QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-23071
THE CHILDREN’S PLACE, INC.
(Exact name of registrant as specified in its charter)
Delaware
31-1241495
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
500 Plaza Drive
Secaucus, New Jersey
07094
(Address of principal executive offices)
(Zip Code)
(201) 558-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.10 par value
PLCE
Nasdaq Global Select Market
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YesxNo☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
x
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐Nox
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.10 per share, outstanding at August 24, 2023: 12,478,857.
The Children’s Place, Inc. and subsidiaries (collectively, the “Company”) is an omni-channel children’s specialty portfolio of brands with an industry-leading digital-first operating model. Its global retail and wholesale network includes four digital storefronts, more than 500 stores in North America, wholesale marketplaces and distribution in 16 countries through six international franchise partners. The Company designs, contracts to manufacture, and sells fashionable, high-quality apparel, accessories and footwear predominantly at value prices, primarily under the Company’s proprietary brands: “The Children’s Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place”.
The Company classifies its business into two segments: The Children’s Place U.S. and The Children’s Place International. Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from its U.S.-based wholesale business. Included in The Children’s Place International segment are its Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, as well as revenue from international franchisees. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com, and www.pjplace.com. The Company also has social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest.
Terms that are commonly used in the notes to the Company’s consolidated financial statements are defined as follows:
•Second Quarter 2023 — The thirteen weeks ended July 29, 2023
•Second Quarter 2022 — The thirteen weeks ended July 30, 2022
•Year-To-Date 2023— The twenty-six weeks ended July 29, 2023
•Year-To-Date 2022 — The twenty-six weeks ended July 30, 2022
•Fiscal 2023 – The fifty-three weeks ending February 3, 2024
•Fiscal 2022 – The fifty-two weeks ended January 28, 2023
•SEC — U.S. Securities and Exchange Commission
•U.S. GAAP — Generally Accepted Accounting Principles in the United States
•FASB — Financial Accounting Standards Board
•FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants
Basis of Presentation
The unaudited consolidated financial statements and accompanying notes to consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated. As of July 29, 2023, January 28, 2023 and July 30, 2022, the Company did not have any investments in unconsolidated affiliates. FASB ASC 810—Consolidation is considered when determining whether an entity is subject to consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the consolidated financial position of the Company as of July 29, 2023 and July 30, 2022, the results of its consolidated operations, consolidated comprehensive income (loss), and consolidated changes in stockholders’ equity for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022, and consolidated cash flows for the twenty-six weeks ended July 29, 2023 and July 30, 2022. The consolidated balance sheet as of January 28, 2023 was derived from audited financial statements. Due to the seasonal nature of the Company’s business, the results of operations for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 are not necessarily indicative of operating results for a full fiscal year. These consolidated financial statements should be read in conjunction with the
7
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2023.
Certain prior period financial statement disclosures have been conformed to the current period presentation.
Fiscal Year
The Company’s fiscal year is a fifty-two week or fifty-three week period ending on the Saturday on or nearest to January 31.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and amounts of revenues and expenses reported during the period. Actual results could differ from the assumptions used and estimates made by management, which could have a material impact on the Company’s financial position or results of operations. Critical accounting estimates inherent in the preparation of the consolidated financial statements include impairment of long-lived assets, impairment of indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation.
Recent Accounting Standards Updates
There are no pending accounting standards updates that are currently expected to have a material impact on the Company’s consolidated financial statements.
2. REVENUES
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The following table presents the Company’s revenues disaggregated by geography:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Net sales:
South
$
127,708
$
146,368
$
247,626
$
282,740
Northeast
59,935
72,113
124,468
147,509
West
46,750
52,411
89,352
102,543
Midwest
34,093
39,218
72,902
82,831
International and other (1)
77,113
70,775
132,891
127,612
Total net sales
$
345,599
$
380,885
$
667,239
$
743,235
____________________________________________
(1) Includes retail and e-commerce sales in Canada and Puerto Rico, wholesale and franchisee sales, and certain amounts earned under the Company’s private label credit card program.
The Company recognizes revenue, including shipping and handling fees billed to customers, upon purchase at the Company’s retail stores or when received by the customer if the product was purchased via e-commerce, net of coupon redemptions and anticipated sales returns. The Company deferred sales of $11.7 million, $2.9 million, and $12.6 million within Accrued expenses and other current liabilities as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively, based upon estimated time of delivery, at which point control passes to the customer. Sales tax collected from customers is excluded from revenue.
8
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For its wholesale business, the Company recognizes revenue, including shipping and handling fees billed to customers, when title of the goods passes to the customer, net of commissions, discounts, operational chargebacks, and cooperative advertising. The allowance for wholesale revenue included within Accounts receivable was $7.4 million, $5.0 million, and $4.3 million as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively.
For the sale of goods to retail customers with a right of return, the Company recognizes revenue for the consideration it expects to be entitled to and calculates an allowance for estimated sales returns based upon the Company’s sales return experience. Adjustments to the allowance for estimated sales returns in subsequent periods have not been material based on historical data, thereby reducing the uncertainty inherent in such estimates. The allowance for estimated sales returns, which is recorded in Accrued expenses and other current liabilities, was $2.5 million, $1.0 million, and $2.3 million as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively.
The Company’s private label credit card is issued to customers for use exclusively at The Children’s Place stores and online at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com, and www.pjplace.com, and credit is extended to such customers by a third-party financial institution on a non-recourse basis to the Company. The private label credit card includes multiple performance obligations for the Company, including marketing and promoting the program on behalf of the bank and the operation of the loyalty rewards program. Included in the agreement with the third-party financial institution was an upfront bonus paid to the Company and an additional bonus to extend the term of the agreement. These bonuses are recognized as revenue and allocated between brand and reward obligations. As the license of the Company’s brand is the predominant item in the performance obligation, the amount allocated to the brand obligation is recognized on a straight-line basis over the term of the agreement. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur.
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration, such as additional bonuses, including profit-sharing, over the life of the private label credit card program. Similar to the upfront bonus, the usage-based royalties and bonuses are recognized as revenue and allocated between the brand and reward obligations. The amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In addition, the annual profit-sharing amount is recognized quarterly within an annual period when it can be estimated reliably. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets.
The Company has a points-based customer loyalty program in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within Accrued expenses and other current liabilities. The total contract liabilities related to this program were $5.6 million, $2.6 million, and $3.9 million as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively.
The Company’s policy with respect to gift cards is to record revenue as and when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recorded within Net sales. Prior to their redemption, gift cards are recorded as a liability within Accrued expenses and other current liabilities. The liability is estimated based on expected breakage that considers historical patterns of redemption. The gift card liability balance as of July 29, 2023, January 28, 2023, and July 30, 2022 was $10.2 million, $11.1 million, and $11.7 million, respectively. During Year-To-Date 2023, the Company recognized Net sales of $3.1 million related to the gift card liability balance that existed at January 28, 2023.
The Company has an international program of territorial agreements with franchisees. The Company generates revenues from the franchisees from the sale of product and, in certain cases, sales royalties. The Company recognizes revenue on the sale of product to franchisees when the franchisee takes ownership of the product. The Company records net sales for royalties when the applicable franchisee sells the product to their customers. Under certain agreements, the Company receives a fee from each franchisee for exclusive territorial rights and based on the opening of new stores. The Company records these territorial fees as deferred revenue and amortizes the fee into Net sales over the life of the territorial agreement.
9
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. RESTRUCTURING
In support of the Company’s ongoing structural transformation from a legacy store operating model to a digital-first retailer, during the Second Quarter 2023, the Company voluntarily entered into an early termination of its corporate office lease and implemented a workforce reduction. On May 26, 2023, the Company proactively accelerated the termination of its corporate office lease to capitalize on the prevailing tenant-favorable market conditions. That lease will now expire in May 2024. On June 28, 2023, the Company announced that it implemented a 17% reduction in the number of its salaried workforce, the substantial majority of whom were located at the Company’s corporate offices in Secaucus, New Jersey, with the balance at other domestic and international locations. The voluntary lease termination, combined with the workforce reduction, will enable the Company to reduce its current space configuration and capitalize on lower prevailing market rates than would have been applicable under its existing lease, which included escalations in occupancy costs, and did not expire until 2029. The actions associated with the workforce reduction are expected to be substantially completed by the end of the third quarter of 2023.
As a result of these strategic actions associated with the voluntary early termination of its corporate office lease and workforce reduction, the Company incurred non-operating charges of $10.6 million in restructuring costs during the Second Quarter 2023 and Year-To-Date 2023 on a pre-tax basis, summarized in the following table:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Employee-related costs
$
5,433
$
—
$
5,433
$
—
Lease termination costs (1)
4,947
—
4,947
—
Professional fees
186
—
186
—
Total restructuring costs (2)
$
10,566
$
—
$
10,566
$
—
____________________________________________
(1)Includes $0.9 million of non-cash charges related to accelerated depreciation on certain assets in the corporate office over the reduced lease term. The Company expects to record additional accelerated depreciation charges of approximately $1.5 million until the expiration of its corporate office lease.
(2)Restructuring costs are recorded within Selling, general and administrative expenses, except accelerated depreciation charges noted above, which are recorded within Depreciation and amortization, and are primarily recorded within The Children’s Place U.S. segment.
The following table summarizes the restructuring costs that have been partially settled with cash payments and the remaining related liability as of July 29, 2023. The remaining related liability is expected to be settled with cash payments in the future and these costs are included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets:
Employee-Related Costs
Lease Termination Costs
Professional Fees
Total
(in thousands)
Balance at April 29, 2023
$
—
$
—
$
—
$
—
Provision
5,433
4,040
186
9,659
Cash payments
(2,602)
(4,040)
—
(6,642)
Balance at July 29, 2023
$
2,831
$
—
$
186
$
3,017
10
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. INTANGIBLE ASSETS
The Company’s intangible assets were as follows:
July 29, 2023
Useful Life
Gross Amount
Accumulated Amortization
Net Amount
(in thousands)
Gymboree tradename (1)
Indefinite
$
69,953
$
—
$
69,953
Crazy 8 tradename (1)
5 years
4,000
(3,462)
538
Total intangible assets
$
73,953
$
(3,462)
$
70,491
January 28, 2023
Useful Life
Gross Amount
Accumulated Amortization
Net Amount
(in thousands)
Gymboree tradename (1)
Indefinite
$
69,953
$
—
$
69,953
Crazy 8 tradename (1)
5 years
4,000
(3,062)
938
Customer databases (2)
3 years
3,000
(3,000)
—
Total intangible assets
$
76,953
$
(6,062)
$
70,891
July 30, 2022
Useful Life
Gross Amount
Accumulated Amortization
Net Amount
(in thousands)
Gymboree tradename (1)
Indefinite
$
69,953
$
—
$
69,953
Crazy 8 tradename (1)
5 years
4,000
(2,661)
1,339
Customer databases (2)
3 years
3,000
(3,000)
—
Total intangible assets
$
76,953
$
(5,661)
$
71,292
____________________________________________
(1)Included within Tradenames, net on the Consolidated Balance Sheets.
(2)Included within Other assets on the Consolidated Balance Sheets.
11
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
July 29, 2023
January 28, 2023
July 30, 2022
(in thousands)
Property and equipment:
Land and land improvements
$
3,403
$
3,403
$
3,403
Building and improvements
36,187
36,187
36,187
Material handling equipment
89,389
71,404
68,450
Leasehold improvements
178,536
196,302
195,342
Store fixtures and equipment
200,201
210,413
205,961
Capitalized software
347,343
336,336
333,967
Construction in progress
7,134
23,959
16,913
862,193
878,004
860,223
Less accumulated depreciation and amortization
(720,949)
(728,130)
(705,485)
Property and equipment, net
$
141,244
$
149,874
$
154,738
At July 29, 2023 and July 30, 2022, the Company reviewed its store related long-lived assets for indicators of impairment, and performed a recoverability test if indicators were identified. Based on the results of the analyses performed, the Company recorded asset impairment charges in the Second Quarter 2023 and Year-To-Date 2023 of $0.8 million and $2.5 million, respectively, inclusive of right-of-use (“ROU”) assets. The Company recorded asset impairment charges in the Second Quarter 2022 and Year-To-Date 2022 of $1.4 million, inclusive of ROU assets.
6. LEASES
The Company has operating leases for retail stores, corporate offices, distribution facilities, and certain equipment. The Company’s leases have remaining lease terms ranging from less than one year up to nine years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the lease early. The Company records all occupancy costs in Cost of sales, except costs for administrative office buildings, which are recorded in Selling, general, and administrative expenses. As of the periods presented, the Company’s finance leases were not material to the Consolidated Balance Sheets, Consolidated Statements of Operations, or Consolidated Statements of Cash Flows.
The following components of operating lease expense were recognized in the Company’s Consolidated Statements of Operations:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Fixed operating lease cost
$
21,481
$
24,070
$
42,387
$
47,040
Variable operating lease cost (1)
14,388
12,573
29,085
27,691
Total operating lease cost
$
35,869
$
36,643
$
71,472
$
74,731
____________________________________________
(1)Includes short term leases with lease periods of less than 12 months.
As of July 29, 2023, the weighted-average remaining operating lease term was 3.2 years, and the weighted-average discount rate for operating leases was 5.2%. Cash paid for amounts included in the measurement of operating lease liabilities during Year-To-Date 2023 was $41.9 million. ROU assets obtained in exchange for new operating lease liabilities were $15.5 million during Year-To-Date 2023.
12
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of July 29, 2023, the maturities of operating lease liabilities were as follows:
July 29, 2023
(in thousands)
Remainder of 2023
$
46,940
2024
41,983
2025
16,132
2026
12,039
2027
9,394
Thereafter
12,866
Total operating lease payments
139,353
Less: imputed interest
(10,373)
Present value of operating lease liabilities
$
128,980
7. DEBT
On November 16, 2021, the Company completed the refinancing of its previous $360.0 million asset-based revolving credit facility and previous $80.0 million term loan with a new lending group led by an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”) by entering into a fourth amendment to its credit agreement, dated as of May 9, 2019, with the lenders party thereto (as amended from time to time, the “Credit Agreement”). The refinanced debt consisted of a $350.0 million asset-based revolving credit facility (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”).
On June 5, 2023, the Company entered into a fifth amendment to its Credit Agreement, pursuant to which, among other things, (i) PNC Bank, National Association (“PNC Bank”) was added as a new lender, (ii) the ABL Credit Facility was increased to $445.0 million, (iii) the London InterBank Offered Rate (“LIBOR”) was replaced by the Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark, and (iv) the pricing grid for applicable margins on borrowings was updated. All other material terms and conditions of the Credit Agreement remained unchanged.
ABL Credit Facility and Term Loan
The Company and certain of its subsidiaries maintain the $445.0 million ABL Credit Facility and the $50.0 million Term Loan with Wells Fargo, Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., JPMorgan Chase Bank, N.A., and PNC Bank as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and Term Agent. Both the ABL Credit Facility and the Term Loan mature in November 2026.
The ABL Credit Facility includes a $25.0 million Canadian sublimit and a $50.0 million sublimit for standby and documentary letters of credit.
Under the ABL Credit Facility, based on the amount of the Company’s average daily excess availability under the facility, borrowings outstanding bear interest, at the Company’s option, at:
(i)the prime rate per annum, plus a margin of 1.250% or 1.500%; or
(ii)the SOFR per annum, plus a margin of 2.000% or 2.250%.
The Company is charged a fee of 0.200% on the unused portion of the commitments. Letter of credit fees range from 1.000% to 1.125% for commercial letters of credit and range from 1.500% to 1.750% for standby letters of credit. Letter of credit fees are determined based on the amount of the Company’s average daily excess availability under the facility. The amount available for loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves.
13
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Once the Company achieves a consolidated EBITDA of at least $200.0 million across four consecutive fiscal quarters, and based on the amount of the Company’s average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility would bear interest, at the Company’s option, at:
(i)the prime rate per annum, plus a margin of 0.625% or 0.875%; or
(ii)the SOFR per annum, plus a margin of 1.375% or 1.625%.
Letter of credit fees would range from 0.688% to 0.813% for commercial letters of credit and would range from 0.875% to 1.125% for standby letters of credit. Letter of credit fees are determined based on the amount of the Company’s average daily excess availability under the facility.
For the Second Quarter 2023 and Year-To-Date 2023, the Company recognized $6.1 million and $10.8 million, respectively, in interest expense related to the ABL Credit Facility. For the Second Quarter 2022 and Year-To-Date 2022, the Company recognized $2.4 million and $3.9 million, respectively, in interest expense related to the ABL Credit Facility.
The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. The Company is not subject to any early termination fees.
The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings and other uses of credit exceed $400.5 million (the “excess availability requirement”). These covenants also limit the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of its business.
Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of the Company’s U.S. and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the Company’s intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock.
The table below presents the components of the Company’s ABL Credit Facility:
July 29, 2023
January 28, 2023
July 30, 2022
(in millions)
Total borrowing base availability
$
466.8
$
404.2
$
478.0
Credit facility maximum, net of the excess availability requirement, as applicable
400.5
315.0
350.0
Maximum borrowing availability (1)
400.5
315.0
350.0
Outstanding borrowings
347.5
287.0
283.9
Letters of credit outstanding—standby
7.4
7.4
7.4
Utilization of credit facility at end of period
354.9
294.4
291.3
Availability (2)
$
45.6
$
20.6
$
58.7
Interest rate at end of period
8.1%
5.9%
3.4%
Year-To-Date 2023
Fiscal 2022
Year-To-Date 2022
(in millions)
Average end of day loan balance during the period
$
315.2
$
274.9
$
268.2
Highest end of day loan balance during the period
$
379.4
$
297.7
$
297.6
Average interest rate
6.3%
3.7%
2.4%
14
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
____________________________________________
(1)Lower of the credit facility maximum, net of the excess availability requirement, and the total borrowing base availability.
(2)The sub-limit availability for letters of credit was $42.6 million at July 29, 2023, January 28, 2023, and July 30, 2022.
The Term Loan bears interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.000% for any portion that is a base rate loan. The Term Loan is pre-payable at any time without penalty, and does not require amortization. For the Second Quarter 2023 and Year-To-Date 2023, the Company recognized $1.0 million, and $1.9 million, respectively, in interest expense related to the Term Loan. For the Second Quarter 2022 and Year-To-Date 2022, the Company recognized $0.5 million, and $0.8 million, respectively, in interest expense related to the Term Loan.
The Term Loan is secured by a first priority security interest in the Company’s intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral securing the ABL Credit Facility on a first-priority basis. The Term Loan is guaranteed by each of the Company’s subsidiaries that guarantees the ABL Credit Facility and contains substantially the same covenants as provided in the ABL Credit Facility.
Both the ABL Credit Facility and the Term Loan contain customary events of default, which include (subject in certain cases to customary grace and cure periods) nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization. As of July 29, 2023, unamortized deferred financing costs amounted to $2.6 million, of which $2.3 million related to our ABL Credit Facility.
8. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in Rael v. The Children’s Place, Inc., a purported class action, pending in the U.S. District Court, Southern District of California. In the initial complaint filed in February 2016, the plaintiff alleged that the Company falsely advertised discount prices in violation of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. The plaintiff filed an amended complaint in April 2016, adding allegations of violations of other state consumer protection laws. In August 2016, the plaintiff filed a second amended complaint, adding an additional plaintiff and removing the other state law claims. The plaintiffs’ second amended complaint sought to represent a class of California purchasers and sought, among other items, injunctive relief, damages, and attorneys’ fees and costs.
The Company engaged in mediation proceedings with the plaintiffs in December 2016 and April 2017. The parties reached an agreement in principle in April 2017, and signed a definitive settlement agreement in November 2017, to settle the matter on a class basis with all individuals in the U.S. who made a qualifying purchase at The Children’s Place from February 11, 2012 through January 28, 2020, the date of preliminary approval by the court of the settlement. The Company submitted its memorandum in support of final approval of the class settlement on March 2, 2021. On March 29, 2021, the court granted final approval of the class settlement and denied plaintiff’s motion for attorney’s fees, with the amount of attorney’s fees to be decided after the class recovery amount has been determined. The settlement provides merchandise vouchers for qualified class members who submit valid claims, as well as payment of legal fees and expenses and claims administration expenses. Vouchers were distributed to class members on November 15, 2021 and they will be eligible for redemption in multiple rounds through November 2023. In connection with the settlement, the Company recorded a reserve for $5.0 million in its consolidated financial statements in the first quarter of 2017.
The Company is also involved in various legal proceedings arising in the normal course of business. In the opinion of management, any ultimate liability arising out of these proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
9. STOCKHOLDERS’ EQUITY
Share Repurchase Program
In November 2021, the Board of Directors authorized a $250.0 million share repurchase program (the “Share Repurchase Program”). Under this program, the Company may repurchase shares on the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, and other market and business conditions. The Company may suspend or discontinue the program at any time and may thereafter reinstitute purchases, all
15
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
without prior announcement. As of July 29, 2023, there was $157.4 million remaining availability under the Share Repurchase Program.
Pursuant to the Company’s practice, including due to restrictions imposed by the Company’s insider trading policy during black-out periods, the Company withholds and repurchases shares of vesting stock awards and makes payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. The Company’s payment of the withholding taxes in exchange for the surrendered shares constitutes a repurchase of its common stock. The Company also acquires shares of its common stock in conjunction with liabilities owed under the Company’s deferred compensation plan, which are held in treasury.
The following table summarizes the Company’s share repurchases:
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
Shares
Amount
Shares
Amount
(in thousands)
Share repurchases related to:
Share repurchase program
203
$
6,964
1,147
$
61,230
Shares acquired and held in treasury
4
$
148
3
$
144
In accordance with the FASB ASC 505—Equity, the par value of the shares retired is charged against Common stock and the remaining purchase price is allocated between Additional paid-in capital and Retained earnings (deficit). The portion charged against Additional paid-in capital is determined using a pro-rata allocation based on total shares outstanding. For all shares retired in Year-To-Date 2023 and Year-To-Date 2022, $2.8 million and $38.9 million was charged to Retained earnings (deficit), respectively.
Dividends
Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Company’s Board of Directors based on a number of factors, including business and market conditions, the Company’s financial performance, and other investment priorities.
10. STOCK-BASED COMPENSATION
The Company generally grants time-vesting stock awards (“Deferred Awards”) and performance-based stock awards (“Performance Awards”) to employees at management levels. The Company also grants Deferred Awards to its non-employee directors.
The following table summarizes the Company’s stock-based compensation expense (benefit):
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Deferred Awards
$
1,690
$
2,171
$
4,190
$
5,596
Performance Awards (1)
(6,452)
4,101
(5,869)
8,238
Total stock-based compensation expense (benefit) (2)
$
(4,762)
$
6,272
$
(1,679)
$
13,834
____________________________________________
(1)Included within the Performance Awards benefit for the Second Quarter 2023 and Year-To-Date 2023 was a combination of ongoing expense associated with existing grants, and $6.7 million of credits resulting from (a) a change in estimate based on revised expectations of the attainment levels for performance metrics of certain awards, and (b) the reversal of unvested expense related to forfeited awards for employees no longer with the Company.
(2)Stock-based compensation expense (benefit) recorded within Cost of sales (exclusive of depreciation and amortization) amounted to $(0.5) million and $0.3 million in the Second Quarter 2023 and Second Quarter 2022, respectively, and $(0.1) million and $0.9 million in Year-To-Date 2023 and Year-To-Date 2022, respectively. All other stock-based compensation expense (benefit) is included in Selling, general, and administrative expenses.
16
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. EARNINGS (LOSS) PER COMMON SHARE
The following table reconciles net income (loss) and share amounts utilized to calculate basic and diluted earnings (loss) per common share:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Net income (loss)
$
(35,355)
$
(13,298)
$
(64,188)
$
6,533
Basic weighted average common shares outstanding
12,522
13,147
12,448
13,384
Dilutive effect of stock awards
—
—
—
148
Diluted weighted average common shares outstanding
12,522
13,147
12,448
13,532
Anti-dilutive shares excluded from diluted earnings (loss) per common share calculation
74
77
151
—
12. INCOME TAXES
The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company’s deferred tax assets and liabilities are comprised largely of differences relating to depreciation and amortization, rent expense, inventory, stock-based compensation, net operating loss carryforwards, tax credits, and various accruals and reserves.
The Company’s effective income tax rate for the Second Quarter 2023 was a benefit of 20.7%, or $9.2 million, compared to 19.0%, or $3.1 million, during the Second Quarter 2022. The increase in the effective income tax rate and income tax benefit for the Second Quarter 2023 compared to the Second Quarter 2022 was primarily driven by the increase in the Second Quarter 2023 pretax loss compared to the pretax loss in the Second Quarter 2022 and the impact of nonrecurring items recognized in the Second Quarter 2023.
The Company’s effective income tax rate for Year-To-Date 2023 was a benefit of 20.3%, or $16.4 million, compared to (477.6)%, or $5.4 million, for Year-To-Date 2022. The increase in the effective income tax rate for Year-To-Date 2023 compared to Year-To-Date 2022 was primarily driven by the Year-To-Date 2023 pretax loss as compared to near break-even pretax income for Year-To-Date 2022 and the release of a reserve in the first quarter of Fiscal 2022 of $6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority which was nonrecurring, partially offset by the impact of nonrecurring items recognized in the Second Quarter 2023.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act allows net operating losses (“NOLs”) incurred in taxable years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to offset 100% of taxable income and to generate a refund of previously paid income taxes. Pursuant to the CARES Act, the Company carried back the taxable year 2020 tax loss of $150.0 million to prior years. During the first quarter of Fiscal 2022, the Company received $22.0 million of this income tax refund and the remaining balance of $19.1 million as of July 29, 2023 is included within Prepaid expenses and other current assets on the Consolidated Balance Sheets.
The Company accrues interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. The total amount of unrecognized tax benefits was $4.3 million, $3.6 million, and $2.3 million as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively, and is included within long-term liabilities. Interest expense recognized in Year-To-Date 2023 and Year-To-Date 2022 related to unrecognized tax benefits was not significant.
The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company files a consolidated U.S. income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, state and local or foreign tax authorities for tax years 2016 and prior.
17
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues arise as a result of a tax audit, and are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
13. SEGMENT INFORMATION
In accordance with FASB ASC 280—Segment Reporting, the Company reports segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com, and www.pjplace.com. Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from the Company’s U.S.-based wholesale business. Included in The Children’s Place International segment are the Company’s Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, and revenue from international franchisees. The Company measures its segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions, such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. The Company periodically reviews these allocations and adjusts them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and the Company has one wholesale customer that individually accounted for more than 10% of its net sales for the Second Quarter 2023. As of July 29, 2023, The Children’s Place U.S. had 525 stores and The Children’s Place International had 71 stores. As of July 30, 2022, The Children’s Place U.S. had 577 stores and The Children’s Place International had 81 stores.
18
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides segment level financial information:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Net sales:
The Children’s Place U.S.
$
313,217
$
341,223
$
606,703
$
669,184
The Children’s Place International (1)
32,382
39,662
60,536
74,051
Total net sales
$
345,599
$
380,885
$
667,239
$
743,235
Operating income (loss):
The Children’s Place U.S.
$
(36,739)
$
(13,943)
$
(64,766)
$
2,926
The Children’s Place International
(202)
114
(2,242)
2,499
Total operating income (loss)
$
(36,941)
$
(13,829)
$
(67,008)
$
5,425
Operating income (loss) as a percentage of net sales:
The Children’s Place U.S.
(11.7
%)
(4.1)
%
(10.7%)
0.4%
The Children’s Place International
(0.6
%)
0.3
%
(3.7%)
3.4%
Total operating income (loss) as a percentage of net sales
(10.7
%)
(3.6)
%
(10.0%)
0.7%
Depreciation and amortization:
The Children’s Place U.S.
$
11,079
$
12,261
$
21,984
$
24,848
The Children’s Place International
874
980
1,817
2,008
Total depreciation and amortization
$
11,953
$
13,241
$
23,801
$
26,856
Capital expenditures:
The Children’s Place U.S.
$
7,170
$
7,612
$
18,142
$
17,969
The Children’s Place International
—
431
10
797
Total capital expenditures
$
7,170
$
8,043
$
18,152
$
18,766
____________________________________________
(1)Net sales from The Children’s Place International are primarily derived from Canadian operations. The Company’s foreign subsidiaries, primarily in Canada, have operating results based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company’s strategic initiatives and results of operations, including adjusted net income (loss) per diluted share. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “project,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company’s current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company’s filings with the Securities and Exchange Commission, including in Part I, Item 1A. Risk Factors of its annual report on Form 10-K for the fiscal year ended January 28, 2023. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions (including inflation), the risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general, the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions, disruptions and higher costs in the Company’s global supply chain, including resulting from COVID-19 or other disease outbreaks, foreign sources of supply in less developed countries, more politically unstable countries, or countries where vendors fail to comply with industry standards or ethical business practices, including the use of forced, indentured or child labor, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the Company’s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2023.
Terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows:
•Second Quarter 2023 — The thirteen weeks ended July 29, 2023
•Second Quarter 2022 — The thirteen weeks ended July 30, 2022
•Year-To-Date 2023— The twenty-six weeks ended July 29, 2023
•Year-To-Date 2022 — The twenty-six weeks ended July 30, 2022
•Fiscal 2023 – The fifty-three weeks ending February 3, 2024
•Fiscal 2022 – The fifty-two weeks ended January 28, 2023
•SEC — U.S. Securities and Exchange Commission
•U.S. GAAP — Generally Accepted Accounting Principles in the United States
•FASB — Financial Accounting Standards Board
•FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants
•AUR — Average unit retail price
•Comparable Retail Sales — Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is reopened for a full fiscal month.
20
•Gross Margin — Gross profit expressed as a percentage of net sales
•SG&A — Selling, general, and administrative expenses
OVERVIEW
Our Business
We are an omni-channel children’s specialty portfolio of brands with an industry-leading digital-first operating model. We design, contract to manufacture, and sell fashionable, high quality apparel, accessories and footwear predominantly at value prices, primarily under our proprietary brands: “The Children’s Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place”. As of July 29, 2023, we had 596 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com, and www.pjplace.com, social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest, and 221 international points of distribution with our six franchise partners in 16 countries.
Segment Reporting
In accordance with FASB ASC 280—Segment Reporting, we report segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, www.sugarandjade.com and www.pjplace.com. Included in The Children’s Place U.S. segment are our U.S. and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children’s Place International segment are our Canadian-based stores, revenue from our Canadian-based wholesale business, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and we have one wholesale customer that individually accounted for more than 10% of our net sales for the Second Quarter 2023.
COVID-19 Pandemic
As a result of the impact of the COVID-19 pandemic, we continue to experience disruptions in our business, including in our global supply chain, which have caused delays in the production and transportation of our products, which we are mitigating through shifting production schedules.
Recent Developments
Recent macroeconomic conditions have increased the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other materials used in production, as well as labor, transportation, fuel and energy. Inflationary pressures have also adversely affected our core customer, resulting in a decrease in discretionary apparel purchases during Year-To-Date 2023. We expect these macroeconomic conditions, including but not limited to increased product input costs, transportation costs and inflationary pressures, to continue to impact Fiscal 2023.
In support of our ongoing structural transformation from a legacy store operating model to a digital-first retailer, during the Second Quarter 2023, we voluntarily entered into an early termination of our corporate office lease and implemented a workforce reduction. On May 26, 2023, we proactively accelerated the termination of our corporate office lease to capitalize on the prevailing tenant-favorable market conditions. That lease will now expire in May 2024. On June 28, 2023, we announced that we implemented a 17% reduction in the number of our salaried workforce, the substantial majority of whom were located at our corporate offices in Secaucus, New Jersey, with the balance at other domestic and international locations. The voluntary lease termination, combined with the workforce reduction, will enable us to reduce our current space configuration and capitalize on lower prevailing market rates than would have been applicable under our existing lease, which included escalations in occupancy costs, and did not expire until 2029.
In connection with the voluntary early termination of our corporate office lease and workforce reduction, we incurred non-operating charges of $10.6 million in restructuring costs during the Second Quarter 2023 and Year-To-Date 2023 on a pretax basis, consisting of employee severance and benefit costs associated with the workforce reduction, in addition to the lease termination payment, accelerated depreciation associated with the early termination of our corporate office lease, and professional fees.
21
Operating Highlights
Net sales decreased $35.3 million, or 9.3%, to $345.6 million during the Second Quarter 2023 from $380.9 million during the Second Quarter 2022, primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures. Comparable retail sales decreased 9.0% for the Second Quarter 2023.
Gross profit decreased $27.7 million to $87.8 million or 25.4% of net sales during the Second Quarter 2023 from $115.5 million or 30.3% of net sales during the Second Quarter 2022. The 490 basis point decrease in gross margin was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, and the deleveraging of fixed expenses resulting from the decline in net sales.
Operating loss increased $(23.1) million to a loss of $(36.9) million during the Second Quarter 2023 compared to $(13.8) million during the Second Quarter 2022. Operating loss deleveraged 710 basis points to (10.7)% of net sales.
Net loss increased $(22.1) million to $(35.4) million, or $(2.82) per diluted share, during the Second Quarter 2023 compared to $(13.3) million, or $(1.01) per diluted share, during the Second Quarter 2022, due to the factors discussed above.
While we continue to face a challenging macroeconomic environment, including increases in the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other inputs, as well as labor, transportation, fuel and energy, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, alternative channels of distribution, and fleet optimization.
Digital remains our top priority and we continue to expand our digital capabilities. We have migrated to a new responsive site and mobile application, and we have expanded our partnerships with our outside providers to help us monitor and reallocate our marketing budgets in a more efficient and timely manner to drive acquisition, retention and reactivation. Starting in the second half of Fiscal 2022, the results from our new marketing strategies have been encouraging and we continue to position marketing as a key growth lever in Fiscal 2023 and beyond. As our digital business continues to expand, we also continue to strengthen our partnership with our third-party logistics providers in an effort to provide our customer with a best-in-class digital experience.
We continue to evaluate our store fleet through our fleet optimization initiative. We have closed 603 stores, including three stores closed during the Second Quarter 2023, since the announcement of our fleet optimization initiative in 2013. We are currently targeting approximately 80 - 100 store closures in Fiscal 2023, which will leave us with approximately 500 stores entering 2024. With over 75% of our store fleet coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility in our lease portfolio. The average unexpired lease term for our stores is approximately 1.1 years in the United States, Puerto Rico, and Canada.
In November 2021, our Board of Directors authorized a $250.0 million share repurchase program (the “Share Repurchase Program”). During the Second Quarter 2023, we repurchased shares of our common stock for $0.9 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards. As of July 29, 2023, there was $157.4 million remaining availability under the Share Repurchase Program.
We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars. The table below summarizes the average translation rates that most significantly impact our operating results:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Average Translation Rates(1)
Canadian dollar
0.7494
0.7775
0.7440
0.7835
Hong Kong dollar
0.1277
0.1274
0.1276
0.1276
____________________________________________
(1)The average translation rates are the average of the monthly translation rates used during each period to translate the respective statements of operations. Each rate represents the U.S. dollar equivalent of the respective foreign currency.
22
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
We describe our significant accounting policies in “Note 1. Basis of Preparation and Summary of Significant Accounting Policies” of the notes to consolidated financial statements included in our most recent Annual Report on Form 10-K for the fiscal year ended January 28, 2023. There have been no significant changes in our accounting policies from those described in our most recent Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ materially from our estimates.
Our critical accounting estimates are described under the heading “Critical Accounting Estimates” in Item 7 of our most recent Annual Report on Form 10-K for the fiscal year ended January 28, 2023. Our critical accounting estimates include impairment of long-lived assets, impairment of indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation. There have been no material changes in these critical accounting estimates from those described in our most recent Annual Report on Form 10-K.
Recent Accounting Standards Updates
There are no pending accounting standards updates that are currently expected to have a material impact on the Company’s consolidated financial statements.
RESULTS OF OPERATIONS
We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales.
The following table sets forth, for the periods indicated, selected data from our Statements of Operations expressed as a percentage of Net sales. We primarily evaluate the results of our operations as a percentage of Net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of Net sales (i.e., “basis points”). For example, SG&A increased 230 basis points to 32.4% of Net sales during the Second Quarter 2023 from 30.1% during the Second Quarter 2022. Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business. Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “deleveraging”), we have less efficiently utilized the investments we have made in our business.
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales (exclusive of depreciation and amortization)
74.6
69.7
72.4
65.4
Gross profit
25.4
30.3
27.6
34.6
Selling, general, and administrative expenses
32.4
30.1
33.7
30.1
Depreciation and amortization
3.5
3.5
3.6
3.6
Asset impairment charges
0.2
0.4
0.4
0.2
Operating income (loss)
(10.7)
(3.6)
(10.0)
0.7
Interest expense, net
(2.2)
(0.7)
(2.0)
(0.5)
Income (loss) before benefit for income taxes
(12.9)
(4.3)
(12.1)
0.2
Benefit for income taxes
(2.7)
(0.8)
(2.5)
(0.7)
Net income (loss)
(10.2)
%
(3.5)
%
(9.6)
%
0.9
%
Number of Company stores, end of period
596
658
596
658
23
The following table sets forth net sales by segment, for the periods indicated:
Thirteen Weeks Ended
Twenty-six Weeks Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
(in thousands)
Net sales:
The Children’s Place U.S.
$
313,217
$
341,223
$
606,703
$
669,184
The Children’s Place International
32,382
39,662
60,536
74,051
Total net sales
$
345,599
$
380,885
$
667,239
$
743,235
Second Quarter 2023 Compared to Second Quarter 2022
Net sales decreased $35.3 million or 9.3%, to $345.6 million during the Second Quarter 2023 from $380.9 million during the Second Quarter 2022, primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures. Comparable retail sales decreased 9.0% for the quarter.
The Children’s Place U.S. net sales decreased $28.0 million or 8.2%, to $313.2 million in the Second Quarter 2023, compared to $341.2 million in the Second Quarter 2022. This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures.
The Children’s Place International net sales decreased $7.3 million or 18.4%, to $32.4 million in the Second Quarter 2023, compared to $39.7 million in the Second Quarter 2022. This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer.
Total e-commerce sales, which include postage and handling, were 50.8% of net retail sales and 44.3% of net sales during the Second Quarter 2023, compared to 47.0% and 43.2%, respectively, during the Second Quarter 2022.
Gross profit decreased $27.7 million to $87.8 million in the Second Quarter 2023, compared to $115.5 million in the Second Quarter 2022. Gross margin deleveraged 490 basis points to 25.4% of net sales in the Second Quarter 2023. The 490 basis point decrease in gross margin was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, and the deleveraging of fixed expenses resulting from the decline in net sales.
Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in shipping and material costs. These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.
Selling, general, and administrative expenses decreased $2.7 million to $112.0 million during the Second Quarter 2023 from $114.7 million during the Second Quarter 2022. SG&A deleveraged 230 basis points to 32.4% of net sales in the Second Quarter 2023. The Second Quarter 2023 results included incremental operating expenses, including restructuring costs of $9.7 million, contract termination fees of $0.5 million, and fleet optimization costs of $0.1 million. The Second Quarter 2022 results included incremental operating expenses, including fleet optimization costs of $0.4 million, a provision for foreign settlement of $0.4 million, restructuring costs of $0.2 million, and professional and consulting fees of $0.1 million. Excluding the impact of these incremental charges, SG&A leveraged 40 basis points to 29.4% of net sales, primarily as a result of reductions in performance-based equity compensation expense, store expenses, and home office payroll, partially offset by the deleveraging of fixed expenses resulting from the decline in net sales and higher planned marketing spend.
Depreciation and amortization was $12.0 million during the Second Quarter 2023, compared to $13.2 million during the Second Quarter 2022. The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 62 stores during the past twelve months, partially offset by the accelerated depreciation related to the voluntary early termination of the corporate office lease.
Asset impairment charges were $0.8 million during the Second Quarter 2023, inclusive of ROU assets. These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections. Asset impairment charges were $1.4 million during the Second Quarter 2022, inclusive or ROU assets.
24
Operating loss increased $(23.1) million to a loss of $(36.9) million during the Second Quarter 2023, compared to $(13.8) million during the Second Quarter 2022. Operating loss deleveraged 710 basis points to (10.7)% of net sales in the Second Quarter 2023. The Second Quarter 2023 results included incremental operating expenses of $12.0 million, as described above, and included all asset impairment charges recorded, compared to $2.1 million in the Second Quarter 2022. Excluding the impact of these incremental charges, operating loss deleveraged 410 basis points to (7.2)% of net sales.
Net interest expense was $7.6 million during the Second Quarter 2023, compared to $2.6 million during the Second Quarter 2022. The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the our revolving credit facility and term loan due to continued market-based rate increases.
Benefit for income taxes was $9.2 million during the Second Quarter 2023, compared to $3.1 million during the Second Quarter 2022. Our effective tax rate was a benefit of 20.7% and 19.0% in the Second Quarter 2023 and Second Quarter 2022, respectively. The increase in our effective tax rate and income tax benefit for the Second Quarter 2023 compared to the Second Quarter 2022 was primarily driven by the increase in the Second Quarter 2023 pretax loss compared to the pretax loss in the Second Quarter 2022 and the impact of nonrecurring items recognized in the Second Quarter 2023.
Net loss increased $(22.1) million to $(35.4) million, or $(2.82) per diluted share during the Second Quarter 2023, compared to $(13.3) million, or $(1.01) per diluted share during the Second Quarter 2022, due to the factors discussed above.
Year-To-Date 2023 Compared to Year-To-Date 2022
Net sales decreased $76.0 million or 10.2%, to $667.2 million during Year-To-Date 2023 from $743.2 million during Year-To-Date 2022, primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures. Comparable retail sales decreased 8.6% during Year-To-Date 2023.
The Children’s Place U.S. net sales decreased $62.5 million or 9.3%, to $606.7 million during Year-To-Date 2023, compared to $669.2 million during Year-To-Date 2022. This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector, and the impact of permanent store closures.
The Children’s Place International net sales decreased $13.5 million or 18.3%, to $60.5 million during Year-To-Date 2023, compared to $74.1 million during Year-To-Date 2022. This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer.
Total e-commerce sales, which include postage and handling, were 48.0% of net retail sales and 42.9% of net sales during Year-To-Date 2023, compared to 45.8% and 42.6%, respectively, during Year-To-Date 2022.
Gross profit decreased $73.2 million to $184.2 million during Year-To-Date 2023, compared to $257.4 million during Year-To-Date 2022. Gross margin deleveraged 700 basis points to 27.6% of net sales during Year-To-Date 2023. The Year-To-Date 2022 results included a net credit of $0.6 million primarily related to the write-off of the lease liability and related right-of-use of a closed store. Excluding the impact of these charges, gross margin deleveraged 690 basis points to 27.6% of net sales. The decrease was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, and the deleveraging of fixed expenses resulting from the decline in net sales.
Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in shipping and material costs. These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.
Selling, general, and administrative expenses increased $1.2 million to $224.9 million during Year-To-Date 2023 from $223.7 million during Year-To-Date 2022. SG&A deleveraged 360 basis points to 33.7% of net sales during Year-To-Date 2023. The Year-To-Date 2023 results included incremental operating expenses, including restructuring costs of $9.9 million, contract termination fees of $3.0 million, and fleet optimization costs of $1.2 million. The Year-To-Date 2022 results included incremental operating expenses, including fleet optimization costs of $0.8 million, professional and consulting fees of $0.6 million, a provision for foreign settlement of $0.4 million, and restructuring costs of $0.2 million. Excluding the impact of these incremental charges, SG&A deleveraged 180 basis points to 31.6% of net sales, primarily as a result of the deleveraging of fixed expenses resulting from the decline in net sales as well as higher planned marketing spend, partially offset by reductions in performance-based equity compensation expense, store expenses, and home office payroll.
Depreciation and amortization was $23.8 million during Year-To-Date 2023, compared to $26.9 million during Year-To-Date 2022. The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 62 stores during the past twelve months, partially offset by the accelerated depreciation related to the voluntary early termination of the corporate office lease.
25
Asset impairment charges were $2.5 million during Year-To-Date 2023, inclusive of ROU assets. Asset impairment charges were $1.4 million during Year-To-Date 2022, inclusive of ROU assets.
Operating income (loss) decreased $(72.4) million to a loss of $(67.0) million during Year-To-Date 2023 from income of $5.4 million during Year-To-Date 2022. Operating margin deleveraged 1,070 basis points to (10.0)% of net sales during Year-To-Date 2023. The Year-To-Date 2023 results included incremental operating expenses of $17.5 million, compared to $3.5 million during Year-To-Date 2022. Excluding the impact of these incremental charges, operating margin deleveraged 860 basis points to (7.4%) of net sales.
Net interest expense was $13.5 million during Year-To-Date 2023, compared to $4.3 million during Year-To-Date 2022. The increase was primarily driven by higher borrowings and higher average interest rates associated with our revolving credit facility and term loan due to continued market-based rate increases.
Benefit for income taxes was $16.4 million during Year-To-Date 2023 compared to $5.4 million during Year-To-Date 2022. Our effective tax rate was 20.3% and (477.6)% during Year-To-Date 2023 and Year-To-Date 2022, respectively. The increase in our effective tax rate for Year-To-Date 2023 was primarily driven by the Year-To-Date 2023 pretax loss as compared to near break-even pretax income for Year-To-Date 2022 and the release of a reserve in the first quarter of Fiscal 2022 of $6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority which was nonrecurring, partially offset by the impact of nonrecurring items recognized in the Second Quarter 2023.
Net income (loss) decreased $(70.7) million to a loss of $(64.2) million, or $(5.16) per diluted share during Year-To-Date 2023, compared to income of $6.5 million, or $0.48 per diluted share during Year-To-Date 2022, due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Currently, our primary uses of cash are for working capital requirements, which are principally inventory purchases, and the financing of capital projects.
On November 16, 2021, we completed the refinancing of our previous $360.0 million asset-based revolving credit facility and our previous $80.0 million term loan with a new lending group led by an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”) by entering into a fourth amendment to our credit agreement, dated as of May 9, 2019, with the lenders party thereto (as amended from time to time, the “Credit Agreement”). The refinanced debt consisted of a $350.0 million asset-based revolving credit facility (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”). Subsequently, on June 5, 2023, we entered into a fifth amendment to our Credit Agreement, pursuant to which, among other things, our ABL Credit Facility was increased to $445.0 million. See “ABL Credit Facility and Term Loan” below for further information.
Our working capital deficit increased $101.5 million to $146.1 million at July 29, 2023, compared to $44.6 million at July 30, 2022, primarily reflecting a decrease in our inventory balance from accelerated liquidation of seasonal inventory and cash on hand, and an increase in borrowings on our ABL Credit Facility, partially offset by a decrease in our accounts payable balance.
At July 29, 2023, we had $347.5 million of outstanding borrowings under our $445.0 million ABL Credit Facility and we had total liquidity of $64.4 million, including $45.6 million of availability under our ABL Credit Facility (after factoring in our excess availability requirement), and $18.8 million of cash on hand. In addition, at July 29, 2023, we had $7.4 million of outstanding letters of credit with an additional $42.6 million available for issuing letters of credit under our ABL Credit Facility.
We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility.
ABL Credit Facility and Term Loan
We and certain of our subsidiaries maintain the $445.0 million ABL Credit Facility and the $50.0 million Term Loan with Wells Fargo, Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., JPMorgan Chase Bank, N.A., and PNC Bank, National Association, as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and Term Agent. Both the ABL Credit Facility and the Term Loan mature in November 2026.
26
The ABL Credit Facility includes a $25.0 million Canadian sublimit and a $50.0 million sublimit for standby and documentary letters of credit.
Under the ABL Credit Facility, based on the amount of our average daily excess availability under the facility, borrowings outstanding bear interest, at our option, at:
(i)the prime rate per annum, plus a margin of 1.250% or 1.500%; or
(ii)the Secured Overnight Financing Rate (“SOFR”) per annum, plus a margin of 2.000% or 2.250%.
We are charged a fee of 0.200% on the unused portion of the commitments. Letter of credit fees range from 1.000% to 1.125% for commercial letters of credit and range from 1.500% to 1.750% for standby letters of credit. Letter of credit fees are determined based on the amount of our average excess availability under the facility. The amount available for loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves.
Once we achieve a consolidated EBITDA of at least $200.0 million across four consecutive fiscal quarters, and based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility would bear interest, at our option, at:
(i)the prime rate per annum, plus a margin of 0.625% or 0.875%; or
(ii)the SOFR per annum, plus a margin of 1.375% or 1.625%.
Letter of credit fees would range from 0.688% to 0.813% for commercial letters of credit and would range from 0.875% to 1.125% for standby letters of credit. Letter of credit fees are determined based on the amount of average daily excess availability under the facility.
For the Second Quarter 2023 and Year-To-Date 2023, we recognized $6.1 million and $10.8 million, respectively, in interest expense related to the ABL Credit Facility. For the Second Quarter 2022 and Year-To-Date 2022, we recognized $2.4 million and $3.9 million, respectively, in interest expense related to the ABL Credit Facility.
The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. We are not subject to any early termination fees.
The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings and other uses of credit exceed $400.5 million (the “excess availability requirement”). These covenants also limit our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of our business.
Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of our U.S. and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock.
27
The table below presents the components of our ABL Credit Facility:
July 29, 2023
January 28, 2023
July 30, 2022
(in millions)
Total borrowing base availability
$
466.8
$
404.2
$
478.0
Credit facility maximum, net of the excess availability requirement, as applicable
400.5
315.0
350.0
Maximum borrowing availability (1)
400.5
315.0
350.0
Outstanding borrowings
347.5
287.0
283.9
Letters of credit outstanding—standby
7.4
7.4
7.4
Utilization of credit facility at end of period
354.9
294.4
291.3
Availability (2)
$
45.6
$
20.6
$
58.7
Interest rate at end of period
8.1%
5.9%
3.4%
Year-To-Date 2023
Fiscal 2022
Year-To-Date 2022
(in millions)
Average end of day loan balance during the period
$
315.2
$
274.9
$
268.2
Highest end of day loan balance during the period
$
379.4
$
297.7
$
297.6
Average interest rate
6.3%
3.7%
2.4%
____________________________________________
(1)Lower of the credit facility maximum net of the excess availability requirement, and the total borrowing base availability.
(2)The sub-limit availability for the letters of credit was $42.6 million at July 29, 2023, January 28, 2023, and July 30, 2022.
The Term Loan bears interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.000% for any portion that is a base rate loan. The Term Loan is pre-payable at any time without penalty, and does not require amortization. For the Second Quarter 2023 and Year-To-Date 2023, we recognized $1.0 million, and $1.9 million, respectively, in interest expense related to the Term Loan. For the Second Quarter 2022 and Year-To-Date 2022, we recognized $0.5 million, and $0.8 million, respectively, in interest expense related to the Term Loan.
The Term Loan is secured by a first priority security interest in our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral securing the ABL Credit Facility on a first-priority basis. The Term Loan is guaranteed by each of our subsidiaries that guarantees the ABL Credit Facility and contains substantially the same covenants as provided in the ABL Credit Facility.
Both the ABL Credit Facility and the Term Loan contain customary events of default, which include (subject in certain cases to customary grace and cure periods) nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization. As of July 29, 2023, unamortized deferred financing costs amounted to $2.6 million, of which $2.3 million related to our ABL Credit Facility.
Cash Flows and Capital Expenditures
Cash used in operating activities was $32.7 million during Year-To-Date 2023, compared to $52.8 million during Year-To-Date 2022. Cash used in operating activities during Year-To-Date 2023 was primarily the result of a lower inventory balance and losses incurred during the period, partially offset by other planned changes in working capital. Cash used in operating activities during Year-To-Date 2022 was primarily the result of the timing of inventory receipts as a result of global supply chain disruptions, partially offset by earnings generated during the period, the receipt of a net income tax refund of $16.4 million, as well as other planned changes in working capital.
Cash used in investing activities was $18.3 million during Year-To-Date 2023, compared to $19.1 million during Year-To-Date 2022, primarily driven by the timing of capital expenditures.
28
Cash provided by financing activities was $53.0 million during Year-To-Date 2023, compared to $45.7 million during Year-To-Date 2022. The increase primarily resulted from net borrowings under our ABL Credit Facility, offset by lower repurchases of our common stock during Year-To-Date 2023 compared to Year-To-Date 2022.
We anticipate total capital expenditures to be in the range of $20 million to $25 million in Fiscal 2023, primarily to support our distribution center expansion, digital initiatives, and enhancement of our fulfillment capabilities, compared to $45.6 million in Fiscal 2022. Our ability to continue to meet our capital requirements in Fiscal 2023 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility. Cash flows generated from operations depends on our ability to achieve our financial plans. We believe that our existing cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility will be sufficient to fund our capital and other cash requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, our financial position and results of operations are routinely subject to market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities, income, and expenses. We utilize cash from operations and short-term borrowings to fund our working capital and investment needs.
Cash and Cash Equivalents
Cash and cash equivalents are normally invested in short-term financial instruments that will be used in operations within 90 days of the balance sheet date. Because of the short-term nature of these instruments, changes in interest rates would not materially affect their fair values.
Interest Rates
Our ABL Credit Facility bears interest at a floating rate equal to the prime rate or SOFR, plus a calculated spread based on our average daily excess availability under the facility. As of July 29, 2023, we had $347.5 million in borrowings under our ABL Credit Facility. A 10% change in the prime rate or SOFR would not have had a material impact on our interest expense.
Our Term Loan bears interest, payable monthly, at (a) the SOFR per annum plus 2.75% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.00% for any portion that is a base rate loan. As of July 29, 2023, the outstanding balance of the Term Loan was $50.0 million. A 10% change in the SOFR would not have had a material impact on our interest expense.
Assets and Liabilities of Foreign Subsidiaries
Assets and liabilities outside the United States are primarily located in Canada and Hong Kong, where our investments in our subsidiaries are considered long-term. As of July 29, 2023, net assets in Canada and Hong Kong amounted to $25.0 million. A 10% increase or decrease in the Canadian and Hong Kong foreign currency exchange rates would increase or decrease the corresponding net investment by $2.5 million. All changes in the net investments in our foreign subsidiaries are recorded in other comprehensive income (loss).
As of July 29, 2023, we had $4.7 million of our cash and cash equivalents held in foreign subsidiaries, of which $1.7 million was in China, $1.3 million was in India, $1.0 million was in Canada, $0.5 million was in Hong Kong, and $0.2 million was held in other foreign countries.
Foreign Operations
We have exchange rate exposure primarily with respect to certain revenues and expenses denominated in Canadian dollars. As a result, fluctuations in exchange rates impact the amount of our reported sales and expenses. Assuming a 10% change in foreign currency exchange rates, the Second Quarter 2023 net sales would have decreased or increased by approximately $5.3 million, and total costs and expenses would have decreased or increased by approximately $7.3 million. Additionally, we have foreign currency denominated receivables and payables that, when settled, result in transaction gains or losses. A 10% change in foreign currency exchange rates would not result in a significant transaction gain or loss in earnings.
We import a vast majority of our merchandise from foreign countries, primarily Bangladesh, Ethiopia, Cambodia, Vietnam, India, Indonesia and China. Consequently, any significant or sudden change in the political, foreign trade, financial, banking, or currency policies and practices, or the occurrence of significant labor unrest in these countries, could have a material adverse impact on our business, financial position, results of operations, and cash flows.
29
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed only to provide “reasonable assurance” that the controls and procedures will meet their objectives. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
Management, including our Chief Executive Officer and President, and our Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of July 29, 2023. Based on that evaluation, our Chief Executive Officer and President, and our Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level, as of July 29, 2023, to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive, principal accounting, and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
Certain legal proceedings in which we are involved are discussed in “Note 8. Commitments and Contingencies” to the accompanying consolidated financial statements and Part I, Item 3 of our Annual Report on Form 10-K for the year ended January 28, 2023.
ITEM 1A.RISK FACTORS.
There were no material changes to the risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the year ended January 28, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In November 2021, our Board of Directors authorized a $250.0 million share repurchase program (the “Share Repurchase Program”). Under this program, we may repurchase shares on the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, and other market and business conditions. We may suspend or discontinue the program at any time and may thereafter reinstitute purchases, all without prior announcement. As of July 29, 2023, there was $157.4 million remaining availability under the Share Repurchase Program.
Pursuant to our practice, including due to restrictions imposed by our insider trading policy during black-out periods, we withhold and repurchase shares of vesting stock awards and make payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. Our payment of the withholding taxes in exchange for the surrendered shares constitutes a repurchase of our common stock. We also acquire shares of our common stock in conjunction with liabilities owed under our deferred compensation plan, which are held in treasury.
The following table provides a month-by-month summary of our share repurchase activity during the Second Quarter 2023:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Plans or Programs
4/30/23-5/27/23 (1)
14,812
$
24.69
11,944
$
157,976
5/28/23-7/1/23 (2)
36,292
16.21
36,292
157,387
7/2/23-7/29/23
—
—
—
157,387
Total
51,104
$
18.67
48,236
$
157,387
____________________________________________
(1)Includes 2,868 shares acquired as treasury stock as directed by participants in the deferred compensation plan and 11,944 shares withheld to cover taxes in conjunction with the vesting of stock awards.
(2)Includes 36,292 shares withheld to cover taxes in conjunction with the vesting of stock awards.
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ITEM 6. EXHIBITS.
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
____________________________________________
(+) Filed herewith.
*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE CHILDREN’S PLACE, INC.
Date:
August 30, 2023
By:
/S/ Jane T. Elfers
Jane T. Elfers
Chief Executive Officer and President
(Principal Executive Officer)
Date:
August 30, 2023
By:
/S/ Sheamus Toal
Sheamus Toal
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
