and $8,136,000in fiscal 2009, 2008 and 2007, respectively.

 

Cash flows resulting from tax deductions in excess ofthe cumulative compensation cost recognized for options exercised (“excess taxbenefits”) are classified as financing cash flows. Excess tax benefits realizedfrom the exercise of stock options was approximately $0.6 million, $1.2 millionand $3.5 million in fiscal 2009, 2008 and 2007, respectively.

 

The Company recognized $213,000, $811,000 and $931,000in compensation expense for option grants during fiscal 2009, 2008 and 2007,respectively. As of January 30, 2010, the total compensation cost relatedto stock option awards that will be incurred in future periods amounts to$56,000.  The weighted-average period over which this amount is expectedto be recognized is 4.7 months.  The Company’s stock option plans allowthe Company to issue new shares from shares authorized for issuance orrepurchase shares on the open market to complete employee stock optionexercises.

 

Shares of nonvested restricted stock granted toemployees vest in equal installments over four years from the date ofgrant.  Shares issued to directors vestone year from the date of grant.  TheCompany records compensation expense on a straight line basis over therequisite service period of the stock recipients which is equal to the vestingperiod of the stock.  Total compensationcost is calculated based on the closing market price on the date of grant timesthe number of shares granted.  Using anestimated forfeiture rate equal to 3.3%, the Company expects to recognize$4,166,000 in future compensation expense from the grants of nonvested stockover the requisite service period of up to four years.  During fiscal 2009, 2008 and 2007,compensation expense arising from nonvested stock grants totaled $2,282,000,$1,213,000 and $565,000, respectively.

 

A summary of activity related to nonvested restrictedstock grants during the year ended January 30, 2010 is as follows:

 
| ** **                               | ** ** | **Nonvested  Shares** | ** ** | **Wtd. Avg. Grant  Date Fair Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Outstanding as of  January 31, 2009 |       | 237,310               |       | $                                    | 20.87      |   |
| Granted                                  |       | 159,998               |       | 21.57                                |       |
| Vested                                   |       | (70,003               | )          | 21.43                                |       |
| Forfeited                                |       | (18,274               | )          | 19.74                                |       |
| Outstanding as of  January 30, 2010 |       | 309,031               |       | $                                    | 21.17      |   |

 

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Table of Contents

 

**(10)     Commitments and Contingencies**

 

The Company leases its stores under operating leases,which generally have an initial term of five years with renewal options. Futureminimum rent payments under operating leases having noncancellable lease termsas of January 30, 2010 are as follows (in thousands):

 
| **Fiscal Year:**                | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2010                                 |       | $          | 27,093     |   |
| 2011                                 |       | 24,060     |       |
| 2012                                 |       | 18,768     |       |
| 2013                                 |       | 13,028     |       |
| 2014                                 |       | 6,711      |       |
| Thereafter                           |       | 4,994      |       |
| Total future minimum  lease payments |       | $          | 94,654     |   |

 

Certain operating leases provide for fixed monthlyrents, while others provide for contingent rents computed as a percentage ofnet sales and others provide for a combination of both fixed monthly rents andcontingent rents computed as a percentage of net sales. Rent expense was $28.2million, $23.1 million and $19.3 million for fiscal 2009, 2008 and 2007(including $1.5 million, $1.6 million and $1.9 million of percentage rent),respectively.

 

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

 

**(11)    Valuation and Qualifying Accounts**

 

The following table summarizes the allowance forinventory shrinkage (in thousands):

 
| ** **                               | ** ** | **Allowance for  Inventory  Shrinkage** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| Balance  as of February 3, 2007     |       | $                                       | 2,269      |   |
| Additions  charged to costs and expenses |       | 8,374                                   |       |
| Deductions                               |       | (8,109                                  | )          |
| Balance  as of February 2, 2008     |       | 2,534                                   |       |
| Additions  charged to costs and expenses |       | 7,331                                   |       |
| Deductions                               |       | (7,885                                  | )          |
| Balance  as of January 31, 2009     |       | 1,980                                   |       |
| Additions  charged to costs and expenses |       | 5,849                                   |       |
| Deductions                               |       | (5,562                                  | )          |
| Balance  as of January 30, 2010     |       | $                                       | 2,267      |   |

 

Additions charged to costs and expenses are the resultof estimated inventory shrinkage. Deductions represent actual inventoryshrinkage incurred from physical inventories taken during the fiscal year.

 

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Table ofContents

 

**(12)    Unaudited Quarterly Results of Operations**

 
| ** **                                                                   | ** ** | **Quarter Ended**                                                           | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Jan. 30**                                                                 | ** ** | **Oct. 31** | ** ** | **Aug. 1** | ** ** | **May 2** | ** ** | **Jan. 31** | ** ** | **Nov. 1** | ** ** | **Aug. 2** | ** ** | **May 3** | ** ** |
| ** **                                                                   | ** ** | **2010**                                                                         | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(in thousands, except per share  and share amounts)** | ** ** |
| **Statement  of Income Data:**                                               |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                                    |       | $                                                                                | 169,811    |   | $ | 127,356 |   | $ | 111,605 |   | $ | 143,097 |   | $ | 146,603 |   | $ | 104,948 |   | $ | 115,655 |   | $ | 120,996 |   |
| Cost of sales                                                                |       | 104,258                                                                          |       | 79,720 |   | 69,011 |   | 85,909 |   | 90,695 |   | 66,208 |   | 70,731 |   | 74,233 |   |
|                                                                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                 |       | 65,553                                                                           |       | 47,636 |   | 42,594 |   | 57,188 |   | 55,908 |   | 38,740 |   | 44,924 |   | 46,763 |   |
| Selling, general and  administrative expenses                                |       | 44,050                                                                           |       | 41,989 |   | 38,994 |   | 40,133 |   | 37,409 |   | 36,482 |   | 36,877 |   | 36,241 |   |
| Depreciation and  amortization                                               |       | 4,752                                                                            |       | 4,851 |   | 4,455 |   | 4,373 |   | 4,346 |   | 4,134 |   | 4,078 |   | 3,703 |   |
|                                                                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  operations                                               |       | 16,751                                                                           |       | 796 |   | (855 | ) | 12,682 |   | 14,153 |   | (1,876 | ) | 3,969 |   | 6,819 |   |
| Interest, net                                                                |       | 69                                                                               |       | 68 |   | 77 |   | 98 |   | 229 |   | 696 |   | 482 |   | 781 |   |
| Unrealized gain (loss)  on investment securities                             |       |                                                                             |       | 57 |   | 671 |   | (728 | ) |   |   |   |   |   |   |   |   |
|                                                                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before  income taxes                                           |       | 16,820                                                                           |       | 921 |   | (107 | ) | 12,052 |   | 14,382 |   | (1,180 | ) | 4,451 |   | 7,600 |   |
| Income tax expense  (benefit)                                                |       | 5,569                                                                            |       | 315 |   | (38 | ) | 4,123 |   | 4,326 |   | (493 | ) | 1,605 |   | 2,432 |   |
| Net income (loss)                                                            |       | $                                                                                | 11,251     |   | $ | 606 |   | $ | (69 | ) | $ | 7,929 |   | $ | 10,056 |   | $ | (687 | ) | $ | 2,846 |   | $ | 5,168 |   |
|                                                                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)  attributable to common shares:                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | $                                                                                | 11,251     |   | $ | 593 |   | $ | (69 | ) | $ | 7,780 |   | $ | 9,908 |   | $ | (687 | ) | $ | 2,807 |   | $ | 5,126 |   |
| Diluted                                                                      |       | $                                                                                | 11,251     |   | $ | 593 |   | $ | (69 | ) | $ | 7,780 |   | $ | 9,908 |   | $ | (687 | ) | $ | 2,808 |   | $ | 5,127 |   |
| Net income (loss) per  common share:                                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic (1)                                                                    |       | $                                                                                | 0.78       |   | $ | 0.04 |   | $ | (0.00 | ) | $ | 0.54 |   | $ | 0.70 |   | $ | (0.05 | ) | $ | 0.20 |   | $ | 0.36 |   |
| Diluted (1)                                                                  |       | $                                                                                | 0.78       |   | $ | 0.04 |   | $ | (0.00 | ) | $ | 0.54 |   | $ | 0.69 |   | $ | (0.05 | ) | $ | 0.20 |   | $ | 0.36 |   |
| Weighted average shares  used to compute net income (loss) per common share: |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | 14,402,156                                                                       |       | 14,369,987 |   | 14,365,024 |   | 14,318,406 |   | 14,240,602 |   | 14,141,132 |   | 14,095,135 |   | 14,047,841 |   |
| Diluted                                                                      |       | 14,447,318                                                                       |       | 14,409,443 |   | 14,365,024 |   | 14,339,270 |   | 14,289,848 |   | 14,141,132 |   | 14,278,985 |   | 14,216,580 |   |

 

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(1)             Net income (loss) per share is computed independentlyfor each period presented. As a result, the total of the per share earnings forthe four quarters may not equal the annual amount.

 

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