The Children's Place(PLCE) - 2024 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements. The financial statements for the thirteen weeks ended April 29, 2023, reveal a significant decline in performance, shifting from net income to a substantial net loss due to reduced sales, lower margins, and increased expenses Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | April 29, 2023 | January 28, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :--------------- | :------------- | | Cash and cash equivalents | $18,242 | $16,689 | $58,494 | | Inventories | $504,194 | $447,795 | $549,167 | | Total current assets | $606,599 | $561,943 | $687,463 | | Total assets | $1,014,870 | $986,281 | $1,145,026 | | Revolving loan | $300,835 | $286,990 | $249,544 | | Total current liabilities | $719,287 | $648,385 | $717,671 | | Total liabilities | $889,049 | $827,803 | $931,342 | | Total stockholders' equity | $125,821 | $158,478 | $213,684 | - Cash and cash equivalents decreased significantly from $58.494 million in April 2022 to $18.242 million in April 2023, indicating reduced liquidity[10] - Inventories decreased from $549.167 million in April 2022 to $504.194 million in April 2023, potentially reflecting efforts to manage stock levels[10] - Total stockholders' equity declined from $213.684 million in April 2022 to $125.821 million in April 2023, reflecting the net loss and share repurchases[10] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Thirteen Weeks Ended, in thousands, except EPS) | Metric | April 29, 2023 | April 30, 2022 | Change (YoY) | | :-------------------------------------- | :------------- | :------------- | :----------- | | Net sales | $321,640 | $362,350 | -11.2% | | Gross profit | $96,462 | $141,905 | -32.0% | | Gross profit margin | 30.0% | 39.2% | -9.2 pp | | Selling, general, and administrative expenses | $112,931 | $109,036 | +3.6% | | Operating income (loss) | $(30,067) | $19,254 | N/A (loss) | | Net income (loss) | $(28,834) | $19,831 | N/A (loss) | | Basic EPS | $(2.33) | $1.46 | N/A (loss) | | Diluted EPS | $(2.33) | $1.43 | N/A (loss) | - Net sales decreased by 11.2% year-over-year, from $362.350 million to $321.640 million[12] - The company reported an operating loss of $30.067 million and a net loss of $28.834 million in Q1 2023, a significant reversal from operating income of $19.254 million and net income of $19.831 million in Q1 2022[12] - Diluted EPS shifted from a positive $1.43 in Q1 2022 to a negative $(2.33) in Q1 2023[12] Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Highlights (Thirteen Weeks Ended, in thousands) | Metric | April 29, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :------------- | | Net income (loss) | $(28,834) | $19,831 | | Foreign currency translation adjustment | $(818) | $(482) | | Total comprehensive income (loss) | $(29,652) | $19,349 | - Total comprehensive income shifted from a gain of $19.349 million in Q1 2022 to a loss of $29.652 million in Q1 2023, primarily driven by the net loss[15] Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Thirteen Weeks Ended, in thousands) | Metric | April 29, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :------------- | | Balance, beginning of period | $158,478 | $225,472 | | Net income (loss) | $(28,834) | $19,831 | | Purchase and retirement of common stock | $(6,088) | $(38,699) | | Balance, end of period | $125,821 | $213,684 | - Stockholders' equity decreased from $158.478 million at January 28, 2023, to $125.821 million at April 29, 2023, primarily due to the net loss and share repurchases[19] - Common stock repurchases amounted to $6.088 million in Q1 2023, significantly lower than $38.699 million in Q1 2022[19][21] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Thirteen Weeks Ended, in thousands) | Metric | April 29, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :------------- | | Net cash provided by (used in) operating activities | $5,134 | $(18,837) | | Net cash used in investing activities | $(11,037) | $(10,983) | | Net cash provided by financing activities | $7,757 | $33,856 | | Net increase in cash and cash equivalents | $1,553 | $3,707 | | Cash and cash equivalents, end of period | $18,242 | $58,494 | - Operating activities generated $5.134 million in cash in Q1 2023, a positive shift from $18.837 million cash used in Q1 2022, primarily due to lower inventory balance[24] - Cash provided by financing activities decreased significantly from $33.856 million in Q1 2022 to $7.757 million in Q1 2023, mainly due to lower net borrowings and reduced share repurchases[24] - Ending cash and cash equivalents decreased to $18.242 million in Q1 2023 from $58.494 million in Q1 2022[24] Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION - The Children's Place, Inc. is the largest pure-play children's specialty apparel retailer in North America, operating under proprietary brands like 'The Children's Place', 'Place', 'Baby Place', 'Gymboree', 'Sugar & Jade', and 'PJ Place'[25] - The company operates in two segments: The Children's Place U.S. (U.S. and Puerto Rico stores, U.S. wholesale) and The Children's Place International (Canadian stores, Canadian wholesale, international franchisees), both including e-commerce[26] - Interim financial statements are unaudited and prepared in accordance with U.S. GAAP and SEC regulations, with certain information condensed or omitted compared to annual statements[27] - Management notes that due to the seasonal nature of the business, Q1 results are not necessarily indicative of a full fiscal year's operating results[29] 2. REVENUES Net Sales Disaggregated by Geography (Thirteen Weeks Ended, in thousands) | Geography | April 29, 2023 | April 30, 2022 | | :---------- | :------------- | :------------- | | South | $119,918 | $136,372 | | Northeast | $64,532 | $75,396 | | West | $42,603 | $50,132 | | Midwest | $38,809 | $43,613 | | International and other | $55,778 | $56,837 | | Total net sales | $321,640 | $362,350 | - Revenue is recognized upon purchase at retail stores or customer receipt for e-commerce, net of coupons and estimated returns[36] - The company operates a private label credit card program and a points-based customer loyalty program, with associated revenues and liabilities recognized based on specific criteria[40][42] - Gift card liability decreased from $13.3 million in April 2022 to $10.5 million in April 2023, with $2.0 million recognized as net sales in Q1 2023 from prior balances[43] 3. INTANGIBLE ASSETS Intangible Assets (in thousands) | Intangible Asset | Useful Life | Net Amount (April 29, 2023) | Net Amount (January 28, 2023) | Net Amount (April 30, 2022) | | :----------------- | :---------- | :-------------------------- | :---------------------------- | :-------------------------- | | Gymboree tradename | Indefinite | $69,953 | $69,953 | $69,953 | | Crazy 8 tradename | 5 years | $738 | $938 | $1,539 | | Customer databases | 3 years | — | — | — | | Total intangible assets | | $70,691 | $70,891 | $71,492 | - The Gymboree tradename, with an indefinite useful life, remains the largest intangible asset at $69.953 million[46] - The net amount of Crazy 8 tradename decreased due to amortization[46] 4. PROPERTY AND EQUIPMENT, NET Property and Equipment, Net (in thousands) | Category | April 29, 2023 | January 28, 2023 | April 30, 2022 | | :-------------------------- | :------------- | :--------------- | :------------- | | Total gross property and equipment | $858,260 | $878,004 | $854,226 | | Less accumulated depreciation and amortization | $(711,945) | $(728,130) | $(697,193) | | Property and equipment, net | $146,315 | $149,874 | $157,033 | - Net property and equipment decreased to $146.315 million as of April 29, 2023, from $157.033 million as of April 30, 2022[50] - The company recorded $1.8 million in asset impairment charges in Q1 2023, including right-of-use (ROU) assets, related to underperforming stores[50] 5. LEASES Operating Lease Costs (Thirteen Weeks Ended, in thousands) | Lease Cost Type | April 29, 2023 | April 30, 2022 | | :---------------- | :------------- | :------------- | | Fixed operating lease cost | $20,906 | $22,970 | | Variable operating lease cost | $14,697 | $15,118 | | Total operating lease cost | $35,603 | $38,088 | - Total operating lease costs decreased to $35.603 million in Q1 2023 from $38.088 million in Q1 2022[52] - The weighted-average remaining operating lease term was 3.6 years, and the weighted-average discount rate was 5.1% as of April 29, 2023[52] - Cash paid for operating lease liabilities was $20.9 million in Q1 2023, and ROU assets obtained for new operating lease liabilities were $10.6 million[52] 6. DEBT - The company maintains a $350.0 million asset-based revolving credit facility (ABL Credit Facility) and a $50.0 million term loan (Term Loan), both maturing in November 2026[56] ABL Credit Facility Components (in millions) | Metric | April 29, 2023 | January 28, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :--------------- | :------------- | | Maximum borrowing availability | $350.0 | $350.0 | $350.0 | | Outstanding borrowings | $300.8 | $287.0 | $249.5 | | Availability | $41.8 | $55.6 | $93.1 | | Interest rate at end of period | 6.5% | 5.9% | 2.0% | - Interest expense related to the ABL Credit Facility increased to $4.7 million in Q1 2023 from $1.6 million in Q1 2022, driven by higher borrowings and interest rates[57] - Interest expense related to the Term Loan increased to $0.9 million in Q1 2023 from $0.4 million in Q1 2022[61] - On June 5, 2023, the ABL Credit Facility was increased to $445.0 million, LIBOR was replaced by SOFR, and pricing grids were updated, increasing liquidity by approximately $85 million[64] 7. COMMITMENTS AND CONTINGENCIES - The company is a defendant in a class action lawsuit (Rael v. The Children's Place, Inc.) regarding alleged false advertising, which was granted final settlement approval in March 2021[65][66] - The settlement provides merchandise vouchers for qualified class members and covers legal/administration expenses; a $5.0 million reserve was recorded in Q1 2017[66] - Management believes that any ultimate liability from this and other legal proceedings will not materially adversely affect the company's financial position, results of operations, or cash flows[67] 8. STOCKHOLDERS' EQUITY - A $250.0 million share repurchase program was authorized in November 2021, with $158.3 million remaining availability as of April 29, 2023[68] Share Repurchases (Thirteen Weeks Ended, in thousands) | Category | April 29, 2023 (Shares) | April 29, 2023 (Amount) | April 30, 2022 (Shares) | April 30, 2022 (Amount) | | :-------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Share repurchase program | 155 | $6,088 | 665 | $38,699 | | Shares acquired and held in treasury | 1 | $74 | 1 | $69 | - Share repurchases in Q1 2023 totaled $6.088 million, significantly less than $38.699 million in Q1 2022[71] - Future dividend declarations are subject to Board approval based on business conditions, financial performance, and investment priorities[72] 9. STOCK-BASED COMPENSATION Stock-Based Compensation Expense (Thirteen Weeks Ended, in thousands) | Award Type | April 29, 2023 | April 30, 2022 | | :----------- | :------------- | :------------- | | Deferred Awards | $2,500 | $3,425 | | Performance Awards | $583 | $4,137 | | Total stock-based compensation expense | $3,083 | $7,562 | - Total stock-based compensation expense decreased to $3.083 million in Q1 2023 from $7.562 million in Q1 2022[73] 10. EARNINGS (LOSS) PER COMMON SHARE Earnings (Loss) Per Common Share Reconciliation (Thirteen Weeks Ended, in thousands) | Metric | April 29, 2023 | April 30, 2022 | | :-------------------------------- | :------------- | :------------- | | Net income (loss) | $(28,834) | $19,831 | | Basic weighted average common shares outstanding | 12,374 | 13,621 | | Diluted weighted average common shares outstanding | 12,374 | 13,841 | | Basic EPS | $(2.33) | $1.46 | | Diluted EPS | $(2.33) | $1.43 | - The company reported a diluted loss per share of $(2.33) in Q1 2023, compared to diluted earnings per share of $1.43 in Q1 2022[76] - Anti-dilutive shares excluded from diluted EPS calculation were 228 thousand in Q1 2023, compared to none in Q1 2022, reflecting the net loss[76] 11. INCOME TAXES - The effective income tax rate was a benefit of 19.8% ($7.1 million) in Q1 2023, compared to 13.0% ($2.3 million) in Q1 2022[78] - The increase in the effective tax rate was primarily due to the release of a nonrecurring reserve for unrecognized tax benefits in Q1 2022 and the pretax loss in Q1 2023[78] - Unrecognized tax benefits totaled $3.8 million as of April 29, 2023, an increase from $2.3 million in April 2022[80] 12. SEGMENT INFORMATION - The company reports segment data based on geography: The Children's Place U.S. and The Children's Place International, both including e-commerce[84] Segment Net Sales and Operating Income (Loss) (Thirteen Weeks Ended, in thousands) | Segment | Net Sales (April 29, 2023) | Net Sales (April 30, 2022) | Operating Income (Loss) (April 29, 2023) | Operating Income (Loss) (April 30, 2022) | | :-------------------------- | :------------------------- | :------------------------- | :--------------------------------------- | :--------------------------------------- | | The Children's Place U.S. | $293,486 | $327,961 | $(28,027) | $16,869 | | The Children's Place International | $28,154 | $34,389 | $(2,040) | $2,385 | | Total | $321,640 | $362,350 | $(30,067) | $19,254 | - Both U.S. and International segments experienced declines in net sales and shifted from operating income to operating losses in Q1 2023[85] - The Children's Place U.S. had 528 stores and International had 71 stores as of April 29, 2023, a decrease from 583 and 82 stores respectively in April 2022[84] 13. SUBSEQUENT EVENTS - On May 26, 2023, the company issued a voluntary termination notice for its corporate office building lease, accelerating the termination to June 1, 2024, and paying a $4 million fee, expected to reduce ROU assets and operating lease liabilities by approximately $17 million[86][99] - On June 5, 2023, the ABL Credit Facility was increased to $445.0 million, LIBOR was replaced by SOFR, and pricing grids were updated, enhancing liquidity by approximately $85 million[87][100][135] - Under the amended ABL Credit Facility, interest rates are now based on the SOFR rate plus a margin of 2.00% or 2.25%, or the prime rate plus 1.25% or 1.50%[88][91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion highlights a challenging Q1 2023 with decreased net sales and an operating loss, driven by macroeconomic pressures, while the company implements strategic initiatives and liquidity enhancements OVERVIEW - The company is the largest pure-play children's specialty apparel retailer in North America, operating 599 stores and 212 international points of distribution as of April 29, 2023[95] - Recent macroeconomic conditions, including increased costs for goods, labor, transportation, and fuel, coupled with inflationary pressures, have adversely affected consumer discretionary apparel purchases, leading to a decrease in Q1 2023 net sales[98] - Net sales decreased by $40.8 million (11.2%) to $321.6 million in Q1 2023, with comparable retail sales down 8.2%[101] - Gross profit decreased by $45.4 million to $96.5 million (30.0% of net sales) in Q1 2023, a 920 basis point decrease in gross margin due to higher input costs and deleverage of fixed expenses[102] - The company reported an operating loss of $30.1 million and a net loss of $28.8 million (or $(2.33) per diluted share) in Q1 2023, a significant decline from Q1 2022[103] - Strategic initiatives include digital transformation, alternative distribution channels, and fleet optimization, with 600 stores closed since 2013 and a target of 80-100 additional closures in Fiscal 2023[104][106] SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES - No significant changes in accounting policies from the most recent Annual Report on Form 10-K[110] - Critical accounting estimates include impairment of long-lived assets, indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation, with no material changes from the prior annual report[112] - No pending accounting standards updates are expected to have a material impact on the consolidated financial statements[113] RESULTS OF OPERATIONS Selected Statements of Operations Data as Percentage of Net Sales | Metric | April 29, 2023 | April 30, 2022 | | :-------------------------------------- | :------------- | :------------- | | Net sales | 100.0% | 100.0% | | Cost of sales (exclusive of depreciation and amortization) | 70.0% | 60.8% | | Gross profit | 30.0% | 39.2% | | Selling, general, and administrative expenses | 35.1% | 30.1% | | Operating income (loss) | (9.3)% | 5.3% | | Net income (loss) | (9.0)% | 5.5% | - Net sales decreased by 11.2% to $321.6 million in Q1 2023, driven by macroeconomic conditions and pressure on consumers[118] - Gross profit margin decreased by 920 basis points to 30.0% due to higher input costs (cotton, supply chain) and deleverage from lower sales[122] - SG&A expenses increased by $3.9 million to $112.9 million, deleveraging 500 basis points to 35.1% of net sales, partly due to incremental operating expenses ($2.4 million contract termination, $1.1 million fleet optimization, $0.3 million restructuring)[124] - Operating income shifted to a loss of $30.1 million in Q1 2023, a $49.4 million decrease from Q1 2022, with operating loss deleveraging 1,460 basis points to (9.3)% of net sales[127] - Net interest expense increased to $5.9 million from $1.7 million, driven by higher borrowings and increased average interest rates[128] LIQUIDITY AND CAPITAL RESOURCES - Working capital deficit increased by $82.5 million to $112.7 million at April 29, 2023, compared to $30.2 million at April 30, 2022, reflecting decreased inventory and cash, and increased ABL borrowings[133] - As of April 29, 2023, the company had $300.8 million outstanding under its $350.0 million ABL Credit Facility, with total liquidity of $25.0 million (including $6.8 million ABL availability and $18.2 million cash on hand)[134] - The Fifth Amendment to the Credit Agreement on June 5, 2023, increased the ABL Credit Facility to $445.0 million, boosting liquidity by approximately $85 million[135][149] - Cash provided by operating activities was $5.1 million in Q1 2023, a positive change from $18.8 million cash used in Q1 2022, primarily due to a lower inventory balance[154] - Cash provided by financing activities decreased to $7.8 million in Q1 2023 from $33.9 million in Q1 2022, due to lower net borrowings and reduced common stock repurchases[156] - Anticipated capital expenditures for Fiscal 2023 are $20 million to $25 million, primarily for distribution center expansion, digital initiatives, and fulfillment capabilities[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk. The company faces market risks from interest rate fluctuations on floating-rate debt and foreign currency movements, particularly impacting Canadian dollar assets and liabilities, alongside geopolitical risks from international sourcing - The company's financial position is subject to market risk from interest rate movements on borrowings and currency rate movements on non-U.S. dollar denominated assets, liabilities, income, and expenses[158] - As of April 29, 2023, the company had $300.8 million in borrowings under its ABL Credit Facility and $50.0 million outstanding on its Term Loan, both bearing floating interest rates[160][161] - The ABL Credit Facility and Term Loan interest rate benchmark transitioned from LIBOR to SOFR on June 5, 2023, with updated pricing grids[162] - Net assets in Canada and Hong Kong amounted to $22.5 million as of April 29, 2023, making them susceptible to foreign currency exchange rate fluctuations[163] - A 10% change in Canadian and Hong Kong foreign currency exchange rates would increase or decrease the corresponding net investment by $2.3 million[163] - The company imports most merchandise from countries like Bangladesh, Ethiopia, Cambodia, Vietnam, India, Indonesia, and China, exposing it to political, trade, financial, and labor risks in these regions[166] Item 4. Controls and Procedures. Management concluded that disclosure controls and procedures were effective as of April 29, 2023, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported timely[167] - The Chief Executive Officer and President and Chief Financial Officer concluded that disclosure controls and procedures were effective at the reasonable assurance level as of April 29, 2023[168] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[169] PART II — OTHER INFORMATION Item 1. Legal Proceedings. The company's legal proceedings are consistent with those disclosed in the notes to the consolidated financial statements and the prior annual report, with no new material developments - Legal proceedings are discussed in Note 7 to the consolidated financial statements and Part I, Item 3 of the Annual Report on Form 10-K[171] Item 1A. Risk Factors. There were no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in Item 1A of Part I in the Annual Report on Form 10-K for the year ended January 28, 2023[172] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The company continued its $250.0 million share repurchase program, with $158.3 million remaining, primarily for tax withholdings on equity awards in Q1 2023 - A $250.0 million share repurchase program was authorized in November 2021, with $158.3 million remaining availability as of April 29, 2023[173] - The company repurchases shares of vesting stock awards to satisfy tax withholding requirements and acquires shares for its deferred compensation plan[174] Share Repurchase Activity (First 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 | | :---------------- | :----------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------- | | 1/29/23-2/25/23 | 1,550 | $47.98 | — | $164,352 | | 2/26/23-4/1/23 | 149,647 | $39.28 | 149,647 | $158,474 | | 4/2/23-4/29/23 | 5,418 | $38.25 | 5,418 | $158,267 | | Total | 156,615 | $39.33 | 155,065 | $158,267 | Item 6. Exhibits. This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including the Fifth Amendment to the Credit Agreement, CEO and CFO certifications, and various Inline XBRL taxonomy documents - Key exhibits include the Joinder and Fifth Amendment to the Amended and Restated Credit Agreement (dated June 5, 2023), and certifications from the Principal Executive Officer and Principal Financial Officer[177] - The report also includes various Inline XBRL (eXtensible Business Reporting Language) taxonomy extension documents for data formatting[177] SIGNATURES - The report was signed on June 7, 2023, by Jane T. Elfers, Chief Executive Officer and President, and Sheamus Toal, Chief Financial Officer[180]