Citi Trends Inc

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited.  In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.  The condensed consolidated balance sheet as of February 1, 2020 is derived from the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “2019 Form 10-K”).  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2019 Form 10-K.  Operating results for the thirteen weeks ended May 2, 2020 are not necessarily indicative of the results that may be expected for the fiscal year, as a result of the seasonality of the business and the current uncertainty surrounding the economic impact of the novel coronavirus (“COVID-19”) pandemic.

In December 2019, COVID-19 emerged and spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.  After closely monitoring and taking into consideration the guidance from federal, state and local governments, the Company temporarily closed all of its retail store locations and distribution centers effective March 20, 2020. The temporary closure of the Company’s stores has had an adverse impact on the Company’s financial condition, results of operations and liquidity.  The Company has taken several steps to increase its cash position and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On March 20, 2020, the Company borrowed $43.7 million in principal amount under its revolving credit facility.  Other measures taken to mitigate the operating and financial impact of the pandemic, included (i) furloughing substantially all store and distribution center personnel, and a significant portion of the corporate staff starting as of April 3, 2020, with employee benefits for eligible employees continuing through the temporary furlough; (ii) implementing temporary tiered salary reductions for management level corporate employees and reducing the cash portion of non-employee director fees; (iii) extending payment terms with vendors and suppliers; (iv) abating payments of rent as appropriate; (v) executing substantial reductions in operating expenses, store occupancy costs, capital expenditures and other costs, including through reduced inventory purchases and eliminating the 401(k) plan match; (vi) suspending any repurchases of shares and payment of dividends; and (vii) amending the revolving credit facility to extend the term to August 2021.

The effective income tax rate was 24.0% for the thirteen weeks ended May 2, 2020, compared to 14.2%  for the thirteen weeks ended May 4, 2019.  The difference in the effective income tax rate was due to a pretax loss for the thirteen weeks ended May 2, 2020 compared to pretax income in the prior year.

On March 27, 2020, the CARES Act was enacted into law.  The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, reduce the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act. As a result of the CARES Act, to the extent that there are taxable losses at the end of fiscal 2020, the Company estimates that it will be able to obtain a tax refund from the carryback of federal NOLs.

Beginning April 24, 2020, we started to reopen stores in select states in accordance with state and local government guidelines.  As of June 9, 2020, we have reopened more than 530 of our 574 stores, while also opening 4 new stores.  Starting in late May 2020, there have been demonstrations in cities throughout the United States.  While they have generally been peaceful, in some locations demonstrations have become violent and resulted in governmental restrictions.  We plan to continue to reopen our closed stores in a phased approach as more states reopen for retail businesses and conditions permit.  As we reopen stores, we have taken numerous measures to protect the health of our associates, customers and communities we serve.  Such measures include implementing occupancy limits, providing personal protective equipment for our associates and customers, encouraging social distancing, adjusting our processes for merchandise returns and implementing new cleaning procedures.  We are planning to incur incremental costs going forward for personal protective equipment, including masks, gloves and hand sanitizer for our associates and customers, as well as additional cleaning supplies.

Cash Flows From Operating Activities. Net cash provided by operating activities was $12.8 million in the thirteen weeks ended May 2, 2020 compared to $8.9 million in the same period of 2019.  Significant sources of cash in the first quarter of 2020 were (1) a $16.4 million decrease in inventory (compared to an $8.6 million decrease in the first quarter of 2019) due to the suspension of purchases as we closed stores due to the COVID-19 pandemic; and (2) a $14.0 million increase in accounts payable (compared to a $9.6 million decrease in the first quarter of 2019) due to extending payment terms with vendors and suppliers as a result of the COVID-19 pandemic.

Significant uses of cash during the first quarter of 2020 included a net loss adjusted for non-cash expenses such as  depreciation, amortization of operating lease right of use assets, loss on disposal of property and equipment, deferred income taxes and stock-based compensation expense, totaling ($11.1) million (compared to $25.0 million in the first quarter of 2019).  Other significant uses of cash from operating activities in the first quarter of 2020 were (1) a $6.8 million decrease in accrued expenses and other long-term liabilities (compared with an $11.9 million decrease in the first quarter of 2019) due primarily to payments of operating lease liabilities; and (2) a $5.5 million decrease in accrued compensation (compared to a $4.6 million decrease in the first quarter of 2019) due to the furlough of substantially all of our store and distribution center personnel, along with a significant portion of our corporate staff, which resulted in lower payroll costs due at the end of the quarter.