CTRN 10-K & 10-Q changes, risk factors and insider trading

Our ability to attract consumers to our stores depends on several factors, including the success of the outdoor neighborhoodcommunity shopping centers where our stores are primarily located.

The success of an individual store can depend on favorable placement within a given shopping center as well as the volume of traffic generated by the other destination retailers and the anchor stores in the shopping centers where our stores are located. We cannot control the development of alternative shopping destinations near our existing stores or the availability or cost of real estate within existing or new shopping destinations. IfAny decline in the volume of consumer traffic at shopping centers, whether because of consumer preferences to shop on the internet or at large warehouse stores, recession risks and potential effects, an economic slowdown, a decline in the popularity of shopping centers, the closing or leaving of a destination retailer or anchor store in our shopping centers closesstore, or leaves, or if there is significant deterioration of the surrounding areas in which our stores are located, it could result in reduced sales at our stores and leave us with excess inventory, which could have a material adverse effect on our financial results or business. Additionally, we are in the process of renovating a number of our stores. If these remodels do not attract new or existing customers to our stores or otherwise drive an increase in sales, then this may have an adverse impact on our business and results of operations.

In order to better serve our customers and maximize sales, it is important that we properly execute our inventory management strategies by appropriately allocating merchandise among our stores, timely and efficiently distributing inventory to such locations, maintaining an appropriate mix and level of inventory in such locations, responding to customer demand, and effectively managing pricing and markdowns, and there is no assurance we will be able to do so. In addition, as we continue to implement new inventory allocation initiatives, there could be disruptions in inventory flow and placement. We also face certain risks from our use of third-party order fulfillment and direct shipping including freight cost increases, timely delivery and delays due to work stoppages. Our financial performance could also be impacted by increases in shrink.shrink in stores and throughout the supply chain.

We rely upon third-party transportation providers for all of our merchandise shipments to our distribution centers and our retail stores. Accordingly, we are subject to risks, including insolvency, labor disputes or strikes, union organizing activity, inclement weather, public health emergencies, supply chain interruptions, port delays, increased freight, distribution and transportation costs,costs including the cost of fuel associated with such providers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise to our distribution centers and our retail stores in a timely, effective and economically viable manner could adversely affect our business strategy, financial condition and results of operations.

We purchase our merchandise from a large assortment of vendors, and a substantial portion of this merchandise is manufactured outside of the United States and imported by our vendors from countries such as China and other areas of the Asia-Pacific region. The product we source could become subject to new or changing trade restrictions imposed by the United States or other foreign governments.

Our growth strategy includes successfully opening and operating new stores,stores (which may include leases assumed or subleased from third parties), optimizing product assortment and investing in infrastructure to expand our off-price value model within our current markets and into new geographic regions. In addition, we may assume leases or subleases from other retailers, which may subject us to risks relating to their creditworthiness or liabilities arising out of their prior operations of the relevant stores. The success of opening new stores is dependent upon, among other things, the current retail environment, the identification of suitable markets and the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics, and other factors, the negotiation of acceptable lease terms, the terms of any leases assumed or subleased, construction costs, the hiring, training and retention of competent sales personnel, and the effective management of inventory to meet the needs of new and existing stores on a timely basis. Our ability to expand successfully into other geographic markets will also depend on acceptance of our retail store experience by customers in those markets. There can be no assurance that any newly opened stores will be received as well as, or achieve net sales or profitability levels consistent with, our projected targets or be comparable to those of our existing stores in the time periods estimated by us, or at all. These risks may increase with further growth, and we may not be able to execute our growth strategies successfully, on a timely basis, or at all, which may adversely affect our business plans, sales and results.

We may consider strategic transactions and business arrangements, including, but not limited to, acquisitions, asset purchases, lease assumptions or subleases, partnerships, joint ventures, restructurings and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our business strategy, financial condition and results of operations.

Our business depends upon the cash on our balance sheet as well as our operations to continue to generate strong cash flow to supply capital to support our general operating activities, to fund our growth and our return of cash to stockholders through our stock repurchase programs, if any, and to pay any interest obligations. Our inability to continue to generate sufficient cash flows to support these activities could adversely affect our growth plans, capital expenditures, operating expenses and financial performance, including our earnings per share. Changes in the capital and credit markets, including market disruptions, limited liquidity, inflation and interest rate fluctuations may increase the cost of financing or restrict our access to these potential sources of liquidity. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating performance and, if applicable, credit rating. We maintain a revolving credit facility with Bank of America through April 10, 2030 which provides for a $75 million credit commitment and a $25 million uncommitted “accordion” feature that under certain circumstances could allow us to increase the size of the facility to $100 million. As of FebruaryJanuary 1,31, 2025,2026, we had no borrowings outstanding under this facility. Although we currently have available a credit facility to fund our current operating needs, if necessary, we cannot be certain that we will be able to replace our existing credit facility or refinance any future debt at a reasonable cost when necessary. We maintain deposit balances with certain financial institutions that are above the federal insurance limit. A failure of these institutions could result in loss of these deposits.

We are subject to numerous federal, state and local laws and regulations that govern numerous aspects of our business. These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events. Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing areas such as minimum wage or living wage requirements, workplace-regulation and other labor or employment benefits laws, supply chain, taxes, including changes to corporate tax rates, privacy and information security, artificial intelligence, or environmental regulation such as carbon emission standards and sustainability programs, transparency and reporting, could increase our costs of doing business or impact our sales, operations or profitability.

Discussions of our results of operations for the year ended February 3,1, 20242025 compared to the year ended JanuaryFebruary 28,3, 20232024 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended February 3,1, 2024,2025, which was filed with the United States Securities and Exchange Commission on April 18,16, 2024.2025.

We are athe leading off-price value retailer of apparel, accessories and home trends primarily for African AmericanBlack families. Our high-quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-conscious customers. As of FebruaryJanuary 1,31, 2025,2026, we operated 591590 stores in urban, suburban and rural markets in 33 states.

We believe that Citi TrendsCITITRENDS is in a unique position to serve our loyal customer base, with a long runway for store growth and a motivatedstrong leadership team supported by a healthy balance sheet. As described in more detail in “Item 1 – Business,” we have identified five strategic areas of focus that we believe will accelerate our sales and earnings growth over the next few years:

Offer Compelling Value Proposition. We believe that we can drive increases in traffic and basket by focusing on our three-tiered product strategy of opening prices, core value product and familiar brands at incredible values, all focused on the wants and needs of our African AmericanBlack customers. We believe that delivering newness and freshness results in high customer frequency. Our expanded offering of “treasures”, or extreme value product offerings, further strengthens this strategy and deepens our relationship with our customers.

Focus on the African AmericanBlack Customer. We believe that a sharpened focus on our African AmericanBlack customers will drive improved sales through a more focused product assortment designed to address their fashion needs and wants, supporting their ability to express themselves through the creation of their own style. We believe that our refined understanding of our customer will drive increased traffic and conversion in our stores.

Consistent Operational Excellence. We believe that the work we are doing to develop fundamental retail practices and to ensurefocus on consistent execution will produce strong, sustainable financial results while positioning us for future, accelerated growth.

Growth. We believe that we can maximize the productivity of our existing 591590 stores located in the heart of AfricanBlack American neighborhoodscommunities by executing on the three areas of focus stated above and by continued refinement of our store format. While we believe that maximizing the productivity of our existing fleet provides significant opportunity for sales and earnings growth, we continue to believe that Citi TrendsCITITRENDS has the potential to grow, and we expect to accelerate square footage expansion inover thetime, rangeincluding through potential assumptions of 6%leases toor 10% annually over time.subleases.

People. We believe that our teams across the organization, led by Ken Seipel, our Chief Executive Officer, and their ability to consistently execute while staying focused on our African AmericanBlack customer, providing great product and a welcoming in-store environment, are a key differentiator for our business and are key to the continued transformation of our company.

We expectare thatmonitoring our operationstrends in the short-term will continue to be influenced by general economic conditions, including on-going inflationary pressures, new and changing tariff programs and changes in consumer sentiment. We continue to monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions.

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costs and advertisingmarketing costs. The years ended January 31, 2026, February 1, 2025,2025 and February 3, 2024 and January 28, 2023 are referred to herein as fiscal 2024,2025, fiscal 20232024 and fiscal 2022,2023, respectively. Fiscal years 20242025 and 20222024 are each comprised of 52 weeks, while fiscal 2023 is comprised of 53 weeks.

The following discussion of our financial performance is based on the consolidated financial statements set forth in Item 8 of this Report. The nature of our business is seasonal. Results may fluctuate due to changes in our business, consumer spending patterns, and the macroeconomic environment.environment and strategic initiatives. Furthermore, the seasonal nature of our business may affect comparisons between periods.

Net Sales. Net sales increased $5.1$66.9 million, or 0.7%,8.9%, to $820.0 million in fiscal 2025 from $753.1 million in fiscal 2024 from $747.9 million in fiscal 2023.2024. The increase in sales was due to a 3.4%9.7% increase in comparable store sales, as well as a decrease of $9.1$5.4 million from net store opening and closing activity. The increase in comparable store sales was the result of increased traffic,transactions with increased average basket andcontributing conversion, particularly into the second half of the year with the implementation of our refined strategies.balance.

Cost of Sales (exclusive of depreciation). Cost of sales increased $8.2$24.3 million, or 1.8%,5.2%, to $495.3 million in fiscal 2025 from $471.0 million in fiscal 2024 from $462.8 million in fiscal 2023.2024. As a percentage of net sales, cost of sales deleverageddecreased 60210 basis points to 60.4% in fiscal 2025 from 62.5% in fiscal 2024 from 61.9% in fiscal 2023 driven by higherlower markdowns fromand ourlower large,shrink expenses since the strategic inventory reset in thefiscal second quarter2024, and higher shrink expense, partially offset by lower freight costsexpense ascompared ato resultfiscal of reduced rates from a new carrier relationship.2024.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $15.7$13.0 million, or 5.5%,4.3%, to $313.2 million in fiscal 2025 from $300.2 million in fiscal 2024 from $284.5 million in fiscal 2023.2024. The increase was primarily due to (1) $4.1$9.7 million of meritincremental increases for store, DCbonus and corporateequity roles; (2) $3.9 million of expenses related to CEO transition and shareholder defense; (3) $3.1 million of one-time investments, such as consulting feesexpense and store and DCdistribution laborcenter expense to processsupport off-price deals to fuel our strategic initiatives and (4) $1.8$66.9 million of storeincremental repair and maintenance costs.sales. As a percentage of sales, SG&A expenses deleveragedleveraged 190170 basis points to 38.2% in fiscal 2025 from 39.9% in fiscal 2024 from 38.0% in fiscal 2023, due to the aforementioned expense increases.2024.

Income Tax (Expense) Benefit. Income tax expense was $5.8$0.3 million in fiscal 20242025 compared to income tax benefitexpense of $3.9$5.8 million in fiscal 2023.2024. The difference is attributable to the $16.5 million valuation allowance related to deferred tax assets, primarily associated with net operating loss carryforward generated in fiscal years 2023 and 2024. The cumulative losses during recent years represents sufficient negative evidence to require a valuation allowance, which will be maintained until sufficient positive evidence exists to support its reversal.

Net Loss.Income (Loss). Net lossincome was $43.2$5.2 million in fiscal 20242025 compared to net loss of $12.0$43.2 million in fiscal 2023,2024, due to the factors discussed above.

Our capital allocation strategy is to maintain adequate liquidity to support current operations while investing in opportunities to profitably grow our business, thenincluding opportunities to accelerate growth through strategic roll-ups and synergistic acquisitions. At the discretion of our board of directors, we may also choose to return excess cash to shareholders through our share repurchase programs.shareholders. Our year-end cash and cash equivalents balance was $61.1$66.1 million compared to $79.7$61.1 million at the end of last year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our year-end inventory balance was $122.6$113.5 million, compared with $130.4$122.6 million at the end of fiscal 2023.2024. The decrease was the result of our large,strategic strategicdecrease in our average in-store inventory reset which leddue to theour markdownongoing ofinventory agedefficiency product in the second quarter plus the impact of a faster supply chaininitiatives and alower focuspack-and-hold on improved inventory productivity.inventory.

Capital expenditures in fiscal 20242025 were $12.1$22.7 million, aan decreaseincrease of $2.8$10.6 million from the prior year, primarily due to opening fewernew stores being opened and more stores being remodeled in fiscal 2024.2025. We anticipate capital expenditures in fiscal 20252026 in the range of $18$35 million to $22$40 million, primarily for opening upapproximately to 525 new stores and remodeling approximately 50 stores, combined with continued investments in our systems and distribution centers.stores.

Cash Flows From Operating Activities. Cash usedprovided inby operating activities was $3.8$21.0 million in fiscal 20242025 compared with cash used of $9.6$3.8 million in fiscal 2023.2024. For fiscal 2024,2025, significant sources of cash included $7.8increase in net income, as well as an $8.8 million reduction in inventory and a $0.1 million increase in accounts payable.inventory. Significant uses of cash include a $49.5$55.2 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities.

For fiscal 2023,2024, significant sources of cash included $3.5a $7.8 million fromreduction insurancein proceeds related to operating activitiesinventory and a $17.9$0.1 million increase in accounts payable. Significant uses of cash included (1)include a $58.3$49.5 million decrease in accrued expenses and other-long-term liabilities due primarily to payments of operating lease liabilities; (2) a $24.6 million increase in inventory due primarily to depleted inventory levels at the end of the prior year; and (3) a $3.5 million increase in income tax receivable.liabilities.

Cash Flows From Investing Activities. Cash used in investing activities was $10.1$8.5 million in fiscal 20242025 compared to cash used of $13.4$10.1 million in fiscal 2023.2024. Sources of cash in fiscal 2025 included $11.2 million from the sale of a building and $0.6 million from insurance proceeds. Cash used in fiscal 2024 consisted entirely of purchases of property and equipment. Cash used in fiscal 2023 consisted of $14.9 million of purchases of property and equipment, partially offset by $1.5 million from insurance proceeds related to investing activities.

Cash Flows From Financing Activities. Cash used in financing activities was $7.5 million in fiscal 2025 compared with $4.7 million in fiscal 20242024. comparedCash with $0.9 millionused in fiscal 2023.2025 included $6.3 million for share repurchases and $1.1 million to settle withholding taxes on the vesting of restricted stock. Cash used in fiscal 2024 wasincluded $3.8 million for share repurchases and $0.9 million to settle withholding taxes on the vesting of restricted stock. Cash used in fiscal 2023 was to settle withholding taxes on the vesting of restricted stock.

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our growth initiatives; and (3) operational needs, including salaries,payroll, occupancy costs, taxes and other operating costs. We have also historically used cash to repurchase stock under our stock repurchase programs. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of FebruaryJanuary 1,31, 2025,2026, our contractual commitments for operating leases totaled $289.3$309.9 million (with $60.7$63.5 million due within 12 months) and our purchase obligations for open merchandise orders totaled $138.0$161.7 million due within 12 months. See Note 8 to the Financial Statements for more information regarding lease commitments.

Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. Inherent in the retail inventory calculation are certain management judgments and estimates, including, among others, merchandise markups, markdowns and shrink, which impact the ending inventory valuation at cost as well as resulting cost of sales. Merchandise markdowns are reflected in the inventory valuation when the price of an item is lowered in the stores. We estimate and record an allowance for shrink for the period between the last physical count and the balance sheet date. The estimate of shrink can be affected by changes in actual shrink trends. Inventory shrink as a percentage of sales in fiscal 2024, fiscal 2023 and fiscal 2022 was 1.7%, 1.0% and 0.7%, respectively. The allowance for inventory shrink was $5.2 million as of February 1, 2025 and $3.9 million as of February 3, 2024. As a measure of sensitivity, a ten percent change in our estimated shrink as of FebruaryJanuary 1,31, 2025,2026, would not have materially impacted our cost of goods sold in fiscal 2024.2025. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We do not generally enter into such arrangements with our vendors. There were no material changes in the estimates or assumptions related to the valuation of inventory during fiscal 2024.2025.

In December 2023, the FASB issued ASU 2023-09, “Improvement to Income Tax Disclosures (Topic 740)”, which requires additional disclosures for income tax rate reconciliations, income taxes paid, and certain other tax disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. AdoptionIn isfiscal required2025, forthe annualCompany periodsadopted beginningASU after2023-09 Decemberin 15,the 2024.current period and retrospectively. The Companyadoption isof currentlyASU evaluating2023-09 did not have a material impact on the impact of this standard on itsCompany’s consolidated financial statements andas relatedthe disclosures.requirements only impact annual income tax reporting disclosures in the Notes to the Company’s consolidated financial statements. Refer to “Note 5. Income Taxes” for additional information.

The factors that may result in actual results differing from such forward-looking information include, but are not limited to: uncertainties relating to general economic conditions, including inflation, energy and fuel costs, unemployment levels, and any deterioration whether caused by acts of war, terrorism, political or social unrest (including any resulting store closures, damage or loss of inventory) or other factors; changes in market interest rates and market levels of wages; the imposition of new taxes on imports, new tariffs and changes in existing tariff rates; the imposition of new trade restrictions and changes in existing trade restrictions; impact of natural disasters such as hurricanes; uncertainty and economic impact of pandemics, epidemics or other public health emergencies; transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to attract and retain workers; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; consumer confidence and changes in consumer spending patterns; competition within the industry; competition in our markets; the duration and extent of any economic stimulus programs; changes in product mix; interruptions in suppliers’ businesses; risks related to cybersecurity, data privacy and intellectual property; temporary changes in demand due to weather patterns; seasonality of the Company’s business; the results of pending or threatened litigation; delays and costs associated with building, opening, remodeling, assuming leases,leases and operating new stores; delays and costs associated with building, opening or expanding new or existing distribution centers; changes in regulator’sregulatory requirements or stakeholder’sstackholder’s expectations on environmental, social and sustainability related topics;topics, challenges effectively managing the use of artificial intelligence; and strategic transactions that could negatively impact our liquidity, increase our expenses, or present significant distractions to management; debt and equity market conditions, including the ability to access capital markets on favorable terms or at all; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2026 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.

We are thea leading off-price value retailer of apparel, accessories and home trends primarily for Black families.families in the United States. Our high-qualityhigh quality and trend-right merchandise offerings at everyday low prices are designed to appeal to the fashion and trend preferences of value-consciousvalue-concious customers.

As of MayAugust 2,1, 2026, we operated 591594 stores in urban, suburban and rural markets in 33 states.

We are monitoring trends in general economic conditions,conditions including on-goinginflation, inflationary pressures, new and changing tariff programstariffs and changes in consumer sentiment. We continuealso toregularly monitor the impacts on our business of unemployment levels, wage inflation, interest rates, inflation rates, housing costs, energy costs, gas prices, consumer confidence, consumer perception of economic conditions, costs to source our merchandise and supply chain disruptions.

The nature of our business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. In addition, sales of clothing are directly impacted by the timing of the seasons to which the clothing relates. While we have expanded our product offerings to balance discretionary with non-discretionary products,product, traffic to our stores is still influenced by weather patterns to some extent.

Net sales consist of store sales and layaway fees, net of returns by customers. Cost of sales consists of the cost of products we sell and associated freight costs. Depreciation is not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Selling, general and administrative expenses are comprised of store costs, including payroll and occupancy costs, corporate and distribution center costscosts, and marketingadvertising costs.

The following discussion contains references to fiscal years 2026 and 2025, which represent fiscal years ending or ended on January 30, 2027 and January 31, 2026, respectively. Fiscal 2026 and fiscal 2025 both have a 52-week accounting period.periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part I, Item 1 of this Report.

The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year as a result of the seasonality of our businessbusiness, and the current economic uncertainty.

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 open for at least 14 full consecutive months without closure for more than seven days within the same fiscal month. Remodeled and relocated stores are included in the comparable store sales results if the selling square footage is not changed significantly, the store is not closed for more than five days in any fiscal month and the store remains in the same trade area. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability. In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate the overall performance of each individual store. Finally, we monitor corporate and distribution center expenses against budgeted amounts.

Thirteen Weeks Ended MayAugust 2,1, 2026 and MayAugust 3,2, 2025

Net Sales. Net sales increased $29.2$20.9 million, or 14.4%,10.9%, to $230.9$211.6 million in the firstsecond quarter of 2026 from $201.7$190.8 million in the firstsecond quarter of 2025. TheComparable increase instore sales wasincreased due10.5%, to a 13.9% increaseresulting in comparable store sales, as well as an increase of $1.5$19.8 million fromin netsales. Net store opening and closing activity.activity resulted in a net increase of $1.0 million in sales.

Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $16.7$11.3 million, or 13.7%,9.8%, to $138.6$125.7 million in the firstsecond quarter of 2026 from $121.9$114.5 million in the firstsecond quarter of 2025. Cost of sales as a percentage of sales decreasedwas to59.4% in the second quarter of 2026 and 60.0% in the first quarter of 2026 from 60.4% in the firstsecond quarter of 2025. The change was due to higher merchandise margin and lower shrink expense,shrink, partially offset by fuelhigher surchargesfreight in freight.expense.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $4.8$3.4 million, or 6.5%,4.3%, to $79.7$82.3 million in the firstsecond quarter of 2026 from $74.9$78.9 million in the firstsecond quarter of 2025. The increase was primarily duedriven by certain store expenses to ansupport increaseadditional in store and corporate expenses and incentive compensation accrual, partially offset by lower distribution center expenses.sales. As a percentage of sales, selling, general and administrative expenses decreased to 34.5%38.9% in the firstsecond quarter of 2026 from 37.1%41.4% in the firstsecond quarter of 2025.2025, primarily driven by the aforementioned items.

Depreciation. Depreciation expense increased $0.7$1.0 million, or 16.9%,19.7%, to $5.1$5.4 million in the firstsecond quarter of 2026 from $4.4$4.5 million in the firstsecond quarter of 2025.

NetImpairment. Income.There Netwere incomeno wasnon-cash $7.8impairment millionexpenses related to underperforming stores in the firstsecond quarter of 2026 compared to net income of $0.9$0.2 million in the firstsecond quarter of 20252025, duecomprised toof theleasehold factorsimprovements discussedand above.fixtures and equipment.

Our capital allocation strategy is to maintain adequate liquidity to prioritize investments in opportunities to profitably grow our business and maintain current operations,operations. thenOur to return excess cash to shareholders through ourexisting share repurchase programs.authorization also remains in place with $40 million of authorization outstanding. We will deploy or return capital based on the opportunities available to us, market conditions, and ultimately, where we believe we can generate the greatest long term value for our shareholders. Our quarter-end cash and cash equivalents balance was $81.1$55.9 million compared to $41.6$50.4 million at the end of the firstsecond quarter oflast 2025.year. Until required for other purposes, we maintain cash and cash equivalents in deposit or money market accounts.

Our quarter-end inventory balance was $115.2$126.4 million, a 7.5% increase compared withto $109.9$117.6 million at the end of the firstsecond quarter oflast 2025.year. The increase was primarily relateddriven by inventory investments to increasedsupport salesstrong volume.customer demand.

Capital expenditures in the first quartertwenty-six weeks of 2026 were $5.8$15.6 million, an increase of $3.7$7.9 million fromover the first quartertwenty-six weeks of 2025, as we investedincreased our investments in morenew existingstores storeand remodels. We anticipate capital expenditures in fiscal 2026 to be in the range of $35 million to $40 million, primarily for opening approximately 25 new stores and remodeling approximatelyof 50existing stores.

No shares were repurchased in the first quartertweny-six weeks of fiscal 2026. In the first quartertwenty-six weeks of fiscal 2025, we returned $6.3 million to shareholdersstockholders through share repurchases. See Part II, Item 2 of this Report and Note 8 to the Financial Statements for more information.

We have a revolving credit facility that matures in April 2030 and provides a $75 million credit commitment and a $25 million uncommitted “accordion” feature. Additional details of the credit facility are in Note 4 to the Financial Statements. At the end of the firstsecond quarter of 2026, we had no borrowings under the credit facility and $2.2 million in letters of credit outstanding.

Cash Flows From Operating Activities. Net cash provided by operating activities was $20.9$6.7 million in the first quartertwenty-six weeks of 2026 compared to net cash used in operating activities of $11.0$7.1 million in the firstsame quarterperiod of 2025. SourcesSignificant sources of cash infor the first quartertwenty-six weeks of 2026 resulted fromincluded net income adjusted for non-cash expensesitems totaling $26.3$45.0 million (compared to a net income adjusted for non-cash items of $18.5$29.9 million in the first quartertwenty-six weeks of 2025), and an increase of $12.6 million in accounts payable (compared to a decrease of $21.9 million in the first quarter of 2025).2025.

Significant uses of cash duringfrom operating activities in the first quartertwenty-six weeks of 2026 included (1) a decrease of $11.3$21.8 million decrease in accrued expenses and other long-term liabilities (compared to a decrease of $19.4$29.6 million decrease in the first quartertwenty-six weeks of 2025) anddue primarily to payments of operating lease liabilities; (2) ana $7.9 million increase of $3.8 million in prepaid and other current assets (compared to ana $9.4 million dollar increase of $3.5 million in the first quartertwenty-six weeks of 2025; (3). a $12.9 million increase in inventory in the first twenty-six weeks of 2026 compared to a $5.1 million decrease in inventory for the same period in 2025 and (4) a $2.8 million decrease in accrued compensation in the first twenty-six weeks of 2026 compared to a $2.0 increase in the same period last year.

Cash Flows From Investing Activities. Cash used in investing activities was $5.8$15.6 million in the first quartertwenty-six weeks of 2026 compared to $2.1$3.5 million provided in the same period last year. Cash used of $15.6 million in the first quartertwenty-six weeks of 2025. Cash used in the first quarter offiscal 2026 and 2025 consisted of purchases of property and equipment. The cash provided of $3.5 million in the first twenty-six weeks of 2025 was from the sale of a building for $11.2 million, offset by $7.7 million used for the purchases of property and equipment.

Cash Flows From Financing Activities. Cash used in financing activities was $0.0$1.3 million in the first quartertwenty-six weeks of 2026 compared to $6.4$7.1 million in the firstsame quarterperiod oflast 2025.year. Cash used in the first quartertwenty-six weeks of 2025fiscal included2026 $6.3was million for share repurchases and $0.1$1.3 million to settle withholding taxes on the vesting of restricted stock.stock, compared to $0.8 million used to settle withholding taxes on the vesting of restricted stock and $6.3 million for share repurchases in the first twenty-six weeks of fiscal 2025.

Our principal cash requirements consist of (1) inventory purchases; (2) capital expenditures to invest in our infrastructure; and (3) operational needs, including salaries, occupancy costs, taxes and other operating costs. We may also use cash to fund any share repurchases, make any required debt payments and satisfy other contractual obligations. Historically, we have met these cash requirements using cash flow from operations and short-term trade credit. As of MayAugust 2,1, 2026, our contractual commitments for operating leases totaled $226.5$224.8 million (with $64.3$64.9 million due within 12 months). See Note 1011 to the Financial Statements for more information regarding lease commitments.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements,statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.