Filed Pursuant to Rule 424(b)(4)
Registration No. 333-130863

1,675,000 Shares

Common Stock

$42.25 per share

The selling stockholders of Citi Trends, Inc. identified in this prospectus are offering 1,675,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

Our shares of common stock are listed for trading on the Nasdaq National Market under the symbol “CTRN.” On January 25, 2006, the last reported sale price of our common stock on the Nasdaq National Market was $42.66 per share.

Investing in the common stock involves risks. See “Risk Factors” beginning on page 7.

The selling stockholders have granted an option to the underwriters to purchase up to a maximum of 251,250 additional shares of our common stock from the selling stockholders within 30 days following the date of this prospectus to cover over-allotments, if any.

The underwriters expect to deliver the shares in New York, New York on or about January 31, 2006

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

CIBC World Markets

The date of this prospectus is January 26, 2006

Table of Contents

This summary highlights information contained in other parts of this prospectus, and because it is only a summary, it does not contain all of the information that you should consider before buying shares. You should read the entire prospectus carefully, including the risk factors and financial statements. All share numbers in this prospectus reflect a 26-for-one stock split of our common stock, which was effected on May 11, 2005. Our fiscal year ends on the Saturday closest to January 31, and, except as otherwise provided, references in this prospectus to a fiscal year mean the 52- or 53-week period ended on the Saturday closest to January 31 of the succeeding year. Fiscal 2004, for example, refers to the fiscal year ended January 29, 2005.

We are a rapidly growing, value-priced retailer of urban fashion apparel and accessories for the entire family. We offer quality, branded merchandise for men, women and children, including products from nationally recognized brands, as well as private label products and a limited assortment of home décor items. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. Through strong relationships with our suppliers, we believe that we are able to offer our products at compelling values. We seek to provide nationally recognized branded merchandise at 20% to 60% discounts to department and specialty stores’ regular prices.
We operate 236 stores (including two stores currently closed due to hurricane damage) in both urban and rural markets in fourteen states. Originally, our stores were located in the Southeast, and during late fiscal 2004 and fiscal 2005 we expanded into the Mid-Atlantic region, the Midwest and Texas. Our stores average approximately 9,000 square feet of selling space, and our stores opened since the beginning of fiscal 2003 average approximately 10,500 square feet of selling space. Our stores are generally located in neighborhood strip shopping centers that are convenient to low and moderate income consumers. These locations allow us to serve our customers at rents that we believe are attractive, and combined with our differentiated merchandise assortment, compelling value proposition and efficient operating model, enable us to generate strong returns on store investments. Our new stores typically return our initial unit investment within 12 to 14 months.
Our predecessor was founded in 1946 and grew to become a chain of family apparel stores operating in the Southeast under the Allied Department Stores name. In 1999, our chain of stores, then consisting of 85 stores throughout the Southeast, was acquired by Hampshire Equity Partners II, L.P., a private equity firm. Our management team implemented several strategies that have driven our success including refining our merchandise offerings with a focus on urban fashions for the entire family, accelerating and completing the remodeling of virtually all of the 85 acquired stores, and executing an aggressive new store growth plan. We

	•	grew our store base from 85 stores at the time of the acquisition to 236 stores as of January 4, 2006;
	•	increased average sales per store from $0.8 million in fiscal 2000 to $1.1 million in fiscal 2004;
	•	generated comparable store sales increases in each of the past five fiscal years;
	•	increased net sales from $80.9 million in fiscal 2000 to $203.4 million in fiscal 2004, representing a compound annual growth rate of 25.9%; and
	•	increased net income from $1.2 million in fiscal 2000 to $7.3 million in fiscal 2004.

We have continued our rapid growth in fiscal 2005 with net sales increasing 40.7% to $193.0 million in the first nine months of fiscal 2005 from $137.1 million in the first nine months of fiscal 2004. Net income grew 165.6% to $6.3 million in the first nine months of fiscal 2005 versus $2.4 million in the first nine months of fiscal 2004. Our comparable store sales increased 6.9%, 11.5% and 25.0%, respectively, in each of the first three quarters of fiscal 2005 compared to 3.5%, 0.3% and 3.0%, respectively, in each of the first three quarters of fiscal 2004. As discussed more fully below in “—Recent Developments” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Overview,” following Hurricanes

Katrina, Rita and Wilma, we experienced a significant increase in sales since September of fiscal 2005 in our store locations in the markets directly affected by the hurricanes and in contiguous markets. This increase more than offset the sales lost on the days certain of our stores were closed due to the hurricanes. This positive post-hurricane impact has begun to dissipate, and we anticipate that the magnitude of this trend will continue to diminish over time.
Our goal is to be the leading value-priced retailer of urban fashion apparel and accessories. We believe the following business strengths differentiate us from our competitors and are important to our success.

	•	focus on providing a timely and fashionable assortment of urban apparel and accessories;
	•	superior value proposition, with nationally recognized brands offered at 20% to 60% discounts to department and specialty stores’ regular prices;
	•	merchandise mix that appeals to the entire family, distinguishing our stores from many competitors that focus only on women and reducing our exposure to fashion trends and demand cycles in any single category;
	•	strong and flexible sourcing relationships managed by our 20-plus member buying team, staffed by individuals with an average of more than 20 years of retail experience;
	•	attractive fashion presentation and store environment similar to a specialty apparel retailer, rather than a typical off-price store; and
	•	highly profitable store model.

Our growth strategy is to open stores in new and existing markets, as well as to increase sales in existing stores. Adding stores in the markets we currently serve enables us to benefit from enhanced name recognition and achieve advertising and operating synergies, and entering new markets opens additional growth opportunities. For fiscal 2005, we have opened 36 new stores thus far and have no additional openings planned. We expect to open 42 to 45 new stores in fiscal 2006. Approximately 90% of the new stores we intend to open in fiscal 2006 will be located in states we currently serve. We intend to increase comparable store sales primarily through merchandising enhancements and the expansion of product categories such as home décor and intimate apparel.

Our strong operating and financial momentum continued in the first two months of the fourth quarter of fiscal 2005. As discussed in this section and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview”, following Hurricanes Katrina, Rita and Wilma we experienced a significant increase in sales in our store locations in the markets directly affected by the hurricanes and in contiguous markets. This increase more than offset the sales lost on the days certain of our stores were closed for one or more days due to the hurricanes.

	•	We expect that net sales for the four-week period ended November 26, 2005 increased 43.5% to $24.7 million compared with $17.2 million for the four-week period ended November 27, 2004. We expect that comparable store sales increased 26.0% for the four-week period ended November 26, 2005 compared with a 0.9% increase in the prior-year period. We expect further that comparable store sales in the non-affected markets increased approximately 18.1% for the four-week period ended November 26, 2005 compared to the prior year period.
	•	Likewise, we expect that our net sales for the five-week period ended December 31, 2005 increased 46.4% to $51.3 million compared with $35.0 million for the five-week period ended January 1, 2005. We expect that comparable store sales increased 21.4% for the five-week period ended December 31, 2005 compared with a 4.3% increase in the prior-year period. We expect further that comparable store sales in the non-affected markets increased approximately 15.3% for the five-week period ended December 31, 2005 compared to the prior year period.

The preceding financial information contains our expectations relating to our results of operations for two of the months of the fourth quarter of fiscal 2005. Our actual results could differ from these expectations. Factors that could cause our actual results to differ from these expectations include possible accounting adjustments resulting from our quarter-end accounting and review procedures and other factors, including those described under “Special Note Regarding Forward-Looking Statements.”

We are incorporated in Delaware, and our principal executive offices are located at 102 Fahm Street, Savannah, Georgia 31401. Our telephone number is (912) 236-1561 and website address is www.cititrends.com. Information contained in, or accessible through, our website does not constitute part of this prospectus.

Common stock offered by the selling stockholders		1,675,000 shares
Common stock to be outstanding after the offering		13,389,327 shares
Use of proceeds		The selling stockholders will receive all of the net proceeds from the sale of shares of our common stock offered by this prospectus. We will not receive any of the proceeds from the sale of shares of common stock offered by this prospectus.
Nasdaq National Market Symbol		“CTRN”

Unless otherwise stated, information in this prospectus assumes:

	•	a 26-for-one stock split of our common stock, which was effected on May 11, 2005;
	•	no exercise of outstanding options to purchase 1,574,133 shares of common stock outstanding as of January 4, 2006, at a weighted average exercise price of $2.60 per share, other than the 376,612 options to be exercised by certain selling stockholders in connection with this offering; and
	•	no exercise of the underwriters’ over-allotment option.

				Fiscal Year Ended(1)																				Nine Months Ended
				February 3,				February 2,				February 1,				January 31,				January 29,				October 30,				October 29,
				2001				2002				2003				2004				2005				2004				2005
				(dollars in thousands, except per share amounts)																				(unaudited)
Statement of Income Data:
	Net sales			$	80,939			$	97,933			$	124,951			$	157,198			$	203,442			$	137,129			$	192,961
	Cost of sales				51,762				62,050				77,807				98,145				127,308				86,288				119,039
	Gross profit				29,177				35,883				47,144				59,053				76,134				50,841				73,922
	Selling, general and administrative expenses				26,834				31,405				38,760				48,845				63,594				46,440				64,281
	Income from operations				2,343				4,478				8,385				10,208				12,540				4,401				9,641
	Interest expense (income), net(2)				787				455				256				563				732				557				(197	)
	Income before income taxes				1,556				4,023				8,129				9,645				11,808				3,844				9,838
	Provision for income taxes				358				1,566				3,101				3,727				4,551				1,480				3,560
	Net income			$	1,198			$	2,457			$	5,028			$	5,918			$	7,257			$	2,364			$	6,278
	Net income per common share:
		Basic		$	0.09			$	0.23			$	0.51			$	0.62			$	0.78			$	0.25			$	0.55
		Diluted		$	0.09			$	0.22			$	0.44			$	0.54			$	0.67			$	0.22			$	0.49
	Weighted average shares used to compute net income per share:
		Basic			9,269,000				9,219,167				9,295,000				9,295,000				9,302,800				9,305,400				11,348,502
		Diluted			9,269,000				9,791,999				10,757,110				10,771,410				10,879,388				10,945,038				12,847,419
Additional Operating Data:
	Number of stores:
		Opened during period			23				12				16				25				40				35				26
		Closed during period			0				4				2				1				1				1				0	(3)
		Open at end of period			115				123				137				161				200				195				226	(4)
	Selling square footage at end of period				786,534				891,843				1,043,713				1,290,039				1,715,943				1,663,597				2,017,014
	Comparable store sales increase(5)				17.6%				6.5%				14.6%				5.7%				3.0%				2.3%				14.1%	(6)
	Average sales per store(7)			$	782			$	823			$	961			$	1,055			$	1,127			$	770			$	906

			As of
			October 29,
			2005
			(in thousands)
Balance Sheet Data:
	Cash and cash equivalents		$	9,371
	Total assets			125,378
	Total liabilities			52,585
	Total stockholders’ equity			72,793

(1)	Our fiscal year ends on the Saturday closest to January 31 of each year. Fiscal years 2001, 2002, 2003 and 2004 comprise 52 weeks. Fiscal year 2000 comprises 53 weeks.
(2)	Our Series A Preferred Stock, which was redeemed using a portion of the net proceeds from our initial public offering, was reclassified as debt as of the second quarter of fiscal 2003, in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The amount of dividends treated as interest expense was $100,000 for the nine months ended October 29, 2005, $324,450 in fiscal 2004, $189,000 in fiscal 2003 and none in fiscal 2002.
(3)	Stores closed for one or more days due to Hurricanes Katrina, Rita and Wilma are not included in this item.
(4)	The number of stores open at the end of the period includes four stores closed as of October 29, 2005, as a result of Hurricanes Katrina, Rita and Wilma, two of which have since been re-opened.
(5)	Stores included in the comparable store sales calculation for any period are those stores that were opened prior to the beginning of the preceding fiscal year and were still open at the end of such period. Relocated stores and expanded stores are included in the comparable store sales results.
(6)	This data includes the positive impact of sales as a result of Hurricanes Katrina, Rita and Wilma during the months of September and October.
(7)	Average sales per store is defined as net sales divided by the average of stores open at the end of the prior period and stores open at the end of the current period.

Risk Factors

An investment in shares of our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide whether to buy our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Citi Trends, Inc.

Our success depends on our ability to anticipate, identify and respond rapidly to changes in consumers’ fashion tastes, and our failure to evaluate adequately fashion trends could have a material adverse effect on our business, financial condition and results of operations.

The apparel industry in general and our core customer market in particular are subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our success is heavily dependent on our ability to anticipate, identify and capitalize on emerging fashion trends, including products, styles and materials that will appeal to our target consumers. Our failure to anticipate, identify or react appropriately to changes in styles, trends, brand preferences or desired image preferences is likely to lead to lower demand for our merchandise, which could cause, among other things, sales declines, excess inventories and higher markdowns. The inaccuracy of our forecasts regarding fashion trends could have a material adverse effect on our business, financial condition and results of operations.

If we are unsuccessful in competing with our retail apparel competitors, our market share could decline or our growth could be impaired and, as a result, our financial results could suffer.

The retail apparel market is highly competitive, with few barriers to entry. We compete against a diverse group of retailers, including national off-price apparel chains such as The TJX Companies, Inc., or TJX Companies, Burlington Coat Factory Warehouse Corp., or Burlington Coat Factory, and Ross Stores, Inc., or Ross Stores; mass merchants such as Wal-Mart and Kmart; smaller discount retail chains that only sell women’s products, such as Rainbow, Dots, Fashion Cents, It’s Fashions (a subsidiary of The Cato Corporation) and Simply Fashions; and general merchandise discount stores and dollar stores, which offer a variety of products, including apparel, for the value-conscious consumer. We also compete against local off-price and specialty retail stores, regional retail chains, traditional department stores, and Internet and other direct retailers.

The level of competition we face from these retailers varies depending on the product segment, as many of our competitors do not offer apparel for the entire family. Our greatest competition is generally in women’s apparel. Many of our competitors are larger than we are and have substantially greater resources than we do and, as a result, may be able to adapt better to changing market conditions, exploit new opportunities, exert greater pricing pressures on suppliers and open new stores more quickly and effectively than we can. Many of these retailers have better name recognition among consumers than we have and purchase significantly more merchandise from vendors. These retailers may be able to purchase branded merchandise that we cannot purchase because of their name recognition and relationships with suppliers, or they may be able to purchase branded merchandise with better pricing concessions than we receive. Our local and regional competitors have extensive knowledge of the consumer base and may be able to garner more loyalty from customers than we can. In addition, our online competitors enjoy a retailing advantage over us as we have only recently completed the upgrade of our website to enable Internet sales of selected urban branded apparel provided by third parties. If the consumer base we serve is satisfied with the selection, quality and price of our competitors’ products, consumers may decide not to shop in our stores. Additionally, if our existing competitors or other retailers decide to focus more on our core customers, particularly African-Americans consumers, we may have greater difficulty in competing effectively, our business and results of operations could be adversely affected, and the market price of our common stock could suffer.

The retail industry periodically has experienced consolidation and other ownership changes. In the future, other United States or foreign retailers may consolidate, undergo restructurings or reorganizations, or realign their affiliations. Any of these developments could result in our competitors increasing their buying power or market visibility. These developments may cause us to lose market share and could have a material adverse effect on our sales, revenues and results of operations.

We could experience a reduction in sales and revenues or reduced cash flows if we are unable to fulfill our current and future merchandising needs.

We depend on our suppliers for the continued availability and satisfactory quality of our merchandise. Most of our suppliers could discontinue selling to us at any time. Additionally, if the manufacturers or other owners of brands or trademarks terminate the license agreements under which some of our suppliers sell us products, we may be unable to obtain replacement merchandise of comparable fashion appeal or quality, in the same quantities or at the same prices. If we lose the services of one or more of our significant suppliers or one or more of them fail to meet our merchandising needs, we may be unable to obtain replacement merchandise in a timely manner. If our existing suppliers cannot meet our increased needs and we cannot locate alternative supply sources, we may be unable to obtain sufficient quantities of the most popular items of the nationally recognized brands at attractive prices, which could negatively impact our sales, revenues and results of operations.

As an apparel retailer, we rely on numerous third parties in the supply chain to produce and deliver the products that we sell, and our business may be negatively impacted by their failure to comply with applicable law.

As an importer and retailer of goods, we rely on numerous third parties to supply the products that we sell. Violations of law by our importers, buying agents, manufacturers or distributors could result in delays in shipments and receipt of goods and could subject us to fines or other penalties, any of which could restrict our business activities, increase our operating expenses or cause our revenues to decline. Further, we are susceptible to the receipt of counterfeit brands or unlicensed goods. We could incur liability with manufacturers or other owners of the brands or trademarked products if we inadvertently receive and sell counterfeit brands or unlicensed goods and, therefore, is important that we establish relationships with reputable vendors to prevent the possibility that we inadvertently receive counterfeit brands or unlicensed goods. Although we have a quality assurance team to check merchandise in an effort to assure that we purchase only authentic brands and licensed goods and are careful in selecting our vendors, we may receive products that we are prohibited from selling or incur liability for selling counterfeit brands or unlicensed goods, which could increase our operating expenses and cause our net income to decline.

If our growth strategy is unsuccessful, our financial condition and results of operation could suffer and the market price of our common stock could decline.

Our ability to continue to increase our net sales and earnings depends, in large part, on opening new stores and operating our new and existing stores profitably. We opened 40 new stores in fiscal 2004. For fiscal 2005, we have opened 36 new stores thus far and have no additional openings planned. We expect to open 42 to 45 new stores in fiscal 2006. If we are unable to open all of these stores or operate them profitability, we may not achieve our forecasted sales and earnings growth targets. Additionally, growth of our store base will place increased demands on our operating, managerial and administrative resources and may lead to management and operating inefficiencies, including merchandising, personnel, distribution and integration problems. These demands and inefficiencies may cause deterioration in the financial performance of our individual stores and, therefore, our entire business.

We would experience increased operating costs and limited amounts of growth if we are unable to obtain reasonably priced financing.

We may need to raise additional debt or equity capital in the future to open new stores, to respond to competitive pressures or to respond to unforeseen financial requirements. We may not be able to obtain additional capital on commercially reasonable terms or at all. Our inability to obtain reasonably priced financing could create increased operating costs and diminished levels of growth, as we could be forced to incur indebtedness with above-market interest rates or with substantial restrictive covenants, issue equity securities that dilute the ownership interests of existing stockholders or scale back our operations and/or store growth strategy.

A significant disruption to our distribution process or southeastern retail locations could have a material adverse effect on our business, financial condition and results of operations.

Our ability to distribute merchandise to our store locations in a timely manner is essential to the efficient and profitable operation of our business. We have two distribution centers located in Savannah, Georgia, one of which also serves as our corporate headquarters, and our recently acquired distribution center in Darlington, South Carolina. Together, these facilities provide distribution capacity to support twice our current sales volume. Any natural disaster or other disruption to the operation of any of these facilities due to fire, hurricane, other natural disaster or any other cause or our inability to continue the timely and efficient build out of our Darlington, South Carolina distribution center could damage a significant portion of our inventory or impair our ability to stock our stores and process product returns to suppliers adequately.

In addition, the southeastern United States, where our three distribution centers are located, is vulnerable to significant damage or destruction from hurricanes and tropical storms. Although we maintain insurance on our stores and other facilities, the economic effects of a natural disaster that affects our distribution centers and/or a significant number of our stores could increase our operating expenses, impair our cash flows and reduce our revenues, which could negatively impact the market price of our common stock.

Hurricanes Katrina, Rita and Wilma have temporarily increased our sales in our store locations in the affected markets and contiguous markets.

Hurricanes Katrina, Rita and Wilma, which caused damage to areas of the Gulf Coast region of the United States during the period of August 2005 to October 2005, impacted our stores in Alabama, Florida, Mississippi, Louisiana and Texas. Thirty-eight of our stores were closed for one or more days due to the hurricanes. Two existing stores have not reopened as of January 4, 2006. In addition, one store scheduled to open in September 2005 was heavily damaged by Hurricane Katrina and remains unopened. Following Hurricanes Katrina, Rita and Wilma, we experienced an increase in sales in our store locations in the markets directly affected by Hurricanes Katrina, Rita and Wilma and in contiguous markets. We believe that these sales increases resulted directly from aid distributed to our customers and the need for our customers to replace lost or damaged clothing and other items. These sales increases have begun to dissipate, and we anticipate that the magnitude of these increases will continue to diminish over time and that we will not continue to increase or maintain our sales at the levels achieved in the months of September, October, November and December in fiscal 2005.

The future contribution of stores affected by the hurricanes to our results of operations will depend on the recovery of the local economy in general in the hurricane impacted areas of the Gulf Coast region. A natural disaster producing the devastation of Hurricane Katrina is unprecedented in recent U.S. history, and the recovery of the local economies and impacted industries in the affected regions will to a certain extent depend on the leadership and actions of federal, state and local governments, which are beyond our control. We can provide no assurance as to the timing and ultimate success of recovery efforts led by federal, state and local governments. In addition, the long-term impact of the hurricanes, such as lack of housing, unemployment or increases in gasoline prices, may disproportionately affect many of our customers in the Gulf Coast region.

Our net sales, inventory levels and earnings fluctuate on a seasonal basis, which makes our business more susceptible to adverse events that occur during those seasons.

Our net sales and earnings are disproportionately higher during the first and fourth quarters each year due to the importance of the spring selling season, which includes Easter, and the fall selling season, which includes Christmas. Factors negatively affecting us during the first and fourth quarters, including adverse weather and unfavorable economic conditions, will have a greater adverse effect on our financial condition than if our business were less seasonal.

In order to prepare for the spring and fall selling seasons, we must order and keep in stock significantly more merchandise than during other parts of the year. This seasonality makes our business more susceptible to the risk that our inventory will not satisfy actual consumer demand. Any unanticipated demand imbalances during these peak shopping seasons could require us either to sell excess inventory at a substantial markdown or fail to satisfy our consumers. In either event, our net sales and gross margins may be lower than historical levels, which could have a material adverse effect on our business, financial condition and results of operations.

We experience fluctuations and variability in our comparable store sales and quarterly results of operations and, as a result, the market price of our common stock may fluctuate or decline substantially.

Our comparable store sales and quarterly results have fluctuated significantly in the past based on a number of economic, seasonal and competitive factors, and we expect them to continue to fluctuate in the future. Since the beginning of fiscal 2003, our quarter-to-quarter comparable store sales have ranged from an increase of 0.3% to an increase of 25.0%. The largest of these increases was due to the unusually high customer traffic following Hurricanes Katrina, Rita and Wilma. In addition, we may be unable to maintain historical levels of comparable store sales as we execute our growth strategy and expand our business. This variability could cause our comparable store sales and quarterly results to fall below the expectations of securities analysts or investors, which could result in volatility of the market price of our common stock. If our comparable store sales and quarterly results fail to meet the expectations of the market generally, the market price of our common stock could decline substantially.

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

Downturns, or the expectation of a downturn, in general economic conditions could adversely affect consumer spending patterns, our sales and our results of operations. Because apparel generally is a discretionary purchase, declines in consumer spending patterns may have a more negative effect on apparel retailers than some other retailers. Therefore, we may not be able to maintain our historical rate of growth in revenues and earnings, or remain as profitable, if there is a decline in consumer spending patterns. In addition, since the majority of our stores are located in the southeastern United States, our operations are more susceptible to regional factors than the operations of our more geographically diversified competitors. Therefore, any adverse economic conditions that have a disproportionate effect on the southeastern United States could have a greater negative effect on our sales, revenues and results of operations than on retailers with a more geographically diversified store base.

Our failure to protect our trademarks could have a negative effect on our brand image and limit our ability to penetrate new markets.

We believe that our “Citi Trends” trademark is integral to our store design and our success in building consumer loyalty to our brand. We have registered this trademark with the U.S. Patent and Trademark Office. We have also registered, or applied for registration of, additional trademarks with the U.S. Patent and Trademark Office that we believe are important to our business. We cannot assure you that these registrations will prevent imitation of our name, merchandising concept, store design or private label merchandise or the

infringement of our other intellectual property rights by others. Imitation of our name, concept, store design or merchandise in a manner that projects lesser quality or carries a negative connotation of our brand image could have a material adverse effect on our business, financial condition and results of operations.

In addition, we cannot assure you that others will not try to block the manufacture or sale of our private label merchandise by claiming that our merchandise violates their trademarks or other proprietary rights since other entities may have rights to trademarks that contain the word “Citi” or may have rights in similar or competing marks for apparel and/or accessories. Although we cannot currently estimate the likelihood of success of any such lawsuit or ultimate resolution of such a conflict, such a controversy could have a material adverse effect on our business, financial condition and results of operations.

Our failure to implement and maintain effective internal controls in our business could have a material adverse effect on our business, financial condition, results of operations and stock price.

We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. We may be required to be in compliance with Section 404 as early as the time we file our annual report for fiscal 2006 with the Securities and Exchange Commission, or the Commission. During the course of our testing, we may identify deficiencies in our internal controls, which we may be unable to correct in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain the adequacy of our internal controls, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. If we cannot produce reliable financial reports or prevent fraud, our business, financial condition and results of operations could be harmed, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly and we may be unable to obtain additional financing to operate and expand our business.

Several of our stores have been substantially damaged by Hurricanes Katrina, Rita and Wilma. There can be no assurance that our losses from the hurricanes will be completely covered by our insurance.

We estimate that Hurricanes Katrina, Rita and Wilma caused total damages of approximately $1.2 million in our stores located in five of the fourteen states in which we currently operate stores. In addition, thirty-eight of our stores were closed for one or more days due to the hurricanes, of which two existing stores have not reopened as of January 4, 2006. We are seeking to recover most of our damages attributable to the hurricanes from insurance under the insurance policies that we maintain. There can be no assurance that our losses from property damage will be offset by the proceeds of insurance obtained under our insurance policies.

Adverse trade restrictions may disrupt our supply of merchandise. We also face various risks because much of our merchandise is imported from abroad.

We purchase the products we sell directly from over 1,000 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 Far East, including Taiwan and the Philippines. The countries in which our merchandise currently is manufactured or may be manufactured in the future could become subject to new trade restrictions imposed by the United States or other foreign governments. Trade restrictions, including increased tariffs or quotas, embargoes, and customs restrictions, against apparel items, as well as United States or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and have a material adverse effect on our business, financial condition and results of operations. In addition, our merchandise supply could be impacted if our vendors’ imports become subject to existing or future duties and quotas, or if our vendors face increased competition from other companies for production facilities, import quota capacity and shipping capacity.

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

The United States may impose new initiatives that adversely affect the trading status of countries where apparel is manufactured. These initiatives may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products imported from countries where our vendors acquire merchandise. Any of these factors could have a material adverse effect on our sales, revenues and results of operations.

The removal of import quotas on textiles and clothing in the future may adversely affect our merchandise supply, impact our sales and reduce our cash flows.

On January 1, 2005, in accordance with the World Trade Organization, or the WTO, Agreement on Textiles and Clothing, the import quotas on textiles and clothing manufactured by countries that are members of the WTO were eliminated. Subsequently, the United States and Europe experienced a surge of imported goods from China, a country that benefited from the removal of the quotas. In response, the United States initially implemented new quotas against various textile and apparel items from China and ultimately negotiated an agreement with the Chinese government. The agreement between the United States and China went into effect in November 2005 and will continue in effect through December 31, 2008. During that time, China has agreed to specified quota limits on most textile and apparel products, and the United States has agreed to use restraint in exercising its right to impose additional safeguards. Beginning in January 2009, the U.S.-China agreement and the quotas against Chinese apparel will expire. At that point, the United States would still have the ability to impose safeguards under the WTO Agreement on Textiles and Clothing although the requirements for doing so will be more stringent. The situation in 2009 potentially could be similar to the experience in 2005, with import surges and a cycle of safeguards and negotiations. This could create logistical delays in our ability to maintain required inventory levels and alter cost differentials between vendors that source domestically and vendors that source more extensively from overseas. We believe this could lower the cost of apparel products and thereby reduce our average dollar amount of sales per customer in our stores. Additionally, retaliatory trade actions could cause a disruption of the supply chain of products from foreign markets, difficulty in predicting accurately the prices of merchandise to be imported from a particular country and adverse effects on our merchandise supply, sales and cash flows.

We depend on the experience and expertise of our senior management team and key employees, and the loss of the services of R. Edward Anderson or George A. Bellino could have a material adverse effect on our business strategy, operating costs, financial condition and results of operations.

The success of our business is dependent upon the close supervision of all aspects of our business by our senior management, particularly the operation of our stores, the selection of our merchandise and the site selection for new stores. In addition, we do not have a non-competition agreement with R. Edward Anderson, our Chief Executive Officer, and our non-competition agreement with George A. Bellino, our President and Chief Merchandising Officer, will expire on December 31, 2006. Accordingly, they could leave us and begin to work for one of our competitors, and, if we lose the services of Mr. Anderson or Mr. Bellino, it could

have a material adverse effect on our business strategy, operating costs, financial condition and results of operations.

Failure to attract, train, assimilate and retain skilled personnel could have a material adverse effect on our growth strategy and our financial condition.

Like most retailers, we experience significant employee turnover rates, particularly among store sales associates and managers, and our continued growth will require us to hire and train even more new personnel. We therefore must continually attract, hire and train new personnel to meet our staffing needs. We constantly compete for qualified personnel with companies in our industry and in other industries. A significant increase in the turnover rate among our store sales associates and managers would increase our recruiting and training costs and could decrease our operating efficiency and productivity. If we are unable to retain our employees or attract, train, assimilate or retain other skilled personnel in the future, we may not be able to service our customers as effectively, thus reducing our ability to continue our growth and to operate our existing stores as profitably as we have in the past.

Increases in the minimum wage could have a material adverse effect on our business, financial condition and results of operations.

From time to time, legislative proposals are made to increase the minimum wage in the United States, as well as certain individual states. Wage rates for many of our employees are at or slightly above the minimum wage. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees but the wages paid to our other hourly employees as well. Any increase in the cost of our labor could have a material adverse effect on our operating costs, financial condition and results of operations.

If legal proceedings to which we are a party result in an adverse judgment against us, it could have a material adverse effect on our business, financial condition and results of operations.

We are from time to time involved in various legal proceedings incidental to the conduct of our business. Such claims may be made by our customers, employees or former employees and could have a material adverse effect on our business, financial condition and results of operation. We are not currently aware of any legal proceedings pending or threatened against us that we expect to have a material adverse effect on our business, financial condition and results of operations.

Any failure of our management information systems or the inability of third parties to continue to upgrade and maintain the systems could have a material adverse effect on our business, financial condition and results of operations.

We depend on the accuracy, reliability and proper functioning of our management information systems, including systems used to track our sales and facilitate inventory management. We also rely on our management information systems for merchandise planning, replenishment and markdowns, and other key business functions. These functions enhance our ability to optimize sales while limiting markdowns and reducing inventory risk through properly marking down slow-selling styles, reordering existing styles and effectively distributing new inventory to our stores. We do not currently have redundant systems for all functions performed by our management information systems. Any interruption in these systems could impair our ability to manage our inventory effectively, which could have a material adverse effect on our business, financial condition and results of operations. To support our growth, we will need to expand our management information systems, and our failure to link and maintain these systems adequately could have a material adverse effect on our business, financial condition and results of operations.

We depend on third-party suppliers to maintain and periodically upgrade our management information systems, including the software programs supporting our inventory management functions. This software is

licensed to us by third-party suppliers. If any of these suppliers is unable to continue to maintain and upgrade these software programs and if we are unable to convert to alternate systems in an efficient and timely manner, it could result in a material adverse effect on our business, financial condition and results of operations.

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

We locate our stores in strip shopping centers, street front locations and downtown business districts where we believe our consumers and potential consumers shop. The success of an individual store can depend on favorable placement within a given strip shopping center or business district. 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. If our store locations fail to attract sufficient consumer traffic or we are unable to locate replacement locations on terms acceptable to us, our business, results of operations, and financial condition could suffer. If one or more of the anchor tenants located in the strip shopping centers or business districts where our stores are located close or leave, or if there is significant deterioration of the surrounding areas in which our stores are located, our business, results of operations and financial condition may be adversely affected.

Risks Relating to this Offering of Common Stock

Our stock price is volatile, and you may lose all or a part of your investment.

Our stock price is volatile. From our initial public offering in May 2005 through January 25, 2006, the trading price of our common stock has ranged from $14.00 to $44.90 per share. As a result of this volatility, investors may not be able to sell their common stock at or above their respective purchase prices. The market price for our common stock may be influenced by many factors, including:

In addition, the stock markets have experienced significant price and trading volume fluctuations from time to time, and the market prices of the equity securities of retailers have been extremely volatile and have recently experienced sharp price and trading volume changes. These broad market fluctuations may adversely affect the market price of our common stock.

There may be sales of substantial amounts of our common stock after this offering, which would cause our stock price to fall.

Our current stockholders hold a substantial number of shares that they will be able to sell in the public market in the near future. As of January 4, 2006, 13,012,715 shares of our common stock were outstanding. As of January 4, 2006, 1,574,133 additional shares of our common stock were subject to outstanding stock options, of which 376,612 will be exercised by certain selling stockholders in connection with this offering. All of the shares sold in this offering and all of the shares issued and sold in our initial public offering, are freely tradeable, except for any shares acquired by holders who are subject to market stand-off provisions or

lock-up agreements entered into in connection with this offering, or by any of our “affiliates,” as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended, which generally includes officers, directors and 10% or greater stockholders. The remaining 7,286,827 shares of our common stock held by existing stockholders are restricted shares, which may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act of 1933, as amended. Sales of a significant portion of the shares of our common stock outstanding after this offering will continue to be restricted as a result of securities laws or contractual arrangements, including lock-up agreements entered into between our directors and officers and the representatives of the underwriters in this offering. These lock-up agreements restrict holders’ ability to transfer their stock for 90 days after the date of this prospectus. These lock-up agreements cover 7,404,884 fully diluted shares of our common stock. The managing underwriter may, however, waive the lock-up period at any time for any stockholder who is party to a lock-up agreement. Sales of a substantial number of shares of our common stock after this offering, or after the expiration or waiver of applicable lock-up periods, could cause our stock price to fall and/or impair our ability to raise capital through the sale of additional stock.

A significant amount of our common stock is concentrated in the hands of one of our existing stockholders whose interests may not coincide with yours.

Upon the completion of our initial public offering, Hampshire Equity Partners II, L.P. and certain of its affiliates, together Hampshire Equity Partners, owned, on a fully diluted basis, approximately 58% of our common stock and will own, on a fully diluted basis, approximately 44.8% of our common stock after this offering. As a result, Hampshire Equity Partners has an ability to exercise control over matters requiring stockholder approval. These matters include the election of directors and the approval of significant corporate transactions, including potential mergers, consolidations or sales of all or substantially all of our assets. Hampshire Equity Partners II, L.P. has one representative, our current Chairman of the Board, on our five member board of directors. In connection with our initial public offering, we entered into a nominating agreement with Hampshire Equity Partners II, L.P. pursuant to which we, acting through our nominating and corporate governance committee, agreed, subject to the requirements of our directors’ fiduciary duties, that (i) Hampshire Equity Partners II, L.P. is entitled to designate two directors to be nominated for election to our board of directors as long as Hampshire Equity Partners II, L.P. owns in the aggregate at least 40% of the shares of our common stock which it owned immediately prior to the consummation of our initial public offering or (ii) Hampshire Equity Partners II, L.P. is entitled to designate one director to be nominated for election to our board of directors as long as Hampshire Equity Partners II, L.P. owns in the aggregate less than 40% and at least 15% of the shares of our common stock which it owned immediately prior to the consummation of our initial public offering. If at any time Hampshire Equity Partners II, L.P. owns less than 15% of the shares of our common stock which it owned immediately prior to the consummation of our initial public offering, it will not have the right to nominate any directors for election to our board of directors. Your interests as a holder of the common stock may differ from the interests of Hampshire Equity Partners.

Securities analysts may not continue to cover our common stock or they may issue negative reports, and this may have a negative impact on the price of our common stock.

The trading market for our common stock relies, in part, on the research and reports that industry or financial analysts publish about our company or our industry. Public statements by these securities analysts may affect our stock price. If any of the analysts who cover us downgrades the rating of our common stock, our common stock price would likely decline. If any of these analysts ceases coverage of our common stock, we could lose visibility in the market, which in turn could cause our common stock price to decline. Further, if no analysts continue to cover our common stock, the lack of research coverage may depress the market price of our common stock.

In addition, recently-adopted rules mandated by the Sarbanes-Oxley Act of 2002 and a global settlement with the Commission have caused a number of fundamental changes in how securities analysts are reviewed and compensated. In particular, many investment banking firms are now required to contract with independent

financial analysts for their stock research. In this environment, it may be difficult for companies with smaller market capitalizations, such as our company, to attract independent financial analysts to cover them, which could have a negative effect on the market price of our common stock.

We do not currently intend to pay dividends on our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.

Provisions in our certificate of incorporation and by-laws and Delaware law may delay or prevent our acquisition by a third party.

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

We are also subject to several provisions of the Delaware General Corporation Law that could delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock or may otherwise be in the best interests of our stockholders. You should refer to the section entitled “Description of Capital Stock” for more information.

Our costs have increased and may continue to increase as a result of being a public company, and complying with regulations applicable to public companies may adversely affect our business.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the Nasdaq National Market, have required changes in the corporate governance practices of public companies. We expect these new rules and regulations to increase significantly our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in connection with becoming a public company, we created additional board committees and adopted policies regarding internal controls and disclosure controls and procedures. In addition, we are in the process of evaluating our internal control structure in relation to Section 404 of the Sarbanes-Oxley Act and, pursuant to this section, we may be required to include management and auditor reports on internal controls over financial reporting as part of our annual report for the year ending fiscal 2006. We will incur additional costs in, and dedicate significant resources toward, complying with these requirements, which may divert management’s attention from, and which may in turn adversely affect, our business. We also expect these new laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new laws, rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. The costs of compliance or our failure to comply with these laws, rules and regulations could adversely affect our financial condition, results of operation and the price of our common stock.

Special Note Regarding Forward-Looking Statements

We have made forward-looking statements in this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Business.” All statements other than historical facts contained in this prospectus, including statements regarding our future financial position, business policy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. For example, our statements to the effect that we intend to open a specified number of new stores, our expectations regarding our net sales for the months of November and December, our expectations of comparable store sales increases for the four-week period ended November 26, 2005 and the five-week period ended December 31, 2005 and our expectations of comparable store sales increases in markets not affected by Hurricanes Katrina, Rita and Wilma for the same periods, that we intend to increase comparable store sales and our expectations as to the effects of our adoption of SFAS 123R on our compensation costs, constitute forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events, including, among other things:

These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section entitled “Risk Factors” and elsewhere in this prospectus.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Commission, we do not plan to publicly update or revise any forward-looking statements contained herein after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

Use of Proceeds

The selling stockholders will receive all of the net proceeds from the sale of shares of our common stock offered by this prospectus. We will not receive any of the proceeds from the sale of shares of common stock offered by this prospectus.

Price Range of Our Common Stock

Our common stock has been quoted on the Nasdaq National Market under the symbol “CTRN” since our initial public offering on May 17, 2005. The following table shows the high and low per share prices or our common stock for the periods indicated.

On January 25, 2006, the last reported sale price of our common stock on the Nasdaq National Market was $42.66 per share. On January 10, 2006, there were six holders of record of our common stock.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance the expansion of our business and for general corporate purposes. Our board of directors has the authority to declare and pay dividends on our common stock, in its discretion, so long as there are funds legally available to do so.

Capitalization

The table below sets forth our cash and cash equivalents and our capitalization as of October 29, 2005. You should read this information together with the sections of this prospectus entitled “Selected Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes appearing elsewhere in this prospectus.

Selected Financial and Operating Data

The following table provides selected financial and operating data for each of the fiscal years in the five-year period ended January 29, 2005 and for the nine months ended October 29, 2005 and October 30, 2004, including: (a) our statement of income data for each such period, (b) additional operating data for each such period and (c) our balance sheet data as of the end of each such period. The statement of income data for fiscal 2002, fiscal 2003 and fiscal 2004, and the balance sheet data as of January 31, 2004 and January 29, 2005 are derived from our audited financial statements included elsewhere in this prospectus that have been audited by KPMG LLP, an independent registered public accounting firm. The statement of income data for fiscal 2000 and fiscal 2001 and the balance sheet data as of January 29, 2000, February 3, 2001, February 2, 2002 and February 1, 2003 are derived from our audited financial statements that are not included in this prospectus. We have also included data for the nine months ended October 30, 2004 and October 29, 2005 from our unaudited condensed interim financial statements included elsewhere in this prospectus. The unaudited condensed financial statements for the nine months ended October 29, 2005 and October 30, 2004 have been prepared on the same basis as our audited financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring accruals that management considers necessary for a fair presentation of the financial information set forth in those statements. Results of operations for the interim periods are not necessarily indicative of the results that might be expected for any other interim period or for an entire period. The selected financial and operating data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected for any future period.

(footnotes on following page)

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Financial and Operating Data” and our audited and unaudited financial statements and the respective related notes included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a rapidly growing, value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. Originally our stores were located in the Southeast, and during late fiscal 2004 and fiscal 2005 we expanded into the Mid-Atlantic region, the Midwest and Texas. We operate 236 stores in both urban and rural markets in fourteen states, with two stores still closed due to Hurricanes Katrina, Rita and Wilma.

Our predecessor was founded in 1946 and grew to become a chain of family apparel stores operating in the Southeast under the Allied Department Stores name. In 1999, our chain of stores was acquired by Hampshire Equity Partners II, L.P., a private equity firm. Since the acquisition, our management team has implemented a focused merchandising and operating model to differentiate our stores and serve our core customers more effectively. Specifically, we concentrated the merchandise offerings on more urban fashion apparel for the entire family and increased the offering of nationally recognized brands. We also accelerated a remodeling campaign to upgrade the acquired store base and create a more appealing shopping environment in our stores. By the end of fiscal 2003, virtually all of the acquired stores had been remodeled and, in some cases, expanded. These initiatives resulted in increases in comparable store sales. We expect that the impact of our remodel, relocate and expansion initiatives will be far less significant in the future and that the primary causes of any increased comparable store sales will result from merchandising enhancements or the expansion of certain product categories, such as home decor and intimate apparel.

During the third quarter of fiscal 2005, our comparable store sales have benefited from additional customer purchases that we believe are related to Hurricanes Katrina, Rita and Wilma. These hurricanes caused extensive damage to areas of the Gulf Coast of the United States and impacted some of our stores in Alabama, Florida, Mississippi, Louisiana and Texas. Thirty-eight of our stores were closed for one or more days due to the hurricanes. Two existing stores have not reopened as of January 4, 2006. In addition, one store scheduled to open in September 2005 was heavily damaged by Hurricane Katrina and remains unopened. In regions impacted by the hurricanes, however, the subsequent sales from the stores that we have reopened, as well as sales from stores located nearby, have more than offset the sales lost on the days the stores affected were closed, positively impacting our comparable store sales. We believe, however, that sales increases in our stores located in markets directly affected by the hurricanes and in contiguous markets resulted directly from aid distributed to our customers and the need for our customers to replace lost or damaged clothing and other items. These sales increases have begun to dissipate. We anticipate that the magnitude of these increases will continue to diminish over time and that we will not continue to increase or maintain our sales or comparable store sales at the levels achieved in the months of September, October, November and December in fiscal 2005.

On May 18, 2005, we completed our initial public offering, in which we issued and sold 2,700,000 shares of our common stock and certain selling stockholders sold 1,150,000 shares of our common stock, at $14.00 per share. In addition, we received notice on May 27, 2005, that the underwriters had exercised the over-allotment option granted in connection with our initial public offering, pursuant to which we issued and sold an additional 577,500 shares on June 1, 2005. We received gross proceeds of approximately $45.9 million and

incurred approximately $4.8 million in expenses in connection with the initial public offering and over-allotment option, for net proceeds of approximately $41.1 million. We did not receive any proceeds from the sale of the shares by the selling stockholders in the initial public offering.

We are continuing to pursue an aggressive store growth strategy and believe that the addition of new stores will be the primary source of future growth. In fiscal 2003 and fiscal 2004, we opened 25 and 40 stores, respectively. During this period, we entered the Baltimore, Houston, Norfolk and Washington, D.C. markets, where we opened a total of 15 new stores. We have continued to expand in fiscal 2005, opening 36 new stores thus far with no additional openings planned and entering the Cincinnati, Dallas, Louisville and Miami markets. We expect to open 42 to 45 new stores in fiscal 2006. Approximately 90% of the new stores we intend to open in fiscal 2006 will be located in states that we currently serve.

Our new store expansion is fueled by store economics that we believe to be very attractive. From an investment perspective, we seek to design stores that are inviting and easy to shop, while limiting start up and fixturing costs. We also have relatively low store operating costs. Our real estate approach is focused on strip shopping center sites within low to moderate income neighborhoods, and we generally utilize previously occupied store sites rather than newly constructed sites. As a result, we are usually able to secure sites with substantial customer traffic at attractive lease terms. Our ongoing advertising expenses are also low, with a significant amount of advertising focused on new store openings.

Our stores generate rapid payback of investment. The average investment for the 65 stores opened in fiscal 2003 and fiscal 2004, including leasehold improvements, equipment, fixturing, cost of inventory to stock the store (net of accounts payables), and pre-opening store expenses, was approximately $280,000. These 65 stores generated average sales of $1.4 million and average store operating profit (defined as store operating revenues less cost of sales and store operating expenses which is comprised of payroll, occupancy, advertising and other operating costs) of approximately $230,000 during their first 12 months of operation.

We measure our performance using key operating statistics. One of our main performance measures is comparable store sales growth. We define a comparable store as a store that has been open for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13^th month of operation at the earliest or its 24^th month at the latest. As an example, all stores opened in fiscal 2003 and fiscal 2004 were not considered comparable stores in fiscal 2004. Relocated and expanded stores are included in the comparable store sales results. We also use other operating statistics, most notably average sales per store. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, our store square footage (and therefore sales per square foot) varies by store. We focus on the overall store sales volume as the critical driver of profitability. Our average sales per store has increased as we have driven comparable store sales and opened new stores which are generally larger than our existing stores. Our average sales per store have increased from $0.8 million in fiscal 2000 to $1.1 million in fiscal 2004, and from $770,000 in the nine months ended October 30, 2004 to $906,000 in the nine months ended October 29, 2005. In addition to sales, we measure gross margin percentage 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 overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts.

In October 2005, we purchased an approximately 286,500 square foot distribution center in Darlington, South Carolina that is situated on 90 acres of land. To date we have paid approximately $1.6 million of the $3 million to $4 million in total we expect to spend on acquisition costs and for capital improvements necessary to prepare the location for full operation. We began receiving and processing shipments from this new distribution location in the fourth quarter of fiscal 2005. We expect this facility, together with our two locations in Savannah, to provide us the capacity to double our existing sales volume.

Our cash requirements are primarily for working capital, opening of new stores, remodeling of existing stores and improvements to our information systems. Historically we have met these cash requirements from cash flow from operations, short-term trade credit and borrowings under our revolving lines of credit, long-term debt and capital leases.

In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The impact of adopting SFAS No. 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards, the assumed award forfeiture rate, the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period and the transition method chosen for adopting SFAS No. 123R. We have preliminarily estimated the effects of adoption of SFAS No. 123R will result in an additional compensation expense of $1.0 million to $1.5 million in fiscal 2006 and a yet to be determined additional compensation expense in fiscal 2007.

We are documenting and testing our internal control procedures in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and reports by our independent auditors. We may be required to comply with Section 404 as early as the time we file our annual report for fiscal 2006 with the Commission. During this time period specific internal controls may be identified as being deficient. We plan to remediate any identified deficiencies and comply with our Section 404 obligations before the deadline.

Basis of the Presentation

Net sales consist of store sales, net of returns by customers, and layaway fees. Cost of sales consists of the cost of products we sell and associated freight costs. Selling, general and administrative expense is comprised of store costs, including salaries and store occupancy costs, handling costs, corporate and distribution center costs and advertising costs. We operate on a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. Each of our fiscal quarters consists of four 13-week periods, with an extra week added on to the fourth quarter every five to six years. Our last three fiscal years ended on February 1, 2003, January 31, 2004 and January 29, 2005 and each included 52 weeks.

Results of Operations

The following discussion of our financial performance is based on the condensed financial statements set forth elsewhere in this prospectus. 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. 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. Furthermore, the seasonal nature of our business may affect comparisons between periods.

Net Sales and Additional Operating Data. The following table sets forth, for the periods indicated, selected statement of income data expressed both in dollars and as a percentage of net sales:

The following table provides information, for the periods indicated, about the number of total stores open at the beginning of the period, stores opened and closed during each period and the total stores open at the end of each period and comparable store sales for the periods:

Thirty-Nine Weeks Ended October 29, 2005 Compared to Thirty-Nine Weeks Ended October 30, 2004

Net Sales. Net sales increased $55.8 million, or 40.7%, to $193.0 million for the thirty-nine weeks ended October 29, 2005 from $137.1 million in the thirty-nine weeks ended October 30, 2004. The increase in net sales was primarily due to 31 new store openings since October 30, 2004 and a comparable store sales increase of 14.1% for the thirty-nine weeks ended October 29, 2005 compared to the thirty-nine weeks ended October 30, 2004. The 31 stores opened since October 30, 2004 accounted for $21.6 million of the total increase in sales, the 35 stores opened between February 1, 2004 and October 30, 2004 accounted for $17.3 million and the 158 comparable stores contributed $16.9 million of the increase in sales. Four stores were expanded and/or relocated since October 30, 2004, all of which, occurred in the thirty-nine weeks ended October 29, 2005. The increase in comparable store sales was primarily from an increase in customer transactions which was due in part to improved sales trends from the increasing consumer preference for branded goods. Comparable store sales for the thirty-nine weeks ended October 29, 2005 also were positively impacted by post-hurricane sales in September and October. Federal Emergency Management Act vouchers and other one-time assistance enabled many of our customers to purchase sizeable amounts of apparel and

other items to replace what had been lost. While the hurricanes have had a negative effect on us by causing 38 stores to be closed for one day or more during the thirty-nine weeks ended October 29, 2005, the subsequent sales increases after the stores have reopened has more than offset the sales missed on those lost days. Stores located in areas contiguous to the stores affected directly by the hurricanes have also shown a dramatic increase in their sales for the thirty-nine weeks ended October 29, 2005. We believe that sales increases in our stores located in markets directly affected by the hurricanes and in contiguous markets resulted directly from aid distributed to our customers and the need for our customers to replace lost or damaged clothing and other items. These sales increases have begun to dissipate. We anticipate that the magnitude of these increases will continue to diminish in the thirteen weeks ended January 28, 2006, and that we will not continue to increase or maintain our sales at the levels achieved in the months of September, October, November and December in fiscal 2005.

Gross Profit. Gross profit increased $23.1 million, or 45.4%, to $73.9 million in the thirty-nine weeks ended October 29, 2005 from $50.8 million in the thirty-nine weeks ended October 30, 2004. The increase in gross profit is primarily a result of the strong sales increases. As a percentage of net sales, gross profit increased to 38.3% in the thirty-nine weeks ended October 29, 2005 from 37.1% in the thirty-nine weeks ended October 30, 2004. This increase, as a percentage of net sales, was primarily due to reduced markdown rates which was a result of well balanced inventories and strong sales increases in the thirty-nine weeks ended October 29, 2005 compared to the thirty-nine weeks ended October 30, 2004.

Selling, General and Administrative Expense. Selling, general and administrative expenses increased $17.8 million, or 38.4%, to $64.3 million in the thirty-nine weeks ended October 29, 2005 from $46.4 million in the thirty-nine weeks ended October 30, 2004. The increase in these expenses was due primarily to additional store level, distribution and corporate costs arising from the opening of 31 new stores since October 30, 2004, the payment of a $1.2 million fee to terminate the consulting agreement with Hampshire Equity Partners II, L.P. and property losses from Hurricanes Katrina, Rita and Wilma, which we anticipate will total approximately $700,000 net of insurance recoveries in the thirty-nine weeks ended October 29, 2005. Selling, general and administrative costs increased additionally due to costs associated with being a public company of approximately $700,000. Selling, general and administrative expense as a percentage of net sales decreased to 33.3% in the thirty-nine weeks ended October 29, 2005 from 33.9% in the thirty-nine weeks ended October 30, 2004. The decrease as a percentage of net sales was primarily due to our strong comparable sales growth and the fixed nature of the selling, general and administrative expenses. In addition, this decrease is in part due to a prior year charge in the thirty-nine weeks ended October 30, 2004 of approximately $300,000 for additional vacation pay accrual pursuant to a change in our vacation policy.

Interest Income. Interest income increased to approximately $499,000 in the thirty-nine weeks ended October 29, 2005 from approximately $16,700 in the thirty-nine weeks ended October 30, 2004. The increase in interest income was due primarily to interest income earned on proceeds from our initial public offering.

Interest Expense. Interest expense decreased 47.4% to approximately $302,000 in the thirty-nine weeks ended October 29, 2005 from approximately $574,000 in the thirty-nine weeks ended October 30, 2004. The decrease in interest expense was due primarily to the redemption of our preferred shares subject to mandatory redemption, the absence of any borrowings under the line of credit and repaying in full our mortgage on the Fahm Street headquarters and distribution center.

Provision for Income Taxes. The provision for income taxes increased to approximately $3.6 million in the thirty-nine weeks ended October 29, 2005 from $1.5 million in the thirty-nine weeks ended October 30, 2004. The effective income tax rates for fiscal 2005 and fiscal 2004 were 36.2%, and 38.5%, respectively. The tax rate decreased in fiscal 2005 as a result of tax exempt investments, a qualification to utilize job tax credits and a reduction in non-deductible preferred stock dividends.

Net Income. Net income increased 165.6% to $6.3 million in the thirty-nine weeks ended October 29, 2005 from $2.4 million in the thirty-nine weeks ended October 30, 2004. The increase in net income was due to the factors discussed previously.

Fiscal 2004 Compared to Fiscal 2003

Net Sales. Net sales increased $46.2 million, or 29.4%, to $203.4 million for fiscal 2004 from $157.2 million for fiscal 2003. The increase resulted primarily from net sales of $63.2 million in fiscal 2004 from stores opened during fiscal 2004 and fiscal 2003 as compared to net sales of $20.9 million in fiscal 2003 from stores opened in fiscal 2003. In addition, the increase was due to a comparable store sales increase of $4.0 million, or 3.0%. The increase in comparable store sales resulted, in part, from an increase in the number of customer transactions and average items per sale, partially offset by a decrease in the average price of an item sold. Remodeled and relocated stores accounted for less of the growth of comparable store sales in fiscal 2004 (only about 0.3% of the 3% growth) due to fewer stores being relocated and remodeled during the year.

Gross Profit. Gross profit increased $17.1 million, or 28.9%, to $76.1 million for fiscal 2004 from $59.1 million for fiscal 2003. The increase resulted primarily from the operation of new stores opened in fiscal 2004 and the full period impact of new stores opened during fiscal 2003, partially offset by a decrease in gross profit margin. Gross profit as a percentage of sales was 37.4% for fiscal 2004 compared to 37.6% for fiscal 2003. Gross margins decreased as a result of higher inbound and outbound freight costs primarily due to fuel surcharges. Our gross margins may not be comparable to other retailers as we include distribution center, advertising and promotional costs in our selling, general and administrative expenses, while certain other retailers deduct these costs directly from their gross margin.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $14.7 million, or 30.2%, to $63.6 million for fiscal 2004 from $48.8 million for fiscal 2003. This increase was caused primarily by store level, distribution and corporate costs associated with the growing store base and the full period impact of new stores opened in fiscal 2003. As a percentage of net sales, selling, general and administrative expenses increased to 31.3% for fiscal 2004 from 31.1% for fiscal 2003. The increase was partially driven by approximately $360,000 of additional vacation pay accrual pursuant to a change in our vacation policy.

Interest Expense. Interest expense increased approximately $169,000 for fiscal 2004 to approximately $732,000 compared to approximately $563,000 for fiscal 2003. The increase was primarily the result of the adoption of SFAS No. 150, which increased interest expense by the inclusion of dividends on mandatory redeemable obligations that were previously deducted from equity as dividends, and increased borrowings related to the cost of new stores during the period, inclusive of inventory. We adopted SFAS No. 150 on July 6, 2003, and dividends treated as interest expense in fiscal 2004 and fiscal 2003 were approximately $324,000 and approximately $189,000, respectively.

Provision for Income Taxes. The provision for income taxes increased approximately $824,000 for fiscal 2004 to $4.6 million compared to $3.7 million for fiscal 2003. Our effective tax rate was 38.5% and 38.6% for fiscal 2004 and fiscal 2003, respectively.

Net Income. Net income increased to $7.3 million for fiscal 2004 from $5.9 million as a result of the factors discussed above.

Fiscal 2003 Compared to Fiscal 2002

Net Sales. Net sales increased $32.2 million, or 25.8%, to $157.2 million for fiscal 2003 from $125.0 million for fiscal 2002. The increase resulted primarily from net sales of $38.6 million in fiscal 2003 from stores opened during fiscal 2003 and fiscal 2002 as compared to net sales of $10.8 million in fiscal 2002 from stores opened in fiscal 2002. In addition, the increase was due to a comparable store sales increase of $6.1 million, or 5.7%. The increase in comparable store sales resulted, in part, from an increase in the number of customer transactions and average items per sale, partially offset by a decrease in average price of an item sold. In addition, in fiscal 2002, we took over shoe operations in our stores from a third party licensee that had previously managed the shoe merchandise and paid us a commission on sales. As a result of this purchase, we recognized shoe sales as part of net sales (amounting to $3.8 million in fiscal 2003) instead

of recognizing only the commissions as an increase to operating income. The increase in comparable store sales in fiscal 2003 benefited from the full year impact of this change. The increase was also caused by the impact of increased sales from stores that were relocated and remodeled during the two-year period, with such stores accounting for approximately one-third of the 5.7% comparable store sales increase.

Gross Profit. Gross profit increased $11.9 million, or 25.3%, to $59.1 million for fiscal 2003 from $47.1 million for fiscal 2002. The increase resulted primarily from the operation of 25 new stores opened in fiscal 2003 and the full year impact of 16 new stores opened during fiscal 2002. Gross margin was 37.6% for fiscal 2003 compared to 37.7% for fiscal 2002. The decrease resulted from higher freight costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $10.1 million, or 26.0%, to $48.8 million for fiscal 2003 from $38.8 million for fiscal 2002. As a percentage of net sales, selling, general and administrative expenses increased to 31.1% for fiscal 2003 from 31.0% for fiscal 2002. The dollar increase was caused primarily by increases in store level expenses, distribution costs and corporate costs associated with the growing store base and full period impact of new stores opened during fiscal 2002.

Interest Expense. Interest expense increased approximately $308,000 for fiscal 2003 to approximately $563,000, compared to approximately $256,000 for fiscal 2002. The increase was primarily the result of our adoption of SFAS No. 150, which increased interest expense by the inclusion of dividends on mandatory redeemable obligations that were previously deducted from equity as dividends, increased borrowings related to the costs of opening new stores during the year, and the full year impact of the purchase of, and mortgage on, the office and distribution facility in Savannah, Georgia. The amount of dividends treated as interest expense in fiscal 2003 was approximately $189,000 and none in fiscal 2002.

Provision for Income Taxes. The provision for income taxes increased approximately $626,000 for fiscal 2003 to $3.7 million, compared to $3.1 million for fiscal 2002. Our effective tax rate was 38.6% and 38.1% for fiscal 2003 and fiscal 2002, respectively. The rate increased in fiscal 2003 due to reclassifying nondeductible preferred stock dividends as interest expense with the adoption of SFAS No. 150 in July 2003.

Net Income. Net income increased to $5.9 million for fiscal 2003 from $5.0 million in fiscal 2002 as a result of the factors discussed above.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly results of operations for fiscal 2003 and fiscal 2004 and the thirty-nine weeks ended October 29, 2005. Each quarterly period presented below consists of 13 weeks, and the information includes our statement of income data for each such period and additional operating data for each such period. In the opinion of management, these unaudited interim financial data have been prepared on the same basis as the audited financial statements and reflect all adjustments (consisting only of normal recurring adjustments) and fairly present the financial information disclosed for these periods. The interim financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, the audited financial statements and related notes included elsewhere in this prospectus. The results of operations for historical periods are not necessarily indicative of results for any future period.

Due to the importance of the spring selling season, which includes Easter, and the fall selling season, which includes Christmas, the first and fourth fiscal quarters have historically contributed, and we expect they will continue to have a significant contribution to our profitability for our entire fiscal year. As a result, any factors negatively affecting us in any year during the first and fourth fiscal quarters, including adverse weather and unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year.

Our quarterly results of operations also may fluctuate based upon such factors as the timing of holiday seasons, the number and timing of new store openings, the amount of store preopening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the timing and level of

markdowns, store closings, remodels and relocations, competitive factors, weather and general economic conditions.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling of existing stores and the improvement of our information systems. Prior to the initial public offering, these cash requirements had been met from cash flow from operations, short-term trade credit and borrowings under our revolving lines of credit, long-term debt and capital leases.

On May 18, 2005, we completed our initial public offering of our common stock, as a result of which we issued and sold 2,700,000 shares of common stock at $14.00 per share. In addition, we received notice on May 27, 2005, that the underwriters had exercised the over-allotment option, pursuant to which we issued and sold an additional 577,500 shares on June 1, 2005. Upon completing the offering and the over-allotment option granted in connection with our initial public offering, we received gross proceeds of approximately $45.9 million and incurred approximately $4.8 million in expenses in connection with our initial public offering, for net proceeds of approximately $41.1 million. In addition, 1,150,000 shares of common stock were sold in our initial public offering by certain of our selling stockholders, for which we received no proceeds. As a result, upon the closing of the offering, there were 12,602,154 shares of common stock outstanding.

Following the closing of our initial public offering on May 23, 2005, each of our 3,605 shares of mandatory redeemable preferred stock were redeemed and extinguished for approximately $3.6 million, and we repaid in full our mortgage on the Fahm Street headquarters and distribution center in the amount of approximately $1.5 million.

Using a portion of the proceeds from our initial public offering and cash flow from operations, we purchased a distribution center in Darlington, South Carolina in the thirteen weeks ending October 29, 2005.

Discussion of Cash Flows

Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004

At October 29, 2005, we had total cash, cash equivalents and marketable securities of $42.0 million compared with total cash and cash equivalents of $11.8 million at January 29, 2005. The most significant factors in the change in our net liquidity position during the first thirty-nine weeks of 2005 were the proceeds from our initial public offering, positive net income from operations adjusted for depreciation and other non-cash charges, offset by the purchase of additional inventory and capital expenditures to open new stores and purchase our distribution center in Darlington, South Carolina.

Inventory represented approximately 43% of our total assets as of October 29, 2005. Management’s ability to manage our inventory can have a significant impact on our cash flows from operations during a given interim period or fiscal year. In addition, inventory purchases can be somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise.

Cash Flows Provided by (Used in) Operating Activities. Net cash provided by (used in) operating activities was $3.1 million in the thirty-nine weeks ended October 29, 2005 compared to ($5.3) million in the thirty-nine weeks ended October 30, 2004. The main sources of cash provided during the thirty-nine weeks ended October 29, 2005 was net income adjusted for depreciation and other non-cash charges of $12.3 million, increases in accrued expenses of $2.6 million, increases in accrued compensation of $2.5 million and deposits taken on layaway transactions of $1.2 million. Uses of cash consisted of the net increase in net inventory of $11.1 million, a $3.7 million change in the net income tax receivable/payable, and an approximately $580,000 increase in prepaid assets and other current assets related to insurance receivables for property damages from Hurricanes Katrina, Rita and Wilma.

Cash Flows Used in Investing Activities. Cash used in investing activities was $41.0 million in the thirty-nine weeks ended October 29, 2005 compared to $6.2 million in the thirty-nine weeks ended October 30, 2004. Net cash used in investing activities increased during the thirty-nine weeks ended October 29, 2005 compared to the thirty-nine weeks ended October 30, 2004 primarily because of the investment of $32.6 million of cash proceeds from the IPO in municipal auction rate securities. We also made capital expenditures in the amount of $8.9 million in the thirty-nine weeks ended October 29, 2005 for the purchase of the distribution center in Darlington, South Carolina, purchase of property and equipment for the build out of 26 new stores, four relocations and remodels, and other general corporate purposes compared to $6.9 million in the thirty-nine weeks ended October 30, 2004 used for the purchase of property and equipment for the build out of 35 new stores, three relocations and remodels and other general corporate purposes. Approximately $988,000 of our capital expenditures on new stores in the thirty-nine weeks ended October 29, 2005 will be reimbursed to us by the landlords of the leased properties. These tenant improvement dollars will be amortized over the life of the individual store’s lease as a reduction to occupancy expense.

Cash Flows Provided by Financing Activities. Cash provided by financing activities was $35.5 million in the thirty-nine weeks ended October 29, 2005 and $3.8 million in the thirty-nine weeks ended October 30, 2004. Financing activities in the thirty-nine weeks ended October 29, 2005 included the receipt of $41.3 million from the initial public offering and subsequent option exercises by employees, payment of $3.6 million redeeming the preferred shares subject to mandatory redemption, the $1.5 million payoff of the mortgage on the Fahm Street headquarters and distribution center and scheduled repayments of approximately $758,000 on outstanding capital leases.

Fiscal 2004 and Fiscal 2003

For fiscal 2004, cash and cash equivalents increased by $1.8 million to $11.8 million from $10.0 million at the end of fiscal 2003. The primary contributor to the increase in cash and cash equivalents was $12.7 million provided by operating activities, partially offset by $8.6 million used in investing activities, primarily to open new stores, and $2.2 million used in financing activities, primarily to make dividend payments to holders of mandatory redeemable stock and repayment on long-term debt and capital lease obligations.

For fiscal 2003, cash and cash equivalents increased by $4.2 million to $10.0 million from $5.8 million at the end of fiscal 2002. The primary contributor to the increase in cash and cash equivalents was $11.2 million of cash provided by operations, partially offset by $6.1 million used in investing activities, primarily to open new stores.

Net cash provided by operating activities was $12.7 million for fiscal 2004 and $11.2 million for fiscal 2003. Net cash provided by operating activities increased in fiscal 2004 attributable to net income of $7.3 million, depreciation, amortization and other non-cash charges of $5.2 million and approximately $155,000 provided by net operating assets and liabilities. Cash flow from net operating assets and liabilities in fiscal 2004 was largely attributable to the investment in inventory, net of accounts payable, offset by the increase in accrued expenses and income tax payable. In fiscal 2004 this change in net inventory position (inventory less accounts payable) resulted in a use of cash of $4.9 million. The change in net inventory position in fiscal 2004 reflects the opening of 40 stores and an increase in inventory levels in preparation for a mid-March Easter season in fiscal 2005. Accrued expenses increased $2.8 million due to additional accruals for rent and landlord allowances, sales taxes, freight, professional fees and other expenses. Income tax payable increased $2.1 million due to our change of method of paying installments on income tax.

Net cash used in investing activities was $8.6 million for fiscal 2004, and $6.1 million for fiscal 2003. Net cash used in investing activities increased in fiscal 2004 compared to fiscal 2003 because we purchased additional property and equipment to open 40 new stores compared to 25 new stores in the prior year. Net cash used in investing activities was $6.1 million for fiscal 2003, and $5.9 million for fiscal 2002. Net cash used in investing activities increased in fiscal 2003 compared to fiscal 2002 because we purchased additional property and equipment to open 25 new stores compared to 16 new stores in the prior year.

Net cash used in financing activities was $2.2 million for fiscal 2004 and approximately $942,000 for fiscal 2003. Net cash used in financing activities for fiscal 2004 was attributable to $1.4 million in payments on preferred stock dividends and approximately $831,000 for payments on capital lease obligations and mortgage payments on our Fahm Street facility. Net cash used in financing activities was approximately $942,000 for fiscal 2003 and $2.8 million for fiscal 2002. Net cash used in financing activities for fiscal 2003 was attributable to payments on capital lease obligations and mortgage payments on our Fahm Street facility. Until required for other purposes, we maintain our cash and cash equivalents in deposit accounts or highly liquid investments with remaining maturities of 90 days or less at the time of purchase.

Liquidity Sources, Requirements and Contractual Cash Requirements and Commitments

Our principal sources of liquidity consist of: (i) cash, cash equivalents and marketable securities (which equaled $42.0 million as of October 29, 2005); (ii) a secured line of credit with a maximum available borrowing of $25.0 million subject to our inventory levels (with availability of $25 million and none drawn down as of October 29, 2005); (iii) an unsecured line of credit with a maximum available borrowing of $3.0 million subject to our inventory levels (with availability of $3.0 million and none drawn down as of October 29, 2005); (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) trade credit. Short-term trade credit represents a significant source of financing for our inventory purchases. Trade credit arises from customary payment terms and trade practices with our vendors. Our management regularly reviews the adequacy of credit available to us from our vendors. Historically, our principal liquidity requirements have been to meet our working capital and capital expenditure needs.

We believe that our sources of liquidity will be sufficient to fund our operations and anticipated capital expenditures for at least the next 24 months. Our ability to fund these requirements and comply with the financial covenants under our secured lines of credit will depend on our cash flow, which in turn is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. In addition, as part of our strategy, we intend to continue to open new stores, which will require additional capital. We cannot assure you that additional capital or other sources of liquidity will be available on terms acceptable to us, or at all.

We anticipate that our capital expenditures for the fourth quarter of fiscal 2005 will be approximately $2.6 million. We anticipate that our capital expenditures will be approximately $13 million to $15 million for fiscal 2006. These expenditures will relate to the purchase of property and equipment for the 42 to 45 stores we plan to open in fiscal 2006, the addition of more office space and the continued buildout of our Darlington, South Carolina distribution center. We plan to finance these capital expenditures with cash flow from operations.

The following table discloses aggregate information about our contractual obligations as of October 29, 2005 and the periods in which payments are due:

Indebtedness. We have a revolving line of credit secured by substantially all of our assets pursuant to which we pay customary fees. This secured line of credit expires in April 2007. This secured line of credit provides for aggregate cash borrowings and the issuance of letters of credit up to the lesser of $25.0 million or our borrowing base (which was approximately $25 million at October 29, 2005), with a letter of credit sub-limit of $2.0 million. Borrowings under this secured line of credit bear interest at the prime rate plus a spread or LIBOR plus a spread, at our election, based on conditions in the credit agreement. As of October 29, 2005, we had no outstanding borrowings on the line of credit, and no outstanding letters of credit. Under the terms of the credit agreement, we are required to maintain a minimum tangible net worth.

In September 2003, we entered into an annual unsecured revolving line of credit with Bank of America that was renewed in June 2004. The line of credit provides for aggregate cash borrowings up to $3.0 million to be used for general operating purposes. Borrowings under the credit agreement bear interest at LIBOR plus a spread. At October 29, 2005, there was no balance on this revolving line of credit.

We borrow funds under these revolving lines of credit from time to time and subsequently repay such borrowings with available cash generated from operations.

Capital Leases. We have capital lease obligations that financed the purchase of our computer equipment. At October 29, 2005, our capital lease obligations were $1.3 million. These obligations have maturity dates ranging from March 2005 to December 2007. The interest rates on these obligations range from 7.2% to 13.0%. All of these obligations are secured by the computer equipment.

Operating Leases. We lease our stores under operating leases, which generally have an initial term of five years with one five-year renewal option. The typical store lease requires a combination of both fixed monthly rentals and rentals computed as percentage of net sales after a certain sales threshold has been met. For the thirty-nine weeks ended October 29, 2005, rental expense was $8.6 million compared to $6.4 million for the thirty-nine weeks ended October 30, 2004 (including approximately $840,000 and $540,000 of percentage rent, respectively).

Purchase Obligations. As of October 29, 2005, we had purchase obligations of $57.0 million, all of which were for less than one year. These purchase obligations primarily consist of outstanding merchandise orders.

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

Outstanding Stock Options

As of October 29, 2005, we had outstanding vested options to purchase approximately 1,430,228 shares of common stock, at a weighted average exercise price of $0.78 per share, and outstanding unvested options to purchase 286,900 shares of common stock, at a weighted average price of $10.64 per share. The per share value of each share of common stock underlying the vested and unvested options, based on the difference between the exercise price per option and the estimated fair market value of the shares at the dates of the grant of the options (also referred to as intrinsic value), ranges from $0 to $4.20 per share.

For all stock option grants prior to fiscal 2005, the fair market values of the shares at the dates of grant were originally estimated by our board of directors, with input from management. We did not obtain contemporaneous valuations by an unrelated valuation specialist because we based our valuation on comparable private company market multiple analyses. We used a consistent formula based on our twelve-month rolling EBITDA, defined as earnings before taxes, interest, depreciation and amortization, multiplied by a private company multiple less outstanding debt. We believe this formula removes uncertainties associated with asset based valuation methodologies and methodologies based on estimated future revenues and costs. For grants in fiscal 2005, stock options were granted under this plan at the market price on the grant date and generally vest ratably over a four-year period. All stock options granted under this plan have a ten-year life subject to earlier termination upon death, disability or cessation of employment.

Significant Factors Contributing to the Difference between Fair Value as of the Date of Each Grant and the IPO Price. As disclosed more fully in Note 8 to the Consolidated Financial Statements, we granted stock options during fiscal 2004 with a fair value of $9.55 per share for the first quarter, $10.25 per share for the second quarter and $11.05 per share for the third quarter. Factors that contributed to the difference between the fair value of those grants and our initial public offering price are:

The intrinsic value exceeded the exercise price established at the date of each grant by the following amounts: $3.01 per share for those options granted in the first quarter of fiscal 2004, $3.44 per share for those options granted in the second quarter of fiscal 2004 and $4.20 per share for those options granted in the third quarter of fiscal 2004.

Based on the closing price of $27.40 per share on October 29, 2005, the intrinsic value of the options outstanding on October 29, 2005 was $47.0 million, of which $39.1 million related to vested options and

$7.9 million related to unvested options. Although it is reasonable to conclude that the completion of this offering will add value to the shares because they will have increased liquidity and marketability, the amount of additional value can be measured with neither precision nor certainty.

Our board of directors has authorized awards for our management employees in the form of stock option grants. See “Management—2005 Long Term Incentive Plan—Initial Grants.”

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our financial statements:

While our recognition of revenue is predominantly derived from routine retail transactions and does not involve significant judgment, revenue recognition represents an important accounting policy of ours. We recognize retail sales at the time the customer takes possession of the merchandise and purchases are paid for less an allowance for returns. We allow for returns up to 10 days after the date of sales and the estimate for returns is based on actual observed return activity 10 days after the period ends. Revenue from layaway sales is recognized when the customer has paid for and received the merchandise. However, revenue from the $2.00 service charge for participating in the program and from the $5.00 re-stocking fee, if charged as part of the layaway program, is recognized at the time of payment. All sales are from cash, check or major credit card company transactions.

Inventory is stated at the lower of cost (first-in, first-out basis) or market as determined by the retail inventory method less a provision for inventory shrinkage. Under the retail inventory method, the cost value of inventory and gross margins are 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 significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting gross margins. We estimate a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in actual shrinkage trends. We believe the first-in first-out retail inventory method results in an inventory valuation that is fairly stated. Many retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which ultimately affect the value of the inventory. We have not entered into such arrangements with our vendors.

We have a significant investment in property and equipment. Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives (primarily three to five years for computer equipment and furniture, fixtures and equipment, five years for leasehold improvements, and 15 years for buildings) of the related assets or the relevant lease term, whichever is shorter. Any reduction in these estimated useful lives would result in a higher annual depreciation expense for the related assets.

We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives or recognition of an impairment loss for intangible assets. Future adverse changes in market and legal conditions, or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the intangible asset, thereby possibly requiring an impairment charge in the future. If facts and circumstances indicate that a long-lived asset, including property and equipment, 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. Impairment losses in the future are dependent on a number of factors such as site selection and general economic trends, and thus could be significantly different from historical results. To the extent our estimates for net sales, gross profit and store expenses are not realized, future assessments of recoverability could result in impairment charges.

We apply the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB interpretation (FIN) No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for our fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current fair value of the underlying stock exceeds the exercise price. We recognize the fair value of stock rights granted to non-employees in the accompanying financial statements. SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, we have elected to continue to apply the intrinsic-value-based method of accounting described above, and have adopted only the disclosure requirements of SFAS No. 123, as amended. Pro forma information regarding net income and net income per share is required in order to show our net income as if we had accounted for employee stock options under the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition Disclosure. This information is contained in Notes 2 and 8 to our financial statements. The fair values of options and shares issued pursuant to our option plan at each grant date were estimated using the Black-Scholes option pricing model.

We lease substantially all of our store properties and accounts for the leases as operating leases in accordance with SFAS No. 13, Accounting for Leases. Many lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin to make improvements in preparation of intended use.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing “rent holidays” at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases. For tenant improvement allowances we record a deferred rent liability on the consolidated balance sheets and amortize the deferred rent over the terms of the leases.

Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The computation of income taxes is subject to estimation due to the judgment required and the uncertainty related to the recoverability of deferred tax assets or the outcome of tax audits. We adjust our income tax provision in the period it is determined that actual results will differ from our estimates. Tax law and rate changes are reflected in the income tax provision in which such changes are enacted.

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

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to financial market risks related to changes in interest rates connected with our revolving lines of credit, which bear interest at variable rates. We cannot predict market fluctuations in interest rates. As a result, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability. A hypothetical 100 basis point increase in prevailing market interest rates would not have materially impacted our financial position, results of operations, cash flows for fiscal 2004. We do not engage in financial transactions for trading or speculative purposes, and we have not entered into any interest rate hedging contracts.

We source all of our product from apparel markets in the United States and, therefore, are not subject to fluctuations in foreign currency exchange rates. We have not entered into forward contracts to hedge against fluctuations in foreign currency prices.

If we were to begin sourcing product directly from overseas, our risk management policy would allow us to utilize foreign currency forward and option contracts to manage currency exposures. If we were to enter into hedging contracts, we anticipate that the contracts would have maturities of less than three months and would settle before the end of each quarterly period. Additionally, we do not expect to enter into any hedging contracts for trading or speculative purposes.

In June 2005 we began investing excess cash in auction rate securities. These securities are highly liquid, variable-rate debt securities. While the underlying security has a long-term nominal maturity, the interest rate is reset through dutch auctions that are typically held every 35 days, creating a short-term instrument. Due to the short-term nature of these investments, we believe that we do not have material exposure to changes in the fair value of our investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. We do not enter into investments for trading or speculative purposes.

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. SFAS No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, which requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged, but which includes certain exceptions to that principle. SFAS No. 153 eliminates the exception from APB Opinion No. 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have a commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on our consolidated financial position or results of operations.

In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and is effective as of the

beginning of the first annual period that begins after June 15, 2005 for public entities that do not file as small business issuers. We have illustrated the effect on our earnings as if we had adopted the fair value method of accounting for stock-based compensation under SFAS No. 123. This information is contained in notes 2 and 8 to our financial statements. The fair values of options and shares issued pursuant to our option plan at each grant date were estimated using the Black-Scholes option pricing model. The fair value-based method of SFAS No. 123 is similar in most respects to the fair value-based method under SFAS No. 123R, although the election of certain methods within the applicable transition rules of SFAS No. 123R may affect the impact on our consolidated financial position or results of operations. The impact of adopting SFAS No. 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards, the assumed award forfeiture rate, the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period and the transition method chosen for adopting SFAS No. 123R. We have preliminarily estimated the effects of adoption of SFAS No. 123R will result in an additional compensation expense of $1.0 million to $1.5 million in fiscal 2006 and a yet to be determined additional compensation expense in fiscal 2007.

Business

We are a rapidly growing, value-priced retailer of urban fashion apparel and accessories for the entire family. We offer quality, branded products from nationally recognized brands, as well as private label products and a limited assortment of home décor items. Our merchandise offerings are designed to appeal to the preferences of fashion conscious consumers, particularly African-Americans. We believe that we provide our merchandise at compelling values. We seek to provide nationally recognized branded merchandise at 20% to 60% discounts to department and specialty stores’ regular prices. Our stores average approximately 9,000 square feet of selling space and are typically located in neighborhood shopping centers that are convenient to low to moderate income customers. Originally our stores were located in the Southeast, and during late fiscal 2004 and fiscal 2005 we expanded into the Mid-Atlantic region, the Midwest and Texas. We operate 236 stores (including two stores currently closed due to the recent hurricanes) in both urban and rural markets in fourteen states. For fiscal 2005, we have opened 36 new stores and have no additional openings planned. We expect to open 42 to 45 new stores in fiscal 2006. Approximately 90% of the new stores we intend to open in fiscal 2006 will be located in states that we currently serve.

Our predecessor was founded in 1946 and grew to become a chain of family apparel stores operating in the Southeast under the Allied Department Stores name. In 1999, our chain of stores, then consisting of 85 stores throughout the Southeast, was acquired by Hampshire Equity Partners II, L.P., a private equity firm. Our management team has implemented several strategies designed to differentiate our stores, improve our operating and financial performance and position us for growth, including:

Industry

According to NPD Fashionworld, a division of the NPD Group, or NPD, a nationally recognized firm that specializes in apparel research, based on Consumer Panel Estimated Data, retail sales of off-price apparel totaled $16.5 billion in the U.S. in 2004, an increase of more than 15% from 2003. The popularity of this segment continues to grow, with off-price retailers accounting for 9.5% of overall retail apparel sales in the U.S. in 2004, versus 8.6% in 2003 and 8.2% in 2002, according to NPD.

The off-price apparel market is dominated by large format, national apparel companies, such as TJX Companies, Burlington Coat Factory and Ross Stores. Our management believes that these retailers generally target more affluent consumers and seek to achieve high volumes by serving the fashion needs of a broad segment of the population. Mass merchants and general merchandise discount retailers, such as Wal-Mart and Kmart, also offer apparel at reduced prices, but we believe that they generally focus on basic apparel and are less fashion oriented. As a result, we believe there is significant demand for a value retailer that addresses the market of low to moderate income consumers generally and, particularly, African-American and other

minority consumers who seek value-priced, urban fashion apparel and accessories. We believe this market benefits from several favorable characteristics, including:

Growing Market with Favorable Demographics. Based on U.S. Census Bureau data, approximately 31% of the U.S. population was non-white in 2000 versus approximately 20% in 1980. According to U.S. Census Bureau data this percentage is estimated to increase to approximately 35% by 2010. African-Americans represented 12.7% of the population as of 2000, which is expected to increase to 13.1% in 2010, based upon U.S. Census Bureau data.

Significant Spending on Apparel. According to the Selig Center for Economic Growth at The University of Georgia the combined U.S. buying power of non-whites grew from $454.3 billion in 1990 to approximately $956.4 billion in 2000. During that period, buying power for African-Americans grew from $318.1 billion to $590.2 billion and is estimated by the Selig Center to grow approximately 70% to $1.0 trillion in 2010.

We believe our core customers are more fashion oriented, which results in a greater propensity to purchase apparel. According to the U.S. Department of Labor, African-Americans spend 4.6% of their annual income on apparel and related products and services, compared to 3.3% for the U.S. population as a whole.

Expansion of Urban Apparel Brands. In recent years, a series of nationally recognized urban brands, often associated with hip-hop and rap musicians, has emerged and gained significant popularity. These brands offer distinctive, urban apparel designed to appeal to African-American consumers, as well as to the broader population. Sales from 13 national urban apparel brands tracked by NPD totaled approximately $1.9 billion in 2004, an increase of approximately 46% from 2003.

Business Strengths

Our goal is to be the leading value-priced retailer of urban fashion apparel and accessories. We believe the following business strengths differentiate us from our competitors and are important to our success:

Focus on Urban Fashion Mix. We focus our merchandise on urban fashions, which we believe appeals to our core customers. We do not attempt to dictate trends, but rather devote considerable effort to identifying emerging trends and ensuring that our apparel assortment is considered timely and fashionable in the urban market. Our merchandising staff tests new merchandise before reordering and actively manages the mix of brands and products in our stores to keep our offering fresh and minimize markdowns.

Superior Value Proposition. As a value-priced retailer, we seek to offer first quality, fashionable merchandise at compelling prices. We seek to provide nationally recognized brands at 20% to 60% discounts to department and specialty stores’ regular prices. We also offer products under our proprietary brands such as Citi Steps, Diva Blue and Urban Sophistication. These private labels enable us to expand product selection, offer fashion merchandise at lower prices and enhance our product offerings.

Merchandise Mix that Appeals to the Entire Family. We merchandise our stores to create a destination environment capable of meeting the fashion needs of the entire value-conscious family. Each store offers a wide variety of products for men and women, as well as infants, toddlers, boys and girls. Our stores feature sportswear, dresses, plus-sized apparel, outerwear, footwear and accessories, as well as a limited assortment of home décor items. We believe that the breadth of our merchandise distinguishes our stores from many competitors that offer urban apparel primarily for women, and reduces our exposure to fashion trends and demand cycles in any single category.

Strong and Flexible Sourcing Relationships. We maintain strong sourcing relationships with a large group of suppliers. We have purchased merchandise from more than 1,000 vendors in the past twelve months. Purchasing is controlled by our 20-plus member buying team located at our Savannah, Georgia headquarters and in New York, New York, and our buyers have an average of more than 20 years of retail experience. We purchase merchandise through planned programs with vendors at reduced prices and opportunistically through close-outs, with the majority of our merchandise purchased for the current season and a limited quantity held

for sale in future seasons. To foster our vendor relationships, we pay vendors promptly and do not ask for typical retail concessions such as promotional and markdown allowances or delivery concessions such as drop shipments to stores.

Attractive Fashion Presentation and Store Environment. We seek to provide a fashion-focused shopping environment that is similar to a specialty apparel retailer, rather than a typical off-price store. Products from nationally recognized brands are prominently displayed by brand, rather than by size, on dedicated, four-way fixtures featuring multiple sizes and styles. The remaining merchandise is arranged on hanging racks. All stores are carpeted and well-lit, with most featuring a sound system that plays urban adult and urban contemporary music throughout the store. Nearly all of our stores have either been opened or remodeled in the past six years.

Highly Profitable Store Model. We operate a proven and efficient store model that delivers strong cash flow and store level return on investment. We locate stores in high traffic strip shopping centers that are convenient to low and moderate income neighborhoods. We generally utilize previously occupied store sites. This approach enables us to generate substantial traffic at attractive rents. Similarly, our advertising expenses are low as we do not rely on promotion-driven sales but rather seek to build our reputation for value through everyday low prices. At the same time, from an investment perspective, we seek to design stores that are inviting and easy to shop, while limiting startup and fixturing costs. As a result, our stores generate rapid payback of investments, typically within 12 to 14 months.

Growth Strategy

Our growth strategy is to open stores in new and existing markets, as well as to increase sales in existing stores. Adding stores in the markets we currently serve often enables us to benefit from enhanced name recognition and achieve advertising and operating synergies. In fiscal 2003 and fiscal 2004, we opened 25 and 40 stores, respectively, and entered the Baltimore, Houston, Norfolk and Washington, D.C. markets.

For fiscal 2005, we have opened 36 new stores thus far and have no additional openings planned, and we entered the Cincinnati, Dallas, Louisville and Miami markets. We expect to open 42 to 45 new stores in fiscal 2006. Approximately 90% of the new stores we intend to open in fiscal 2006 will be located in states we currently serve.

We intend to increase comparable store sales by increasing the assortment and amount of inventory in existing merchandise categories for which recent sales and/or sales trends are encouraging. We also intend to increase comparable store sales through the expansion of adjacent product categories such as home décor and intimate apparel. In order to expand such developing categories, we added a dedicated buyer in home décor in fiscal 2005 and upgraded our buying capabilities and focus within the intimate apparel category.

Store Operations

Store Format. Our existing 236 stores’ average selling space is approximately 9,000 square feet, which allows us space and flexibility to departmentalize our stores and provide directed traffic patterns. New stores opened since the beginning of fiscal 2003 average approximately 10,500 square feet of selling space, which is larger than our historical store base. As a result of these new stores, as well as due to the remodeling and expansion of existing stores, our average square footage of selling space per store has increased from approximately 7,600 at the end of fiscal 2002 to its current level.

We arrange our stores in a racetrack format with women’s sportswear, our most attractive and fashion current merchandise, in the center of each store, and complementary categories adjacent to those items. Men’s and boy’s apparel is displayed on one side of the store while dresses, footwear and accessories are displayed on the other side. Merchandise for infants, toddlers and girls is displayed along the back of the store. Impulse items, such as jewelry and sunglasses, are featured near the checkout area. Products from nationally recognized brands are prominently displayed on four way racks at the front of each department. The

remaining merchandise is displayed on hanging racks and occasionally on table displays. Large hanging signs identify each category location. The unobstructed floor plan allows the customer to see virtually all of the different product areas from the store entrance and provides us the flexibility easily to expand and contract departments in response to consumer demand, seasonality and merchandise availability. Virtually all of our inventory is displayed on the selling floor. Our prices are clearly marked and often have the comparative retail-selling price noted on the price tag.

Store Management. Store operations are managed by our Vice President of Store Operations, three regional managers and 26 district managers, each of whom typically manages eight to ten stores. Our typical store is staffed with a store manager, two or three assistant managers and seven to eight part time sales associates, all of whom rotate work days on a shift basis. District managers and store managers participate in a bonus program based on achieving predetermined levels of sales and profits. The district managers also participate in bonus programs based on achieving targeted payroll costs. Our regional managers participate in a bonus program based on a rollup of the district managers’ bonuses. The assistant managers and sales associates are compensated on an hourly basis with incentives. Moreover, we recognize individual performance through internal promotions and provide extensive opportunities for advancement, particularly given our rapid growth.

We place significant emphasis on loss prevention in order to control inventory shrinkage. Our initiatives include electronic tags on all of our products, training and education of store personnel on loss prevention issues, digital video camera systems, alarm systems and motion detectors in the stores. We also capture extensive point-of-sale data and maintain systems that monitor returns, voids and employee sales, and produce trend and exception reports to assist us in identifying shrinkage issues. We have a centralized loss prevention team that focuses exclusively on implementation of these initiatives and specifically on stores that have experienced above average levels of shrinkage.

Employee Training. Our employees are critical to achieving our goals, and we strive to hire employees with high energy levels and motivation. We have well-established store operating policies and procedures and an extensive 90-day in-store training program for new store managers and assistant managers. Our sales associates also participate in a 30-day customer service and store procedures training program, which is designed to enable them to assist customers in a friendly, helpful manner.

Layaway Program. We offer a layaway program that allows customers to purchase merchandise by initially paying a 20% deposit together with a $2.00 service charge. The customer then makes additional payments every two weeks and has 60 days within which to complete the purchase. If the purchase is not completed, the customer receives a merchandise credit for amounts paid less a $5.00 re-stocking fee and the service charge. Sales under our layaway program accounted for approximately 13% of our total sales in fiscal 2004.

Store Economics. We believe we benefit from attractive store-level economics. The average investment for the 65 stores we opened in fiscal 2003 and fiscal 2004, including leasehold improvements, equipment, fixturing, cost of inventory to stock the store (net of accounts payable) and pre-opening store expenses, was approximately $280,000. These 65 stores generated average sales of $1.4 million and average store operating profit (defined as store operating revenue less cost of sales and store operating expenses which is comprised of payroll, occupancy, advertising and other operating costs) of approximately $230,000 during their first twelve months of operation.

Store Locations

As of January 4, 2006, we operated 236 stores (including two stores, one in Belle Glade, Florida and one in New Orleans, Louisiana, currently closed due to the recent hurricanes) located in fourteen states. Our stores are primarily located in strip shopping centers and downtown business districts. We have no franchising relationships as all of our stores are company-operated. The table below sets forth the number of stores in each of these fourteen states and the specific markets within each such state in which we operated at least two stores as of January 4, 2006:

     Alabama—19
          Birmingham—4
          Montgomery—2
          Mobile—2
          Single store locations—11
     Arkansas—5
          Little Rock—3
          Single store locations—2
     Florida—16
          Jacksonville—3
          Orlando—2
          Tampa—2
          Single store locations—9
     Georgia—48
          Albany—2
          Atlanta—9
          Augusta—3
          Macon—3
          Savannah—2
          Single store locations—29
     Kentucky—1
     Louisiana—22
          Baton Rouge—2
          Monroe—2
          New Orleans—2
          Shreveport—3
          Single store locations—13
     Maryland—3
          Baltimore—2
          Single store locations—1
     Mississippi—19
          Jackson—2
          Single store locations—17
     North Carolina—31
          Charlotte—3
          Durham—2
          Fayetteville—2
          Greensboro—2
          Winston-Salem—2
          Single store locations—20
     Ohio—1
     South Carolina—32
          Charleston—2
          Columbia—2
          Orangeburg—2
          Single store locations—26
     Tennessee—10
          Memphis—6
          Nashville—2
          Single store locations—2
     Texas—16
          Dallas-Fort Worth—3
          Houston—8
          Single store locations—5
     Virginia—13
          Norfolk—7
          Richmond—4
          Single store locations—2

Site Selection. Cost-effective store locations are an important part of our profitability model. Accordingly, we look for second and third use store locations that offer attractive rents, but also meet our demographic and economic criteria.

In selecting a location, we target both urban and rural markets. Demographic criteria used in site selection include concentrations of our core consumers. In addition, we require convenient site accessibility, as well as strong co-tenants, such as food stores, dollar stores, rent-to-own stores and other apparel stores. We prepare detailed demographic studies and pro forma financial statements for each prospective store location. Our economic criteria for a site include specific store-level profitability and return on capital invested.

We have a dedicated real estate management team responsible for new store site selection. Our group has identified a significant number of target sites in existing strip shopping centers and off-mall locations with appropriate market characteristics in both new and existing markets. We opened a total of 65 new stores in fiscal 2003 and fiscal 2004. We have opened 36 new stores in fiscal 2005 and expect to open 42 to 45 new stores in fiscal 2006. We have funded our store openings with a portion of the net proceeds from our initial public offering and cash flow from operations.

Shortly after we sign a new store lease, our store construction department prepares the store by installing fixtures, signs, dressing rooms, checkout counters, cash register systems and other items. Once we take possession of a store site, we can open the store within approximately three to four weeks.

Product Merchandising and Pricing

Merchandising. Our merchandising policy is to offer high quality, branded products at attractive prices for the entire value-conscious family. We seek to maintain a diverse assortment of first quality, in-season

merchandise that appeals to the distinctive tastes and preferences of our core customers. Approximately 35% to 40% of our sales are typically represented by nationally recognized brands that we purchase from approximately 30 to 50 vendors. We also offer a wide variety of products from less recognized brands that represent approximately 60% of sales. The remaining 10% of sales represent private label products under our proprietary brands such as Citi Steps, Diva Blue and Urban Sophistication. Our private label products enable us to expand product selection, offer merchandise at lower prices and enhance our product offerings.

Our merchandise includes apparel, accessories and home décor. Within apparel, we offer men’s, women’s, which includes dresses, sportswear and plus size offerings, and children’s, which includes offerings for infants, toddlers, boys and girls. We also offer accessories, which includes intimate apparel, handbags, hats, jewelry, footwear, toys, belts and sleepwear, as well as a limited assortment of home décor, which includes giftware, lamps, pictures, mirrors and figurines.

The following table sets forth our approximate merchandise assortment by classification as a percentage of net sales for the thirty-nine weeks ended October 29, 2005. We have made an estimate for layaways based on total layaway transactions still outstanding as of October 29, 2005.

Pricing. We purchase our merchandise at low prices and mark prices up less than department or specialty stores. We seek to provide our nationally recognized brands at prices 20% to 60% below regular retail prices available in department stores and specialty stores, and that product offering validates both our value and fashion positioning to our consumers. We also consider the price-to-value relationships of our non-branded products to be strong. Our basic pricing strategy is everyday low prices. Our discount from the suggested retail price is usually reflected on the price tag. We review each department in our stores at least monthly for possible markdowns based on sales rates and fashion seasons to promote faster turnover of inventory and to accelerate the flow of current merchandise. Our return policy permits any customer the right to return merchandise within ten days of purchase and receive a cash refund if they have a receipt, unless such item was purchased in a closeout or discount in which case we will only permit a merchandise exchange. We believe that our practice in this regard is more restrictive when compared to other apparel retailers.

Sourcing and Allocation

Our merchandising department oversees the sourcing and allocation of merchandise to our stores, which allows us to utilize volume purchase discounts and maintain control over our inventory. We source our merchandise from over 1,000 vendors, consisting of domestic manufacturers and importers. For the thirty-nine weeks ended October 29, 2005, no vendor represented over 6% of our net sales. Our President and Chief Merchandising Officer supervises our 18 member planning and allocation team, as well as our buying team which is comprised of four merchandise managers and 19 buyers. Consistent with our plan to grow the intimate apparel and home décor categories, we added a dedicated buyer in home décor in fiscal 2005 and upgraded our buying capabilities and focus in intimate apparel.

Our buyers have an average of more than 20 years of experience in the retail business and have developed long-standing relationships with many of our vendors, including those controlling the distribution of branded apparel. These buyers are responsible for maintaining vendor relationships, securing high quality, fashionable merchandise that meets our margin requirements and identifying and responding to emerging fashion trends. Our buyers, who are based in Savannah and New York, accomplish this by traveling to the major United States apparel markets regularly, visiting our major manufacturers and attending national and regional apparel

trade shows, including urban-focused trade shows. We also retain the services of two independent fashion consulting firms, Barbara Fields Buying and Henry Donegar Associates, that monitor market trends.

Our buyers purchase merchandise in styles, sizes and quantities to meet inventory levels developed by our planning staff. We work closely with our suppliers and are able to differentiate ourselves by our willingness to purchase less than a full assortment of styles, colors and sizes and by our policy of paying promptly and not asking for typical retail concessions such as promotional and markdown allowances. Our purchasing department utilizes several buying techniques that enable us to offer to consumers branded and other merchandise at everyday low prices. The majority of the nationally recognized branded products we sell are purchased in-season and represent our vendors’ excess inventories resulting from production or retailer order cancellations. We generally purchase later in the merchandising buying cycle than department and specialty stores. This allows us to take advantage of imbalances between retailers’ demands for specific merchandise and manufacturers’ supply of that merchandise. We also purchase merchandise from some vendors in advance of the selling season at reduced prices. Occasionally, we purchase merchandise on an opportunistic basis, which we then “pack and hold” for sale three to nine months later. Where possible, we seek to purchase items based on style or color in limited quantities on a test basis with the right to reorder as needed. Finally, we purchase private label merchandise that we source to our specifications.

As is customary in the industry, we do not enter into long-term contracts with any of our suppliers. While we believe we may encounter delays if we change suppliers, we believe alternate sources of merchandise for all product categories are available at comparable prices.

We allocate merchandise across our store base according to store-level demand. Our merchandising staff utilizes a centralized management system to monitor merchandise purchasing, allocation and sales in order to maximize inventory turnover, identify and respond to changing product demands and determine the timing of mark-downs to our merchandise. Our buyers also regularly review the age and condition of our merchandise and manage both the reordering and clearance processes. In addition, our merchandising team communicates with our regional, district and store managers to ascertain regional and store-level conditions and to better ensure that our product mix meets our consumers’ demands in terms of quality, fashion, price and availability.

Advertising and Marketing

Our advertising goal is to build the “Citi Trends” brand and promote consumers’ association of our brand with value, quality, fashion and everyday low prices. We generally focus our advertising efforts during the Easter, back-to-school and Christmas seasons. This advertising consists of radio commercials on local hip-hop radio stations that highlight our brands, our value and our everyday low prices. We also do in-store advertising that includes window signs designated for special purposes, such as seasonal events and clearance periods, and taped audio advertisements co-mingled with our in-store music programs. Signs change in color, quantity and theme every three to six weeks. For store grand openings, we typically seek to create community awareness and consumer excitement through radio advertising preceding and during the grand opening and by creating an on-site event with local radio personalities broadcasting from the new location. We also distribute promotional items such as gift certificates and shopping sprees in connection with our grand openings.

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

Distribution

All merchandise sold in our stores is shipped directly from our distribution centers in Savannah, Georgia and our distribution center in Darlington, South Carolina. In October 2005, we purchased our Darlington facility which is situated on 90 acres of land. To date we have paid approximately $1.6 million of the $3 million to

$4 million in total we expect to spend on acquisition costs and for capital improvements necessary to prepare the location for full operation. We began receiving and processing shipments from this new distribution location in the fourth quarter of fiscal 2005. We will continue our physical renovation and updating of the distribution center, which has the same technology and information systems as our other distribution centers.

All work necessary to prepare the merchandise to be sales-floor ready is performed in our distribution centers. Some of our merchandise comes from vendors pre-ticketed and pre-packed and can be shipped directly from the distribution centers to our stores without repacking. However, most merchandise has to be price ticketed and repacked in store shipping units before being shipped to the stores.

We generally ship merchandise from our distribution centers to stores daily, but approximately 40 of our smaller volume stores receive merchandise every other day. We use United Parcel Service, Inc. and FedEx Corporation to ship merchandise to our stores. Our two distribution centers in Savannah have a combined approximately 240,000 square feet, including approximately 20,000 square feet of office space. Our Darlington, South Carolina facility has approximately 286,500 square feet. We expect these facilities to provide us the capacity to double our existing sales volume.

Quality control reviews of every merchandise receipt are performed by a dedicated team at our distribution centers. These teams are responsible for working with our vendors and manufacturers to ensure consistent and superior quality across all merchandise categories. Nearly all of our merchandise is purchased from recognized domestic manufacturers and importers, which reduces our risk of inadvertently handling counterfeit items.

Information Technology and Systems

We have information systems in place to support each of our business functions. We purchased our enterprise software from Island Pacific, a primary software provider to the retail industry. Our computer platform is an IBM AS400. The Island Pacific software supports the following business functions: purchasing, purchase order management, price and markdown management, distribution, merchandise allocation, general ledger, accounts payable and sales audit.

The Island Pacific merchandise system captures and reports sales and inventory by item, by store and by day. This information allows our merchandising team to evaluate merchandise performance in considerable detail with high levels of precision. Over the last four years we have enhanced the Island Pacific software, particularly to enhance merchandise allocation and distribution functions. In 2004, we purchased and installed Buyers Toolbox software to aid our merchandise planning and allocation functions.

Our stores use point-of-sale software from DataVantage, a division of MICROS Systems, Inc., to run our store cash registers. The system uses bar code scanners at checkout to capture item sales. It also supports end-of-day processing and automatically transmits sales and transaction data to Savannah each night. Additionally, the software supports store time clock and payroll functions. To facilitate marking down and re-ticketing merchandise, employees in our stores use hand-held scanners that read the correct item price and prepare new price tickets for merchandise. Our DataVantage software also enables us to sort and review transaction data and generate exception and other database reporting to assist in loss prevention.

We had planned to complete installation of the latest upgrade to the DataVantage software. We, however, experienced delays implementing the upgrade and now plan to complete installation of the upgrade by the end of fiscal 2006. The new software will enable improved and less costly telecommunications between our stores and our corporate headquarters. The upgrade will also provide improved credit and debit card processing, store e-mail and more reliable data transmissions to our home office systems.

We believe that our information systems, with upgrades and updates over time, are adequate to support our operations for the foreseeable future.

Competition

The markets we serve are highly competitive. The principal methods of competition in our retail business are fashion, assortment, pricing and presentation. We believe we have a competitive advantage in our offering of fashionable brands at everyday low prices. We compete against a diverse group of retailers including national off-price retailers, mass merchants, smaller specialty retailers and dollar stores. The off-price retail companies with which we compete include TJX Companies, Burlington Coat Factory and Ross Stores. In particular, TJX Companies’ A.J. Wright stores target moderate income consumers. Ross Stores has recently launched a similar concept targeting lower income consumers, called dd’s DISCOUNTS. We believe our strategy of appealing to African-American consumers and offering urban apparel products allows us to compete successfully with these retailers. We also believe we offer a more inviting store format than the off-price retailers, including our use of carpeted floors and more prominently displayed brands. We also compete with a group of smaller specialty retailers that only sell women’s products, such as Rainbow, Dots, Fashion Cents, It’s Fashions and Simply Fashions. Our mass merchant competitors include Wal-Mart and Kmart. These chains do not focus on fashion apparel and, within their apparel offering, lack the urban focus that we believe differentiates our offering and appeals to our core customers. Similarly, while some of the dollar store chains offer apparel, they typically offer a more limited selection focused on basic apparel needs.

Intellectual Property

We regard our trademarks and service marks as having significant value and as being important to our marketing efforts. We have registered the “Citi Trends” trademark with the U.S. Patent and Trademark Office on the Principal Register as both a trademark for retail department store services and as a trademark for clothing. We have also registered the following trademarks with the U.S. Patent and Trademark Office on the Principal Register: “Citi Club,” “Citi Express,” “Citi Knights,” “Citi Nite,” “Citi Steps,” “Citi Trends Fashion for Less,” “Citi Women,” “CT Sport,” “Diva Blue,” “Lil Citi Man,” “Lil Ms Hollywood,” “Univer Soul”, “Urban Sophistication” and “Vintage Harlem.” Our policy is to pursue registration of our marks and to oppose vigorously infringement of our marks.

Properties

All our existing 236 stores, totaling approximately 2.6 million gross square feet, are leased under operating leases. Additionally, as of January 4, 2006, we have signed leases for 11 new stores to be opened during fiscal 2006 aggregating approximately 150,000 total gross square feet. Our typical store lease is for five years with an option to extend our lease term for an additional five-year period, and all but one lease requires us to pay percentage rent and increases in specified site-related charges. Nearly all of our store leases provide us the right to cancel following an initial three-year period in the event the store does not meet pre-determined sales levels.

We own an approximately 170,000 square foot facility located on Fahm Street in Savannah, Georgia, which serves as our headquarters and one of our three distribution centers. This facility is financed under a mortgage which was repaid with a portion of the proceeds from our initial public offering. We currently lease the land and building for our distribution center located on Coleman Boulevard. The lease for this distribution center expires in September 2006, with options to renew for up to three more years. On October 19, 2005, we acquired an approximately 286,500 square foot distribution center in Darlington, South Carolina. We began to receive shipments into the new facility in December. In addition, we currently lease 1,200 square feet in New York City, which is used for buyer operations and meetings with vendors.

Employees

As of January 4, 2006, we had approximately 1,120 full-time and approximately 1,600 part-time employees. Of these employees, approximately 2,295 are employed in our stores and the remainder are employed in our

distribution centers and corporate offices. We are not a party to any collective bargaining agreements, and none of our employees is represented by a labor union.

Legal Proceedings

We are from time to time involved in various legal proceedings incidental to the conduct of our business, including claims by our customers, employees or former employees. Such claims could have a material adverse effect on our business, financial condition and results of operation. We, however, are not aware of any legal proceedings pending or threatened against us that we expected to have a material adverse effect on our business, financial condition or results of operation.

Management

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors and their ages as of January 4, 2006:

R. Edward Anderson. Mr. Anderson has served as our Chief Executive Officer and as a director since December 2001. Prior to his current responsibilities, Mr. Anderson served as Executive Vice President and Chief Financial Officer of Variety Wholesalers, our previous owner, from December 1997 to December 2001. From 1978 to 1994, Mr. Anderson served as Chief Financial Officer of Rose’s Stores, Inc., a discount retailer. In August 1994, Mr. Anderson was promoted to Chief Executive Officer and served in this position until December 1997. Mr. Anderson also served as the Chairman of the Board of Directors of Rose’s Stores, Inc. from August 1994 to December 1997.

George A. Bellino. Mr. Bellino has served as our President and Chief Merchandising Officer since December 2001 and served as a director from April 1999 to May 2005. Mr. Bellino served as our Chief Executive Officer and President from April 1999 to December 2001. From January 1997 to March 1999, Mr. Bellino served as President of our predecessor company. From June 1992 to December 1996, Mr. Bellino served as the Vice President of Merchandising at Pennsylvania Fashions, a privately held off-price apparel chain. From June 1990 to October 1991, Mr. Bellino served as President of General Textiles / Family Bargain Center, a retail apparel chain.

Thomas W. Stoltz. Mr. Stoltz has served as our Chief Financial Officer since September 2000. From January 1999 to August 2000, Mr. Stoltz served as Chief Financial Officer of Sharon Luggage and Gifts, a privately held retailer. From August 1996 to December 1998, Mr. Stoltz served as the Chief Financial Officer and Vice President of Finance of Factory Card Outlet, a greeting card retailer. Mr. Stoltz is a certified public accountant licensed in North Carolina and a member of the American Institute of Certified Public Accountants.

James A. Dunn. Mr. Dunn has served as our Vice President of Store Operations since April 2001. From January to April 2001, Mr. Dunn was our Director of Training and Development and from January 2000 to January 2001 was one of our Regional Managers. Prior to joining us, Mr. Dunn was a Store Manager at Staples from January 1999 to December 2000. Prior to that Mr. Dunn was a Regional Manager at Dress Barn, where he supervised 77 stores and 10 district sales managers.

Gregory P. Flynn. Mr. Flynn has served as our Chairman of the board of directors since 2001 and as a member of the compensation committee since 2001. Mr. Flynn is also a member of the nominating and corporate governance committee. Mr. Flynn is currently a Managing Partner of Hampshire Equity Partners II, L.P. and Hampshire Equity Partners III, L.P. and has been associated with Hampshire since 1996. Hampshire Equity Partners II, L.P. and certain of its affiliates are selling stockholders in this offering. From 1994 to 1996, Mr. Flynn served as a Managing Partner of ING Equity Partners, L.P.

John S. Lupo. Mr. Lupo has served as a director since May 2003, and is the Chairman of the compensation committee, as well as a member of the audit committee and the nominating and corporate governance committee.

Mr. Lupo is a principal in the consulting firm Renaissance Partners, LLC, which he joined in February 2000. From November 1998 until December 1999, Mr. Lupo served as Executive Vice President of Basset Furniture. From October 1996 until October 1998, Mr. Lupo served as the Chief Operating Officer of the International Division of Wal-Mart Stores Inc., and from September 1990 until September 1996, Mr. Lupo served as Senior Vice President and General Merchandise Manager of Wal-Mart Stores Inc. Mr. Lupo is a director for Spectrum Brands (formerly known as Rayovac Corp.), a public reporting company, and serves on their Compensation and Corporate Governance and Nominating Committees.

Tracy L. Noll. Mr. Noll has served as a director since July 2000 and is the Chairman of the audit committee, as well as a member of the compensation committee and the nominating and corporate governance committee. Mr. Noll is currently a private investor based in Dallas, Texas. He served as President and Chief Operating Officer of National Dairy Holdings, L.P. from April 2001 to September 2003. He served as Executive Vice President of Suiza Foods Corporation, a public reporting company, from September 1994 until March 2001, including serving as Chief Financial Officer from September 1994 until July 1997. He served as Vice President and Chief Financial Officer of Morningstar Foods Inc., a public reporting company, from April 1988 until June 1994. Mr. Noll currently serves as a Director and is Chairman of the Audit Committee of Reddy Ice Group, Inc., a public reporting company.

Patricia M. Luzier. Ms. Luzier has served as a director since November 30, 2005 and is the Chairman of the nominating and corporate governance committee, as well as a member of the audit committee and the compensation committee. Ms. Luzier was previously the Senior Vice President and Chief Administrative Officer of Cole National Corporation, a public reporting specialty retailer, from 1999 until October 2004. She served as Senior Vice President, Human Resources and Administration for HomePlace Group, Inc. from 1998 until 1999. She also served as Senior Vice President of Human Resources with Vicorp Restaurants, Inc. from 1994 until 1998. Ms. Luzier currently serves as a Director for Dale Carnegie and Associates and serves on their Compensation Committee.

Each of our executive officers serves at the discretion of the board of directors and holds office until his successor is elected and qualified or until his earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Board of Directors Composition

Our board of directors consists of five directors divided into three classes, three of which are “independent” under the rules of the Nasdaq National Market. Mr. Flynn is the only Hampshire Equity Partners nominated director, and the three independent directors are Messrs. Noll and Lupo and Ms. Luzier.

Our second amended and restated certificate of incorporation divides our board into three classes having staggered terms, with one of such classes being elected each year for a new three-year term. Class I directors have an initial term expiring in 2006, Class II directors have an initial term expiring in 2007 and Class III directors have an initial term expiring in 2008. Class I is comprised of Ms. Luzier. Class II is comprised of Messrs. Noll and Lupo. Class III is comprised of Messrs. Flynn and Anderson.

In connection with our initial public offering, we entered into a nominating agreement with Hampshire Equity Partners II, L.P. pursuant to which we, acting through our nominating and corporate governance committee, agreed, subject to the requirements of our directors’ fiduciary duties, that (i) Hampshire Equity Partners II, L.P. is entitled to designate two directors to be nominated for election to our board of directors as long as Hampshire Equity Partners II, L.P. owns in the aggregate at least 40% of the shares of our common stock which it owned immediately prior to the consummation of our initial public offering or (ii) Hampshire Equity Partners  II, L.P. is entitled to designate one director to be nominated for election to our board of directors as long as Hampshire Equity Partners  II, L.P. owns in the aggregate less than 40% and at least 15% of the

shares of our common stock which it owned immediately prior to the consummation of our initial public offering. If at any time Hampshire Equity Partners  II, L.P. owns less than 15% of the shares of our common stock which it owned immediately prior to the consummation of our initial public offering, it will not have the right to nominate any directors for election to our board of directors. See “Related Party Transactions—Nominating Agreement”.

Board of Directors Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.

The audit committee, currently consisting of Messrs. Noll and Lupo and Ms. Luzier, reviews our internal accounting procedures and consults with and reviews the services provided by our independent registered public accountants. Mr. Noll is the Chairman of the audit committee and qualifies as an “audit committee financial expert” for purposes of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The principal duties and responsibilities of our audit committee are to:

The audit committee is required to report regularly to our board of directors to discuss any issues that arise with respect to the quality or integrity of our financial statements, our compliance with legal or regulatory requirements, the performance and independence of our independent auditors, or the performance of the internal audit function.

The compensation committee, consisting of Messrs. Lupo, Noll and Flynn and Ms. Luzier, reviews and determines the compensation and benefits of all of our officers, establishes and reviews general policies relating to the compensation and benefits of all of our employees, and administers our long-term incentive plan. Mr. Lupo is the Chairman of the compensation committee. The principal duties and responsibilities of our compensation committee are to:

Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of our current compensation committee serves or has ever served as one of our officers or employees. None of our executive officers serves or has ever served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

The nominating and corporate governance committee currently consists of Messrs. Lupo, Noll and Flynn and Ms. Luzier. Ms. Luzier is the Chair of the nominating and corporate governance committee. The principal duties and responsibilities of our nominating and corporate governance committee are to:

We have adopted a written code of business conduct applicable to our directors, officers and employees in accordance with the rules of the Nasdaq National Market and the Commission. Our code of business conduct is designed to deter wrongdoing and to promote:

Our code is available on our website at www.cititrends.com.

Director Compensation

Our independent directors currently receive a $24,000 annual retainer, $2,500 per meeting attended and an annual award of 2,500 options with an exercise price set to the fair market value of our common stock on the date of grant as compensation from us for their services as members of the board of directors. A director who serves as the chairman of the audit committee receives an $8,000 annual retainer and a director who serves as chair of the compensation committee receives a $2,000 annual retainer. All non-employee directors also receive $500 for attendance at each committee meeting. We reimburse all of our directors for out-of-pocket expenses in connection with attendance at board of directors and committee meetings.

Executive Compensation

The following table sets forth a summary of the compensation paid during fiscal 2004 to our Chief Executive Officer and our four most highly compensated executive officers, together referred to as our named executive officers:

Summary Compensation Table

Stock Option Grants

The following table contains summary information regarding stock option grants made during fiscal 2004 by us to the named executive officers. We also granted stock options to purchase shares of common stock to certain of our employees and to our current stockholders, including Hampshire Equity Partners II, L.P. All options were granted at fair market value of our common stock, as determined by our board of directors, on the grant date.

Option Grants In Last Fiscal Year