10-Q 1 ctrn-20190803x10q.htm 10-Q ctrn_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 3, 2019

 

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number  000-51315

 

CITI TRENDS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

DELAWARE

 

52-2150697

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

104 Coleman Boulevard

 

 

Savannah, Georgia

 

31408

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (912) 236-1561

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

CTRN

 

NASDAQ Stock Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large Accelerated Filer ☐                                        Accelerated Filer ☒

Non-Accelerated Filer ☐ 

 

 

Smaller Reporting Company ☐

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

As of August 19, 2019 the registrant had 11,910,406 outstanding shares of common stock, $0.01 par value per share. 

 

 

CITI TRENDS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

PAGE

 

 

NUMBER

PART I 

FINANCIAL INFORMATION

 

 

 

 

Item 1 

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) August 3, 2019 and February 2, 2019

3

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Twenty-six weeks ended August 3, 2019 and August 4, 2018

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Thirteen weeks ended August 3, 2019 and August 4, 2018

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Twenty-six weeks ended August 3, 2019 and August 4, 2018

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) Twenty-six and Thirteen weeks ended August 3, 2019 and August 4, 2018

6

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3 

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4 

Controls and Procedures

19

 

 

 

PART II 

OTHER INFORMATION

 

 

 

 

Item 1 

Legal Proceedings

20

 

 

 

Item 1A 

Risk Factors

20

 

 

 

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 3 

Defaults Upon Senior Securities

20

 

 

 

Item 4 

Mine Safety Disclosures

20

 

 

 

Item 5 

Other Information

20

 

 

 

Item 6 

Exhibits

21

 

 

 

 

SIGNATURES

22

 

2

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Citi Trends, Inc.

Condensed Consolidated Balance Sheets

August 3, 2019 and February 2, 2019

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

August 3,

    

February 2,

    

 

 

    

2019

    

2019

    

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,425

 

$

17,863

 

 

Short-term investment securities

 

 

37,776

 

 

50,350

 

 

Inventory

 

 

132,050

 

 

139,841

 

 

Prepaid and other current assets

 

 

15,621

 

 

17,544

 

 

Income tax receivable

 

 

2,098

 

 

 —

 

 

Total current assets

 

 

214,970

 

 

225,598

 

 

Property and equipment, net of accumulated depreciation of $253,708 and $245,958 as of August 3, 2019 and February 2, 2019, respectively

 

 

54,843

 

 

56,224

 

 

Operating lease right of use assets

 

 

152,932

 

 

 —

 

 

Long-term investment securities

 

 

16,976

 

 

8,883

 

 

Deferred tax asset

 

 

7,150

 

 

6,539

 

 

Other assets

 

 

777

 

 

745

 

 

Total assets

 

$

447,648

 

$

297,989

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

71,303

 

$

73,391

 

 

Operating lease liabilities

 

 

41,976

 

 

 —

 

 

Accrued expenses

 

 

14,070

 

 

15,311

 

 

Accrued compensation

 

 

11,257

 

 

12,746

 

 

Income tax payable

 

 

 —

 

 

395

 

 

Layaway deposits

 

 

1,671

 

 

526

 

 

Total current liabilities

 

 

140,277

 

 

102,369

 

 

Noncurrent operating lease liabilities

 

 

118,102

 

 

 —

 

 

Other long-term liabilities

 

 

1,869

 

 

8,195

 

 

Total liabilities

 

 

260,248

 

 

110,564

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 32,000,000 shares; 15,855,281 shares issued as of August 3, 2019 and 15,827,713 shares issued as of February 2, 2019; 11,913,205 shares outstanding as of August 3, 2019 and 12,158,237 shares outstanding as of February 2, 2019

 

 

157

 

 

157

 

 

Paid in capital

 

 

92,120

 

 

91,794

 

 

Retained earnings

 

 

180,287

 

 

176,094

 

 

Treasury stock, at cost; 3,942,076 shares held as of August 3, 2019 and 3,669,476 shares held as of February 2, 2019

 

 

(85,164)

 

 

(80,620)

 

 

Total stockholders’ equity

 

 

187,400

 

 

187,425

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

447,648

 

$

297,989

 

 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

3

Citi Trends, Inc.

Condensed Consolidated Statements of Operations

Twenty-Six Weeks Ended August 3, 2019 and August 4, 2018

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

August 3,

 

August 4,

 

    

2019

    

2018

Net sales

 

$

387,862

 

$

393,031

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

 

(242,850)

 

 

(239,811)

Selling, general and administrative expenses

 

 

(126,436)

 

 

(125,290)

Depreciation

 

 

(9,221)

 

 

(9,650)

Asset impairment

 

 

(472)

 

 

(942)

Income from operations

 

 

8,883

 

 

17,338

Interest income

 

 

793

 

 

658

Interest expense

 

 

(78)

 

 

(75)

Income before income taxes

 

 

9,598

 

 

17,921

Income tax expense

 

 

(1,433)

 

 

(3,389)

Net income

 

$

8,165

 

$

14,532

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.68

 

$

1.08

Diluted net income per common share

 

$

0.68

 

$

1.08

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

Basic

 

 

11,929

 

 

13,446

Diluted

 

 

11,944

 

 

13,491

 

Citi Trends, Inc.

Condensed Consolidated Statements of Operations

Thirteen Weeks Ended August 3, 2019 and August 4, 2018

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

August 3,

 

August 4,

 

 

    

2019

    

2018

 

Net sales

 

$

182,830

 

$

181,999

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

 

(114,612)

 

 

(110,398)

 

Selling, general and administrative expenses

 

 

(62,989)

 

 

(62,285)

 

Depreciation

 

 

(4,607)

 

 

(4,676)

 

Asset impairment

 

 

(472)

 

 

(942)

 

Income from operations

 

 

150

 

 

3,698

 

Interest income

 

 

414

 

 

363

 

Interest expense

 

 

(40)

 

 

(38)

 

Income before income taxes

 

 

524

 

 

4,023

 

Income tax expense

 

 

(147)

 

 

(788)

 

Net income

 

$

377

 

$

3,235

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.03

 

$

0.24

 

Diluted net income per common share

 

$

0.03

 

$

0.24

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

Basic

 

 

11,882

 

 

13,314

 

Diluted

 

 

11,882

 

 

13,351

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

4

Citi Trends, Inc.

Condensed Consolidated Statements of Cash Flows

Twenty-Six Weeks Ended August 3, 2019 and August 4, 2018

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

 

August 3,

 

August 4,

 

 

    

2019

    

2018

 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,165

 

$

14,532

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

9,221

 

 

9,650

 

Amortization of operating lease right of use assets

 

 

23,041

 

 

 —

 

Asset impairment

 

 

472

 

 

942

 

Loss on disposal of property and equipment

 

 

22

 

 

50

 

Deferred income taxes

 

 

88

 

 

(608)

 

Insurance proceeds related to operating activities

 

 

1,012

 

 

475

 

Noncash stock-based compensation expense

 

 

1,054

 

 

1,130

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Inventory

 

 

7,424

 

 

(1,290)

 

Prepaid and other current assets

 

 

(2,808)

 

 

(2,292)

 

Other assets

 

 

(32)

 

 

 —

 

Accounts payable

 

 

(2,190)

 

 

(3,899)

 

Accrued expenses and other long-term liabilities

 

 

(22,566)

 

 

229

 

Accrued compensation

 

 

(1,489)

 

 

(4,192)

 

Income tax payable/receivable

 

 

(2,493)

 

 

(1,617)

 

Layaway deposits

 

 

1,145

 

 

1,174

 

Net cash provided by operating activities

 

 

20,066

 

 

14,284

 

Investing activities:

 

 

 

 

 

 

 

Sales/redemptions of investment securities

 

 

29,554

 

 

24,139

 

Purchases of investment securities

 

 

(25,073)

 

 

(16,217)

 

Purchases of property and equipment

 

 

(8,374)

 

 

(5,715)

 

Insurance proceeds related to investing activities

 

 

573

 

 

195

 

Net cash (used in) provided by investing activities

 

 

(3,320)

 

 

2,402

 

Financing activities:

 

 

 

 

 

 

 

Cash used to settle withholding taxes on the vesting of nonvested restricted stock

 

 

(728)

 

 

(1,005)

 

Dividends paid to stockholders

 

 

(1,912)

 

 

(2,166)

 

Repurchase of common stock

 

 

(4,544)

 

 

(20,974)

 

Net cash used in financing activities

 

 

(7,184)

 

 

(24,145)

 

Net increase (decrease) in cash and cash equivalents

 

 

9,562

 

 

(7,459)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

17,863

 

 

48,451

 

End of period

 

$

27,425

 

$

40,992

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

62

 

$

63

 

Cash payments of income taxes

 

$

3,838

 

$

5,614

 

Supplemental disclosures of noncash investing activities:

 

 

 

 

 

 

 

Accrual for purchases of property and equipment

 

$

343

 

$

499

 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

 

 

5

Citi Trends, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Twenty-Six and Thirteen Weeks Ended August 3, 2019 and August 4, 2018

(Unaudited)

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended August 3, 2019

 

 

Common Stock

 

Paid in

 

Retained

 

Treasury Stock

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Amount

 

Total

Balances —February 2, 2019

 

15,827,713

 

$

157

 

$

91,794

 

$

176,094

 

3,669,476

 

$

(80,620)

 

$

187,425

Adoption of lease accounting standard (see Note 12)

 

 —

 

 

 —

 

 

 —

 

 

(2,060)

 

 —

 

 

 —

 

 

(2,060)

Vesting of nonvested restricted stock units

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 1

Issuance of nonvested shares to employees and directors
under incentive plan

 

57,133

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

706

 

 

 —

 

 —

 

 

 —

 

 

706

Net share settlement of nonvested shares and restricted stock units

 

(36,237)

 

 

(1)

 

 

(712)

 

 

 —

 

 —

 

 

 —

 

 

(713)

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

82,312

 

 

(1,640)

 

 

(1,640)

Dividends paid to stockholders ($0.08 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(958)

 

 —

 

 

 —

 

 

(958)

Net income

 

 —

 

 

 —

 

 

 —

 

 

7,788

 

 —

 

 

 —

 

 

7,788

Balances —May 4, 2019

 

15,848,609

 

 

157

 

 

91,788

 

 

180,864

 

3,751,788

 

 

(82,260)

 

 

190,549

Vesting of nonvested restricted stock units

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of nonvested shares to employees and directors
under incentive plan

 

27,478

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of nonvested shares by employees and directors

 

(19,969)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

348

 

 

 —

 

 —

 

 

 —

 

 

348

Net share settlement of nonvested shares and restricted stock units

 

(837)

 

 

 —

 

 

(16)

 

 

 —

 

 —

 

 

 —

 

 

(16)

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

190,288

 

 

(2,904)

 

 

(2,904)

Dividends paid to stockholders ($0.08 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(954)

 

 —

 

 

 —

 

 

(954)

Net income

 

 —

 

 

 —

 

 

 —

 

 

377

 

 —

 

 

 —

 

 

377

Balances—August 3, 2019

 

15,855,281

 

$

157

 

$

92,120

 

$

180,287

 

3,942,076

 

$

(85,164)

 

$

187,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended August 4, 2018

 

 

Common Stock

 

Paid in

 

Retained

 

Treasury Stock

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Amount

 

Total

Balances —February 3, 2018

 

15,777,946

 

$

156

 

$

90,605

 

$

158,927

 

2,034,170

 

$

(40,220)

 

$

209,468

Vesting of nonvested restricted stock units

 

10,663

 

 

 1

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 1

Issuance of nonvested shares to employees and directors
under incentive plan

 

65,663

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

584

 

 

 —

 

 —

 

 

 —

 

 

584

Net share settlement of nonvested shares and restricted stock units

 

(38,421)

 

 

 —

 

 

(982)

 

 

 —

 

 —

 

 

 —

 

 

(982)

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

85,537

 

 

(2,672)

 

 

(2,672)

Dividends paid to stockholders ($0.08 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(1,085)

 

 —

 

 

 —

 

 

(1,085)

Net income

 

 —

 

 

 —

 

 

 —

 

 

11,297

 

 —

 

 

 —

 

 

11,297

Balances—May 5, 2018

 

15,815,851

 

 

157

 

 

90,207

 

 

169,139

 

2,119,707

 

 

(42,892)

 

 

216,611

Vesting of nonvested restricted stock units

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of nonvested shares to employees and directors
under incentive plan

 

14,382

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

547

 

 

 —

 

 —

 

 

 —

 

 

547

Net share settlement of nonvested shares and restricted stock units

 

(853)

 

 

 —

 

 

(25)

 

 

 —

 

 —

 

 

 —

 

 

(25)

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

645,275

 

 

(18,302)

 

 

(18,302)

Dividends paid to stockholders ($0.08 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(1,081)

 

 —

 

 

 —

 

 

(1,081)

Net income

 

 —

 

 

 —

 

 

 —

 

 

3,235

 

 —

 

 

 —

 

 

3,235

Balances—August 4, 2018

 

15,829,380

 

$

157

 

$

90,729

 

$

171,293

 

2,764,982

 

$

(61,194)

 

$

200,985

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

 

6

Citi Trends, Inc.

Notes to the Condensed Consolidated Financial Statements (unaudited)

August 3, 2019

 

1. Basis of Presentation

 

Citi Trends, Inc. and its subsidiary (the “Company”) operate as a value-priced retailer of urban fashion apparel and accessories for the entire family.  As of August 3, 2019, the Company operated 562 stores in 32 states.

 

The condensed consolidated financial statements and notes thereto have been prepared by the Company without audit. The condensed consolidated balance sheet as of February 2, 2019 has been derived from the audited financial statements as of that date, but does not include all required year-end disclosures.  In the opinion of management, such statements include all adjustments considered necessary for fair financial statement presentation.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended February 2, 2019.

 

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements.  Operating results for the twenty-six weeks ended August 3, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2020.

 

The following contains references to fiscal years 2019 and 2018, which represent fiscal years ending or ended on February 1, 2020 and February 2, 2019, respectively.  Fiscal 2019 and 2018 both have 52-week accounting periods.

 

2. Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The most significant estimates made by management include those used in the valuation of inventory, property and equipment, self-insurance liabilities, leases and income taxes. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.

 

3. Cash and Cash Equivalents/Concentration of Credit Risk

 

For purposes of the condensed consolidated balance sheets and condensed consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents.  Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents.  The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds.  The Company maintains cash accounts that exceed federally insured limits.

 

4. Earnings per Share

 

Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock.  During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding, because the inclusion of common stock equivalents would be antidilutive.

 

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The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method.  The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized.  For the twenty-six weeks ended August 3, 2019 and August 4, 2018, there were 135,000 and 118,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.  For the thirteen weeks ended August 3, 2019 and August 4, 2018, there were 143,000 and 127,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.

 

The following table provides a reconciliation of the weighted average number of common shares outstanding used to calculate basic earnings per share to the weighted average number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share for the twenty-six and thirteen week periods ended August 3, 2019 and August 4, 2018:

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

    

August 3, 2019

    

August 4, 2018

Weighted average number of common shares outstanding

 

11,929,019

 

13,446,285

Incremental shares from assumed vesting of nonvested restricted stock

 

15,082

 

45,009

Weighted average number of common shares and common stock equivalents outstanding

 

11,944,101

 

13,491,294

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

    

August 3, 2019

    

August 4, 2018

Weighted average number of common shares outstanding

 

11,881,896

 

13,314,470

Incremental shares from assumed vesting of nonvested restricted stock

 

 —

 

36,851

Weighted average number of common shares and common stock equivalents outstanding

 

11,881,896

 

13,351,321

 

 

5. Fair Value Measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date. Fair value is established according to a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

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

 

Level 2:  Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

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

 

As of August 3, 2019, the Company’s investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity.  Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Market

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of the U.S. Treasury and U.S. government agencies (Level 1)

 

$

30,630

 

$

19

 

$

(1)

 

$

30,648

 

Bank certificates of deposit (Level 2)

 

 

7,146

 

 

 —

 

 

 —

 

 

7,146

 

 

 

$

37,776

 

$

19

 

$

(1)

 

$

37,794

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of the U.S. Treasury (Level 1)

 

$

2,485

 

$

 6

 

$

 —

 

$

2,491

 

Bank certificates of deposit (Level 2)

 

 

14,491

 

 

 —

 

 

 —

 

 

14,491

 

 

 

$

16,976

 

$

 6

 

$

 —

 

$

16,982

 

 

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The amortized cost and fair market value of investment securities as of August 3, 2019 by contractual maturity are as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

 

 

    

Fair

 

 

 

Amortized

 

Market

 

 

    

Cost

    

Value

 

Mature in one year or less

 

$

37,776

 

$

37,794

 

Mature after one year through five years

 

 

16,976

 

 

16,982

 

 

 

$

54,752

 

$

54,776

 

 

As of February 2, 2019, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Market

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of the U.S. Treasury and U.S. government agencies (Level 1)

 

$

38,706

 

$

 4

 

$

(37)

 

$

38,673

 

Obligations of states and municipalities (Level 2)

 

 

95

 

 

 —

 

 

 —

 

 

95

 

Bank certificates of deposit (Level 2)

 

 

11,549

 

 

 —

 

 

 —

 

 

11,549

 

 

 

$

50,350

 

$

 4

 

$

(37)

 

$

50,317

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of the U.S. Treasury (Level 1)

 

$

4,956

 

$

 —

 

$

(16)

 

$

4,940

 

Bank certificates of deposit (Level 2)

 

 

3,927

 

 

 —

 

 

 —

 

 

3,927

 

 

 

$

8,883

 

$

 —

 

$

(16)

 

$

8,867

 

 

The amortized cost and fair market value of investment securities as of February 2, 2019 by contractual maturity were as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

 

 

    

Fair

 

 

 

Amortized

 

Market

 

 

    

Cost

    

Value

 

Mature in one year or less

 

$

50,350

 

$

50,317

 

Mature after one year through five years

 

 

8,883

 

 

8,867

 

 

 

$

59,233

 

$

59,184

 

 

There were no changes among the levels in the twenty-six weeks ended August 3, 2019.

 

Fair market values of Level 2 investments are determined by management with the assistance of a third party pricing service.  Because quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.

 

6. Impairment of Assets

If facts and circumstances indicate that a long-lived asset or operating lease right-of-use asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.  In the twenty-six and thirteen weeks ended August 3, 2019, non-cash impairment expense related to an underperforming store totaled $0.5 million, comprised of $0.3 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset.  In the twenty-six and thirteen weeks ended August 4, 2018, non-cash impairment expense related to underperforming stores totaled $0.9 million, comprised entirely of leasehold improvements and fixtures and equipment.

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7. Revolving Line of Credit

 

On October 27, 2011, the Company entered into a five-year, $50 million credit facility with Bank of America.  The facility was amended on August 18, 2015, extending the maturity date to August 18, 2020.  The amended facility provides a $50 million credit commitment and a $25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $75 million.  Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus either 1.25% or 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus either 0.25% or 0.5%, (ii) the Federal Funds Rate plus either 0.75% or 1.0%, or (iii) LIBOR plus either 1.25% or 1.5%, based in any such case on the average daily availability for borrowings under the facility.  The facility continues to be secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings under the credit facility.

 

8.  Income Taxes

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 

 

U.S. GAAP requires companies to calculate income taxes by applying their estimated full-year tax rate in each interim period unless the estimated full-year tax rate is not reliably predictable.  For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company utilized this annual effective tax rate method to calculate income taxes.

 

For the twenty-six weeks ended August 3, 2019, the effective income tax rate was 14.9%.  This compares with a rate of 18.9% for the twenty-six weeks ended August 4, 2018.  The decrease in the effective income tax rate was due primarily to the combination of lower pretax income and higher federal and state tax credits this year.

 

9. Other Long-Term Liabilities

 

The components of other long-term liabilities as of August 3, 2019 and February 2, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

August 3,

    

February 2,

 

 

    

2019

    

2019

 

Deferred rent

 

$

 —

(1)

$

2,344

 

Tenant improvement allowances

 

 

 —

(1)

 

4,037

 

Other

 

 

1,869

 

 

1,814

 

 

 

$

1,869

 

$

8,195

 

 

 

(1)

Commencing February 3, 2019, deferred rent and tenant improvement allowances are included as part of the Company’s operating lease right of use assets (see Note 12 regarding the Company’s adoption of the lease accounting standard).

.

 

10. Commitments and Contingencies

 

The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, employees or former employees.  Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, it establishes appropriate reserves. While legal proceedings are subject to

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uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.

 

11. Stock Repurchase Program and Cash Dividends

 

Repurchases of Common Stock

On November 28, 2018, the Company’s Board of Directors approved a program that authorized the purchase of up to $25.0 million in shares of the Company’s common stock.  During the twenty-six weeks ended August 3, 2019, the Company repurchased 272,600 shares of its common stock at an aggregate cost of $4.5 million.  During the thirteen weeks ended August 3, 2019, the Company repurchased 190,288 shares of its common stock at an aggregate cost of $2.9 million.  At August 3, 2019, $5.1 million remained available for purchase under this program.

 

Dividends

On February 12, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share, which was paid on March 19, 2019 to stockholders of record as of March 5, 2019.  On May 21, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share, which was paid on June 18, 2019 to stockholders of record as of June 4, 2019.  On August 20, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share payable on September 17, 2019 to stockholders of record as of September 3, 2019.  Any determination to declare and pay cash dividends for future quarters will be made by the Company’s Board of Directors.

 

12. Recent Accounting Pronouncements

 

Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016–02” or “Topic 842”) which replaced the existing guidance in ASC 840, Leases. The new standard established a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU 2016-02 on February 3, 2019, the first day of fiscal 2019.  As part of the implementation process, the Company assessed its lease arrangements, evaluated practical expedient and accounting policy elections and implemented necessary modifications to its existing lease system. In adopting the new lease standard, the Company elected the optional transition method which applied the standard as of the effective date but did not apply the standard to the comparative periods previously presented in the consolidated financial statements. The new standard also provided optional practical expedients for transition, which the Company elected, which permitted it to not reassess prior conclusions regarding lease classification, identification or initial direct costs. Further, the Company elected a short-term lease exception policy which permitted it to not apply the recognition requirements of the new standard to short-term leases (leases with terms of 12 months or less). The Company also elected an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company did not elect an optional hindsight practical expedient.

 

The Company leases all of its retail store locations and certain office space and equipment. All leases are classified as operating leases. Under the new guidance, right–of-use assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term. The Company uses its incremental borrowing rate as the discount rate which approximates the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the total lease payments under similar terms.  The incremental borrowing rate for existing leases as of the opening balance sheet date was based on the remaining terms of the leases.  The incremental borrowing rate for all new or amended leases is based upon the lease terms which include the contractual period obligated by the leases plus any additional periods covered by options available to extend the leases if the Company is reasonably certain to exercise such options.  Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term and is included in selling, general and administrative expenses. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $133.6 million and $141.0 million, respectively, as of February 3, 2019. The difference between the lease assets and lease liabilities was primarily due to reclassification of lease incentives, as well as impairment of operating lease right-of-use assets for stores previously impaired as of the effective date.  Lease impairment, net of the related deferred taxes, totaled approximately $2.1 million and is reflected as an adjustment to retained earnings at the transition date.  

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13.  Revenue

 

Revenue Recognition

The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise.  Sales taxes collected by the Company from customers are excluded from revenue.  Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation.  Non-refundable layaway service fees are recognized in revenue when collected by the Company from customers.  The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise.

 

Sales Returns

The Company allows customers to return merchandise for up to thirty days after the date of sale.  Expected refunds to customers are recorded based on estimated margin using historical return information.  The refund liability for merchandise returns is included in “Accrued expenses” on the condensed consolidated balance sheet and totaled $0.5 million and $0.3 million as of August 3, 2019 and February 2, 2019, respectively.  The corresponding asset for the recoverable cost of expected refunds is included in “Prepaid and other current assets” and totaled $0.3 million and $0.2 million as of August 3, 2019 and February 2, 2019, respectively.

 

Disaggregation of Revenue

The Company’s retail operations represent a single operating segment based on the way the Company manages its business.  Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation.  The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.

 

In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line.  The percentage of net sales related to each classification of its merchandise assortment for the twenty-six and thirteen week periods ended August 3, 2019 and August 4, 2018 was approximately: