Citi Trends(CTRN) - 2024 Q4 - Annual Report

PART I Business Overview Citi Trends is a specialty value retailer operating 602 stores across 33 states, serving multicultural families with a strategy focused on store productivity, inventory, and community impact - The company operates 602 stores in 33 states, primarily serving African American and multicultural families in low-income neighborhoods[99][75] - The business strategy focuses on four pillars: Driving Comparable Store Productivity, Managing Inventory and Maximizing Margin, Investing in Infrastructure, and Making a Difference in the community[135][136][138] Net Sales Percentage by 'Citi' (Product Category) | Citis | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Ladies | 27% | 26% | 26% | | Kids | 23% | 23% | 22% | | Accessories & Beauty | 17% | 18% | 18% | | Mens | 17% | 17% | 18% | | Home & Lifestyle | 9% | 8% | 9% | | Footwear | 7% | 8% | 7% | - The company believes it has the potential to grow its store fleet to approximately 1,000 locations over time, a 65% increase from its current size[106] - As of February 3, 2024, approximately 15% of the store fleet has been updated to the new CTx format, which features a redesigned layout and enhanced visual merchandising[132] Risk Factors The company faces significant risks including fashion trend anticipation, intense competition, lack of e-commerce, economic sensitivity of its customer base, and cybersecurity threats - Business success is highly dependent on anticipating and responding to rapidly evolving fashion trends, and failure to do so could lead to lower demand and excess inventory[161][192] - The company faces intense competition from a diverse group of retailers, including national chains and mass merchants, many of which have greater resources and name recognition[193][163] - The company does not sell products online, which could adversely affect sales as the retail industry sees continued growth in e-commerce[164] - The low-income consumer, which is the company's core customer, is especially sensitive to economic downturns, inflation, and changes in government stimulus, which could adversely affect spending patterns[202][227] - Cybersecurity failures, such as the January 2023 ransomware incident, could expose the company to costly fines, litigation, and reputational damage[219][241] Cybersecurity The company maintains a cybersecurity program with oversight from the VP of Information Systems and the audit committee, continuously investing in system fortification despite no material incidents in Fiscal 2023 - The company's cybersecurity program is led by the Vice President of Information Systems, with oversight from the audit committee, which receives bi-annual updates[251][252] - The company experienced a cybersecurity disruption in January 2023 but states it did not have a material impact on business, operations, or financial condition. No material incidents occurred in Fiscal 2023[250] - Cybersecurity risk management includes regular network monitoring, vulnerability scanning, penetration testing, and partnerships with external cybersecurity firms[249] Properties Citi Trends operates 602 leased stores averaging 11,000 sq ft, owns its Savannah headquarters, and leases two distribution centers in South Carolina and Oklahoma - The company operates 602 stores, all of which are leased, with a typical lease term of five years plus extension options[253][276] - The company owns its 70,000 sq. ft. headquarters in Savannah, GA, and leases two distribution centers in Darlington, SC (550,000 sq. ft.) and Roland, OK (565,000 sq. ft.)[277] Top 5 States by Store Count | State | Number of Stores | | :--- | :--- | | Georgia | 63 | | Texas | 59 | | Florida | 52 | | North Carolina | 47 | | South Carolina | 41 | Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate a material adverse effect on its financial condition or operations - The company is subject to various legal proceedings but does not expect them to have a material adverse effect on its business[279] - In connection with a January 2023 cyber disruption, four putative class action lawsuits were filed against the company and have been consolidated. The company has accrued $0.8 million for estimated losses related to these matters[18] PART II Market for Common Equity and Related Matters Citi Trends' common stock trades on NASDAQ (CTRN), with dividends suspended since 2020 and $50.0 million remaining for share repurchases - The company's common stock trades on The NASDAQ Stock Market under the symbol "CTRN"[307] - The company suspended quarterly cash dividends in 2020 and has not reinstated them[281] - No shares were repurchased in fiscal 2023. As of February 3, 2024, $50.0 million remained available under the company's share repurchase programs[308] Management's Discussion and Analysis (MD&A) Fiscal 2023 saw a 5.9% sales decrease to $747.9 million and a $12.0 million net loss, impacted by inflation and the absence of prior year's sale-leaseback gains, yet the company maintained strong liquidity Results of Operations Fiscal 2023 net sales decreased to $747.9 million due to lower comparable store sales, increased cost of sales, and higher SG&A, resulting in a $12.0 million net loss Consolidated Statement of Operations Highlights (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $747,941 | $795,011 | $991,595 | | (Loss) income from operations | ($19,454) | $75,305 | $79,517 | | Net (loss) income | ($11,979) | $58,892 | $62,240 | | Diluted net (loss) income per share | ($1.46) | $7.17 | $6.91 | Store Activity and Comparable Sales | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total stores open, end of year | 602 | 611 | 609 | | Comparable store sales (decrease) increase | (6.8)% | (22.1)% | 25.1% | - The decrease in fiscal 2023 net sales was driven by a 6.8% decrease in comparable store sales, attributed to continued inflationary pressures on the company's core customers[296] - In fiscal 2022, the company recognized a $64.1 million gain from the sale-leaseback of its distribution centers, which significantly impacted year-over-year comparisons of operating and net income[67] Liquidity and Capital Resources The company maintains liquidity through cash and a $75 million credit facility, ending fiscal 2023 with $79.7 million cash and projecting $20 million in capital expenditures for fiscal 2024 - The company ended fiscal 2023 with a cash and cash equivalents balance of $79.7 million, compared to $103.5 million at the end of fiscal 2022[85] Cash Flow Summary (in millions) | Activity | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($9.6) | $5.8 | | Net cash (used in) provided by investing activities | ($13.4) | $60.2 | | Net cash used in financing activities | ($0.9) | ($12.2) | - Year-end inventory increased to $130.4 million from $105.8 million in fiscal 2022, reflecting targeted rebuilds and an earlier set for the spring season[79] - Capital expenditures for fiscal 2024 are anticipated to be approximately $20 million, primarily for opening up to 5 new stores and remodeling 40 stores[348] Critical Accounting Estimates Critical accounting estimates involve significant judgments in inventory valuation using the retail inventory method and operating lease accounting requiring incremental borrowing rate determination - Inventory valuation relies on the retail inventory method, which involves management judgments on merchandise markups, markdowns, and shrinkage[328] - Inventory shrinkage as a percentage of sales was 1.0% in fiscal 2023, up from 0.7% in 2022 and 0.4% in 2021[328] - For operating leases, the company determines an incremental borrowing rate to calculate the present value of future lease payments, as an implicit rate is not readily available[305][4] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2023-2021, including balance sheets, statements of operations, cash flows, and stockholders' equity, with accompanying notes Notes to Consolidated Financial Statements Notes detail accounting policies, property and equipment, tax expenses, stock compensation, lease and purchase commitments, and a February 2024 Cooperation Agreement with an investor Property and Equipment, net (in thousands) | Category | Feb 3, 2024 | Jan 28, 2023 | | :--- | :--- | :--- | | Leasehold improvements | $131,143 | $128,522 | | Furniture, fixtures and equipment | $138,980 | $137,464 | | Computer equipment | $56,666 | $50,457 | | Total | $332,677 | $322,631 | | Accumulated depreciation | ($276,446) | ($262,525) | | Property and equipment, net | $56,231 | $60,106 | Total Lease Cost (in thousands) | Component | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Operating lease cost | $62,163 | $60,167 | $52,737 | | Variable lease cost | $11,070 | $9,911 | $10,938 | | Short term lease cost | $1,598 | $1,395 | $1,091 | | Total lease cost | $74,831 | $71,473 | $64,766 | - As of February 3, 2024, the company had total future minimum lease payments of $307.3 million and open merchandise purchase obligations of $132.8 million[426][423] - In February 2024, the company entered into a Cooperation Agreement with an investor, agreeing to nominate certain individuals to the Board of Directors at the 2024 Annual Meeting[456] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of February 3, 2024, with an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of the end of fiscal 2023[458] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of February 3, 2024[27] - No changes occurred in the fourth quarter of fiscal 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[432] PART III Directors, Executive Officers, Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive officers, compensation, security ownership, and corporate governance, is incorporated by reference from the 2024 proxy statement - Information regarding Directors, Executive Officers, and Corporate Governance (Item 10) is incorporated by reference from the 2024 proxy statement[464] - Information regarding Executive Compensation (Item 11) is incorporated by reference from the 2024 proxy statement[437] - Information regarding Security Ownership (Item 12), Certain Relationships and Director Independence (Item 13), and Principal Accountant Fees (Item 14) is incorporated by reference from the 2024 proxy statement[465][49][33] PART IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits, including corporate governance documents, credit agreements, incentive plans, and CEO/CFO certifications for the Form 10-K report - The financial statements from Part II, Item 8 are filed as part of this report[34] - Exhibits filed include corporate governance documents, credit agreements, incentive plans, and various management contracts and severance agreements[51][469][37] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[37]