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The Children's Place(PLCE) - 2021 Q4 - Annual Report

PART I Item 1. Business North America's largest children's apparel retailer, impacted by COVID-19, focuses on product, digital, and fleet optimization - The company designs, contracts to manufacture, sells at retail and wholesale, and licenses children's apparel, footwear, and accessories under "The Children's Place," "Place," "Baby Place," and "Gymboree" brand names16 - Merchandise is available in physical stores (segmented by age: girls/boys 4-18, toddler 6 months-5T, baby 0-24 months) and online at www.childrensplace.com and www.gymboree.com[16](index=16&type=chunk)17 - The company was founded in 1969 and became publicly traded in 199718 - The Children's Place, Inc. is the largest pure-play children's specialty apparel retailer in North America, operating under proprietary brands such as "The Children's Place," "Place," "Baby Place," and "Gymboree"16 - As of January 30, 2021, the company operated 749 stores across North America and online stores, having closed 178 stores in Fiscal 2020 and 60 in Fiscal 201918 - Key strategic initiatives include superior product offerings (relaunching Gymboree), digital transformation (redesigned responsive sites, mobile apps, personalization, ship-from-store capabilities), and fleet optimization (targeting 300 store closures in Fiscal 2020-2021, totaling approximately 570 since 2013)22 - The COVID-19 pandemic led to temporary closure of all U.S. and Canadian stores on March 18, 2020, with most re-opening by late June. As of January 30, 2021, 680 of 749 stores were open21 - In response to COVID-19, the company reduced non-essential expenses, deferred capital expenditures, extended vendor payment terms, suspended rent payments (later resumed modified), targeted 300 store closures through Fiscal 2021, implemented executive salary reductions/forfeitures, furloughed staff, and temporarily suspended capital return programs (share repurchases and dividends)2226 - The company acquired Gymboree Group, Inc. intellectual property and related assets on April 4, 2019, including the "Gymboree" and "Crazy 8" brands, relaunching Gymboree in February 202025 Net Sales and Operating Income by Segment (In thousands) | Segment | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net Sales: | | | | | The Children's Place U.S. | $1,372,079 | $1,671,165 | $1,727,907 | | The Children's Place International | $150,519 | $199,502 | $210,177 | | Total Net Sales | $1,522,598 | $1,870,667 | $1,938,084 | | Operating Income (Loss): | | | | | The Children's Place U.S. | $(196,565) | $77,989 | $86,983 | | The Children's Place International | $(3,350) | $18,369 | $24,345 | | Total Operating Income (Loss) | $(199,915) | $96,358 | $111,328 | | Operating Income as % of Net Sales: | | | | | The Children's Place U.S. | (14.3)% | 4.7% | 5.0% | | The Children's Place International | (2.2)% | 9.2% | 11.6% | | Total Operating Income as % of Net Sales | (13.1)% | 5.2% | 5.7% | Total Assets by Segment (In thousands) | Segment | January 30, 2021 | February 1, 2020 | | :----------------------------- | :----------------------------- | :----------------------------- | | The Children's Place U.S. | $1,054,339 | $1,080,665 | | The Children's Place International | $85,788 | $100,732 | | Total Assets | $1,140,127 | $1,181,397 | General The Children's Place is North America's leading children's specialty apparel retailer, operating stores and e-commerce under proprietary brands - The company designs, contracts to manufacture, sells at retail and wholesale, and licenses children's apparel, footwear, and accessories under "The Children's Place," "Place," "Baby Place," and "Gymboree" brand names16 - Merchandise is available in physical stores (segmented by age: girls/boys 4-18, toddler 6 months-5T, baby 0-24 months) and online at www.childrensplace.com and www.gymboree.com[16](index=16&type=chunk)17 - The company was founded in 1969 and became publicly traded in 199718 COVID-19 Pandemic COVID-19 severely impacted operations, leading to store closures, reduced spending, and aggressive financial and safety measures - The COVID-19 pandemic caused significant adverse economic conditions, business disruptions, and volatility in retail markets, leading to a decline in retail traffic and consumer spending on discretionary items20 - All U.S. and Canadian stores were temporarily closed on March 18, 2020, with most reopening in late June. As of January 30, 2021, 680 of 749 stores were open21 - Financial flexibility actions included reducing/deferring non-essential expenses and capital expenditures, extending vendor payment terms, temporarily suspending and then modifying rent payments, accelerating store closures (targeting 300 in FY2020-2021), executive salary reductions, employee furloughs, and suspending capital return programs2226 - Health and safety measures included incentive pay, emergency leave, sick pay, health insurance programs for employees, training, health screenings, PPE, plexiglass partitions, rigorous cleaning, and limited store/distribution center capacity24 Gymboree Acquisition Acquired Gymboree and Crazy 8 brands in April 2019, relaunching Gymboree in February 2020 via e-commerce and co-branded stores - On April 4, 2019, the company acquired intellectual property and assets of Gymboree Group, Inc., including worldwide rights to "Gymboree" and "Crazy 8" names, trademarks, domain names, copyrights, and customer databases25 - The Gymboree brand was relaunched in February 2020 via www.gymboree.com and co-branded sections within select The Children's Place stores25 Segment Reporting Reports two segments, U.S. and International, measuring profitability by operating income with allocated corporate costs - Segments are 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)26 - Both segments include e-commerce businesses at www.childrensplace.com and www.gymboree.com[26](index=26&type=chunk) - Segment profitability is based on operating income. Corporate overhead and certain inventory procurement functions are managed by the U.S. segment and allocated to the International segment primarily based on net sales26 Total Assets by Segment (In thousands) | Segment | January 30, 2021 | February 1, 2020 | | :----------------------------- | :----------------------------- | :----------------------------- | | The Children's Place U.S. | $1,054,339 | $1,080,665 | | The Children's Place International | $85,788 | $100,732 | | Total Assets | $1,140,127 | $1,181,397 | Key Capabilities Aims to offer high-quality, value-priced, trend-right children's merchandise through strong merchandising, brand, and global sourcing - Objective: sell high quality, value priced, trend right children's merchandise, offering one-stop shopping across apparel, footwear, and accessories29 Merchandising Strategy Delivers coordinated apparel, footwear, and accessories monthly, enabling head-to-toe outfit purchases based on seasonal trends - Strategy delivers compelling, coordinated assortments of apparel, footwear, and accessories for head-to-toe outfits30 - Merchandise deliveries are seasonal, with new products introduced monthly30 High Quality and Value High-quality, value-priced, and trend-right products under proprietary brands provide a significant competitive advantage - Offering high quality, value priced, trend right apparel, footwear, and accessories under "The Children's Place," "Place," "Baby Place," and "Gymboree" brand names is a competitive advantage31 Brand Image Strengthens brand image and loyalty through high-quality, value-priced products, coordinated outfits, and a loyalty program - Focus on brand image and customer loyalty through: high quality, age-appropriate, trend-right products at value prices; coordinated outfits; exclusive e-commerce products; strong merchandising; consistent marketing; personalized communications; and MyPLACE Loyalty Rewards program and private label credit card39 Low-Cost Global Sourcing Designs and sources most branded products globally, using vendor relationships and sourcing offices for quality and cost control - The company designs, sources, and contracts to manufacture the substantial majority of its branded products, essential for consistency, quality, and value32 - Maintains strong multi-year relationships with vendors and an extensive global sourcing network (China, Bangladesh, Indonesia, Ethiopia, Cambodia, etc.) to manage costs and quality32 Merchandising Process Collaborative merchandising process develops seasonal strategies and manages inventory flow based on trend information and store types - Strong collaboration between design, merchandising, sourcing, and planning teams is key to brand building33 - Design team gathers trend information; merchandising develops seasonal strategies; planning and allocation manage sales, margin plans, and inventory flow based on store types343536 Production, Quality Assurance, and Responsible Sourcing Contracts with global vendors for manufacturing, ensuring quality, responsible sourcing, and sustainability through audits and worker programs - Merchandise is sourced directly from a diversified network of independent contract vendors primarily in Bangladesh, Cambodia, China, Ethiopia, Vietnam, and Indonesia3738 - Responsible sourcing program provides guidance to global vendors on safe and appropriate working conditions, monitoring local laws and conditions3940 - Sustainability program components include: Vendor Code of Conduct (prohibiting child/forced labor, harassment, discrimination); Addressing Forced Labor (no sourcing from Xinjiang Province, due diligence); Ongoing Auditing Program (internal and third-party audits); Corrective Action Plans; Vendor Factory Engagement42 - Partnerships for safe and fair working conditions: ILO's BetterWork program (60+ factories in 7 countries), Social & Labor Convergence Project (SLCP), Nirapon (Bangladesh worker safety), and various Worker Well-Being Programs (BSR's HERproject, CARE's Healthy Food Healthy Workplace, The Centre for Child Rights and Business, The Solidarity Center)424446 - Environmental Stewardship initiatives include: mapping and reducing Greenhouse Gas (GHG) Emissions (Science Based Targets Initiative approved goals); Responsibly Sourced Raw Materials (Better Cotton Initiative, increased use of sustainable materials like FSC mix paper, recycled plastic, recycled polyester, sustainable inks/dyes); Chemical Management (AFIRM member); Wastewater and Effluent (Sustainable Apparel Coalition member)4652 Company Stores Operates 749 stores and 230 international points, continuing fleet optimization with 300 targeted closures in FY2020-2021 Number of Stores by Location | Location | January 30, 2021 | February 1, 2020 | | :--------- | :--------------- | :--------------- | | United States | 640 | 795 | | Canada | 101 | 121 | | Puerto Rico | 8 | 8 | | Total Stores | 749 | 924 | - The company also has 230 international points of distribution with eight partners in 19 countries49 - Store concepts range from 3,400 to 7,100 square feet, designed for an open, brightly lit environment with white fixtures to highlight products50 - Fleet optimization initiative has closed 449 stores since 2013, including 178 in Fiscal 2020. The company targets 300 closures in Fiscal 2020 and 2021, bringing the total to approximately 57051 - Store closures have reduced total square footage from 5.2 million to 3.5 million, resulting in improved profitability and operating margin due to sales transfer to remaining stores/e-commerce and elimination of underperforming locations51 E-commerce Sales E-commerce is a top strategic priority, investing in infrastructure and technology for a best-in-class online shopping experience - E-commerce is a top strategic priority for U.S. and International segments, operating at www.childrensplace.com and www.gymboree.com[53](index=53&type=chunk) - Commitment to best-in-class, end-to-end user experience, including product assortment, website operation, fulfillment, and customer service53 - Investments in back-end infrastructure and front-end technology (e.g., mobile optimization) are ongoing to improve customer experience53 International Franchisees and Wholesale Expands globally via 230 international points with partners, generating revenue from product sales, royalties, and wholesale - Operates 230 international points of distribution (stores, shop-in-shops, e-commerce) with eight partners in 19 countries54 - Generates revenue from franchisees through product sales and sales royalties54 - Wholesale business includes a relationship with Amazon54 Store Operations Geographically organized store operations with centralized support, incentivizing managers based on selling productivity and financial goals - Store operations are organized by geographical region with centralized corporate support55 - Store managers focus on selling productivity, including greeting, replenishment, presentation standards, and controls55 - Store management is motivated by a monthly incentive compensation plan based on financial goals55 Seasonality Business is seasonal, with sales concentrated in back-to-school and holidays, though COVID-19 disrupted patterns in Fiscal 2020 - Business is seasonal, with heavier sales concentrations during back-to-school and holiday seasons56 - First fiscal quarter depends on Easter sales, second/third on back-to-school, and fourth on holiday sales56 - COVID-19 pandemic significantly disrupted seasonal influences in Fiscal 202056 Quarterly Net Sales and Operating Income (Loss) as a Percentage of Full Year | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | | :------------------------------------------------ | :------------ | :------------- | :------------ | :------------- | | Quarterly net sales as a percentage of full year: | | | | | | Fiscal 2020 | 16.8 % | 24.2 % | 27.9 % | 31.1 % | | Fiscal 2019 | 22.0 % | 22.5 % | 28.1 % | 27.4 % | | Quarterly operating income (loss) as a percentage of full year: | | | | | | Fiscal 2020 | (86.6)% | (32.3)% | 11.7 % | 7.2 % | | Fiscal 2019 | 5.2 % | 4.0 % | 60.1 % | 30.7 % | Marketing Promotes brands via online/offline direct marketing, emphasizing value and fashion, with loyalty programs driving 80% of sales - Marketing utilizes both online and offline channels, emphasizing value fashion57 - Relaunched Gymboree brand in February 2020 with improved digital experience and shop-in-shop locations57 - MyPLACE Rewards loyalty program and private label credit card members accounted for approximately 80% of sales at the end of Fiscal 202059 Distribution Operates distribution centers in Alabama and Ontario, supplemented by third-party providers for e-commerce and international - Owns and operates a 700,000 sq ft distribution center in Alabama for U.S. retail and e-commerce60 - Leases and operates a 95,000 sq ft distribution center in Ontario, Canada for Canadian retail60 - Utilizes third-party providers in Indiana and Ontario, Canada for U.S. and Canadian e-commerce operations, and in Malaysia and China for international franchise business60 Competition Operates in a highly competitive market, facing diverse retailers including specialty, mass, off-price, and e-commerce - Highly competitive market, competing with specialty stores, mass merchants, off-price stores, catalog companies, and e-commerce retailers (e.g., Target, Old Navy, GapKids, Carter's, T.J. Maxx, Marshall's, Burlington Coat Factory, Kohl's, Walmart, Amazon)61 Trademarks and Service Marks Owns and protects key trademarks like "The Children's Place" and "Gymboree," registered globally as significant assets - Owns registered trademarks and service marks including "The Children's Place," "Place," "Baby Place," "Gymboree," and "Crazy 8"62 - Trademarks are registered in the U.S., Canada, and other foreign countries where products are sourced or franchising operations exist62 Government Regulation Subject to extensive regulations covering product safety, consumer protection, and labor, adhering to acts like CPSIA and customs laws - Subject to extensive federal, state, local, provincial, and international laws and regulations (product testing/safety, consumer protection, privacy, advertising, customs, wage/hour, zoning)63 - Adheres to CPSIA, Federal Hazardous Substances Act, Flammable Fabrics Act, Textile Fiber Product Identification Act, CCPSA, Canadian Textile Labelling Act, and Canadian Care Labelling Program64 - Products are imported and subject to U.S. and Canadian customs laws, tariffs, anti-dumping, and countervailing duties65 Human Capital Manages 13,300 employees, with Board oversight on talent, development, diversity, and pay equity, emphasizing internal promotions - As of January 30, 2021, the company had approximately 13,300 employees (1,900 corporate/distribution, 1,700 full-time store, 9,700 part-time/seasonal store)66 - Board of Directors and Compensation Committee oversee human capital management, including talent and succession planning67 - Senior leadership team has an average tenure of over seven years; 67% of senior leadership and 65% of corporate roles filled internally67 - Diversity and inclusion, pay equity, employee relations, recruiting, and development programs are top priorities6869 Internet Access to Reports SEC filings and corporate governance materials are accessible on the company's corporate website - Company files periodic reports, proxy statements, and other information with the SEC (http://www.sec.gov)[70](index=70&type=chunk) - Copies of Proxy Statement, 10-K, 10-Q, 8-K, and corporate governance materials are available on http://corporate.childrensplace.com[71](index=71&type=chunk)72 Item 1A. Risk Factors Faces risks from COVID-19, strategy execution, cash flow, supply chain, competition, cybersecurity, and regulatory changes - COVID-19 pandemic has significantly disrupted business, leading to store closures, reduced demand, supply chain disruptions, increased e-commerce fulfillment costs, and potential asset impairment triggers747576 - Failure to successfully execute business strategies (superior product, digital transformation, fleet optimization) could materially adversely affect financial results7778798182 - Dependence on sufficient cash flows, which are influenced by seasonal fluctuations, store/e-commerce operations, inventory timing, vendor terms, and economic conditions (including COVID-19 effects)8385 - Risks related to global operations include reliance on unaffiliated manufacturers/suppliers, transportation companies, international business risks (tariffs, foreign regulations, political instability, currency fluctuations), and potential disruptions at ports87919395969798 - Retail and apparel industry risks include inability to anticipate fashion trends, marketing changes, or customer shopping patterns; decline in consumer confidence/spending; fluctuations in raw material, labor, and energy prices; product liability costs; and intense competition105106107108109110111112113 - Cybersecurity, data privacy, and IT risks include privacy breaches, failure to comply with privacy laws (e.g., CCPA), cybersecurity incidents (theft, data loss, operational delays, reputational damage, fines), and reliance on third-party vendors for IT systems117118119120121122123124125126127 - Risks related to stock and stock price include volatility due to fluctuations in financial results, market conditions, competitor actions, and legislative/regulatory changes. Highly concentrated stock holdings could influence stockholder proposals128131132133134135 - Legal and regulatory risks include inability to protect intellectual property, impacts from federal tax and other legislation (e.g., Tax Cuts and Jobs Act, minimum wage), non-compliance with laws (wage/hour, product safety), and litigation136137138139140141142143144145146 Item 1B. Unresolved Staff Comments No unresolved staff comments to report - No unresolved staff comments147 Item 2. Properties Leases all retail stores, owns a 700,000 sq ft Alabama distribution center, and leases other key facilities - All existing store locations in the U.S., Puerto Rico, and Canada are leased, with terms expiring through 2029 and an average unexpired term of approximately 2 years148 Non-Store Locations as of January 30, 2021 | Location | Use | Approximate Sq. Footage | Current Lease Term Expiration | | :------------------------ | :-------------------------- | :---------------------- | :---------------------------- | | Fort Payne, AL | Warehouse Distribution Center | 700,000 | Owned | | Ontario, Canada | Warehouse Distribution Center | 95,000 | 4/30/2024 | | 500 Plaza Drive, Secaucus, NJ | Corporate Offices | 200,000 | 5/31/2029 | | Hong Kong, China | Product Support | 28,000 | 4/30/2021 | | Brownsburg, Indiana | Warehouse Distribution Center | 315,000 | 8/31/2024 | - The Fort Payne, AL facility supports U.S. stores, wholesale, and e-commerce. The Ontario, Canada facility supports Canadian stores and e-commerce. The Secaucus, NJ corporate offices support all segments. The Hong Kong office supports product. The Brownsburg, Indiana facility supports U.S. e-commerce149150 Item 3. Legal Proceedings Defendant in a class action lawsuit for false advertising, with a $5.0 million settlement reserve and deferred final ruling - Defendant in Rael v. The Children's Place, Inc., a class action alleging false advertising of discount prices152 - A definitive settlement agreement was signed in November 2017, providing merchandise vouchers for class members and covering legal/administration expenses153 - Preliminary court approval for the settlement was granted on January 28, 2020; final ruling deferred after July 31, 2020 hearing153 - A $5.0 million reserve was recorded in Q1 2017 for the proposed settlement153 - Management believes other legal proceedings in the normal course of business will not have a material adverse effect on financial position, results of operations, or cash flows154 Item 4. Mine Safety Disclosure This item is not applicable to the company - Not applicable155 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock listed on Nasdaq (PLCE); share repurchases and dividends suspended due to COVID-19, with $92.8 million remaining on repurchase program - Common stock is listed on the Nasdaq Global Select Market under the symbol "PLCE"158 - As of March 24, 2021, there were 38 holders of record and approximately 19,600 beneficial holders of common stock158 - The $250 million 2018 Share Repurchase Program had approximately $92.8 million remaining at January 30, 2021. Share repurchases were temporarily suspended in March 2020 due to COVID-19159 - Dividend payments were temporarily suspended in March 2020 due to COVID-19. In Fiscal 2019, $34.9 million in cash dividends were paid160 Share Repurchases (In thousands) | Share Repurchases Related To: | Fiscal Year Ended Jan 30, 2021 (Shares) | Fiscal Year Ended Jan 30, 2021 (Value) | Fiscal Year Ended Feb 1, 2020 (Shares) | Fiscal Year Ended Feb 1, 2020 (Value) | | :---------------------------- | :-------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | | 2018 Share Repurchase Program | 294 | $15,490 | 1,585 | $131,393 | | Shares acquired and held in treasury | 6 | $209 | 4 | $271 | Equity Plan Compensation Information as of January 30, 2021 | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Securities remaining available for future issuances | | :---------------------------- | :--------------------------------------------------------- | :------------------------------------------- | :------------------------------------------------ | | Approved by Security Holders | N/A | N/A | 725,248 | | Not Approved by Security Holders | N/A | N/A | N/A | | Total | N/A | N/A | 725,248 | Item 6. Selected Financial Data Provides a five-year financial summary, showing Fiscal 2020's significant net loss and sales decrease due to COVID-19 Selected Statement of Operations Data (in thousands, except per share) | Metric | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | Fiscal Year Ended Feb 3, 2018 | Fiscal Year Ended Jan 28, 2017 | | :------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,522,598 | $1,870,667 | $1,938,084 | $1,870,275 | $1,785,316 | | Gross profit | $333,251 | $655,305 | $683,596 | $711,355 | $671,593 | | Selling, general, and administrative expenses | $428,234 | $478,120 | $498,343 | $476,486 | $454,143 | | Asset impairment charges | $38,527 | $6,039 | $6,096 | $5,190 | $4,026 | | Operating income (loss) | $(199,915) | $96,358 | $111,328 | $161,510 | $147,408 | | Net income (loss) | $(140,365) | $73,300 | $100,960 | $84,698 | $102,336 | | Diluted income (loss) per common share | $(9.59) | $4.68 | $6.01 | $4.67 | $5.40 | | Cash dividends declared and paid per common share | $— | $2.24 | $2.00 | $1.60 | $0.80 | | Number of Company stores at end of period | 749 | 924 | 972 | 1,014 | 1,039 | | Comparable retail sales increase (decrease) | N/A | (2.7)% | 4.6 % | 5.8 % | 4.9 % | Selected Balance Sheet Data (in thousands) | Metric | January 30, 2021 | February 1, 2020 | | :-------------------- | :--------------- | :--------------- | | Working capital (deficit) | $(171,416) | $(145,127) | | Total assets | $1,140,127 | $1,181,397 | | Revolving loan | $169,778 | $170,808 | | Long-term debt | $75,346 | $— | | Stockholders' equity | $93,377 | $235,187 | - Fiscal 2020 was a 52-week year, while Fiscal 2018 was a 53-week year173 - Working capital deficit for Fiscal 2020 and 2019 includes current lease liabilities of $174.6 million and $121.9 million, respectively, due to the adoption of FASB ASC 842—Leases174 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial condition and operations, highlighting COVID-19's impact on sales, profitability, liquidity, and accounting policies OVERVIEW North America's largest children's apparel retailer, severely impacted by COVID-19 in Fiscal 2020, implemented mitigation and growth strategies - The company is the largest pure-play children's specialty apparel retailer in North America, operating 749 stores and 230 international points of distribution as of January 30, 2021179 - COVID-19 pandemic caused significant business disruption, including temporary closure of all U.S. and Canadian stores on March 18, 2020, and a significant decrease in back-to-school demand181182186 - Net sales decreased by $348.1 million (18.6%) to $1,522.6 million in Fiscal 2020 from $1,870.7 million in Fiscal 2019, primarily due to COVID-19 impacts, partially offset by increased e-commerce sales186 - Gross profit decreased by $322.0 million (49.1%) to $333.3 million in Fiscal 2020, with consolidated gross margin decreasing 1,310 basis points to 21.9%187 - Net loss was $(140.4) million in Fiscal 2020, compared to net income of $73.3 million in Fiscal 2019. Diluted EPS was $(9.59) in Fiscal 2020 vs. $4.68 in Fiscal 2019191 - Key strategic growth initiatives remain superior product (Gymboree relaunch), digital transformation (redesigned site, mobile app, personalization, ship-from-store), and fleet optimization (targeting 570 total store closures since 2013)192193194195 Average Foreign Currency Translation Rates | Currency | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--------------- | :---------- | :---------- | :---------- | | Canadian Dollar | 0.7481 | 0.7550 | 0.7675 | | Hong Kong Dollar | 0.1290 | 0.1277 | 0.1276 | | China Yuan Renminbi | 0.1459 | 0.1446 | 0.1503 | CRITICAL ACCOUNTING POLICIES Critical accounting policies involve estimates for inventory, stock compensation, asset impairment, income taxes, fair value, and insurance liabilities - Inventory is valued at the lower of cost or net realizable value using an average cost method, with estimates based on historical sales, market trends, and future demand200 - Stock-based compensation (time vesting and performance-based awards) is expensed at fair value over vesting periods, with a forfeiture estimate203 - Long-lived assets are reviewed for impairment when events indicate carrying value may not be recoverable, comparing undiscounted cash flows to net book value. Fair value is determined primarily using discounted future cash flows204205 - Income taxes are accounted for using the liability method, with deferred taxes based on temporary differences. A valuation allowance is recorded if deferred tax assets are unlikely to be realized207 - Fair value measurement uses a three-level hierarchy (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs). Cash, receivables, payables, and revolving loan are Level 1; derivatives are Level 2; long-lived assets measured on a nonrecurring basis are Level 3211212213 - Self-insurance and purchased insurance policies cover workers' compensation, general liability, property losses, cyber-security, D&O, vehicle liability, and employee medical benefits. Liabilities are estimated based on historical claims and actuarial assumptions214 - Adopted new FASB guidance in Fiscal 2020 related to cloud computing implementation costs, fair value measurement disclosures, and financial instrument credit losses, none of which had a material impact215217218 RESULTS OF OPERATIONS Fiscal 2020 saw significant sales decline and net loss due to COVID-19, impacting gross margin and increasing impairment charges Selected Income Statement Data as a Percentage of Net Sales | Metric | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | | Cost of sales (exclusive of depreciation and amortization) | 78.1 % | 65.0 % | 64.7 % | | Gross profit | 21.9 % | 35.0 % | 35.3 % | | Selling, general, and administrative expenses | 28.1 % | 25.6 % | 25.7 % | | Depreciation and amortization | 4.4 % | 4.0 % | 3.6 % | | Asset impairment charges | 2.5 % | 0.3 % | 0.3 % | | Operating income (loss) | (13.1)% | 5.2 % | 5.7 % | | Income (loss) before provision for income taxes | (13.9)% | 4.7 % | 5.6 % | | Provision (benefit) for income taxes | (4.7)% | 0.8 % | 0.4 % | | Net income (loss) | (9.2)% | 3.9 % | 5.2 % | | Number of Company stores, end of period | 749 | 924 | 972 | Net Sales by Segment (In thousands) | Segment | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | The Children's Place U.S. | $1,372,079 | $1,671,165 | $1,727,907 | | The Children's Place International | $150,519 | $199,502 | $210,177 | | Total net sales | $1,522,598 | $1,870,667 | $1,938,084 | - Fiscal 2020 vs. Fiscal 2019: Net sales decreased by $348.1 million (18.6%) due to COVID-19 disruptions, accelerated store closures, and decreased back-to-school demand, partially offset by increased e-commerce sales. E-commerce sales increased to approximately 53% of net sales from 31%222224225226 - Fiscal 2020 vs. Fiscal 2019: Gross profit decreased by $322.0 million (49.1%), and gross margin decreased by 1,310 basis points to 21.9%, primarily due to higher e-commerce fulfillment costs, decreased merchandise margin from pandemic-driven actions, and deleverage of fixed expenses227 - Fiscal 2020 vs. Fiscal 2019: SG&A expenses decreased by $49.9 million (10.4%) but increased as a percentage of net sales by 250 basis points to 28.1% due to deleverage of fixed expenses and higher incentive compensation accruals, partially offset by reduced store expenses229 - Fiscal 2020 vs. Fiscal 2019: Asset impairment charges increased to $38.5 million (primarily for 419 stores) from $6.0 million, driven by decreased net revenues and cash flow projections due to COVID-19230 - Fiscal 2020 vs. Fiscal 2019: Net loss of $(140.4) million compared to net income of $73.3 million. Diluted EPS was $(9.59) vs. $4.68233 - Fiscal 2019 vs. Fiscal 2018: Net sales decreased by $67.4 million (3.5%) due to a 2.7% comparable retail sales decrease, competitor liquidations, and fewer stores. E-commerce sales increased to 31% of net sales from 28%234236237 - Fiscal 2019 vs. Fiscal 2018: Gross profit decreased by $28.3 million (4.1%), and gross margin decreased by 30 basis points to 35.0% due to deleverage of fixed expenses and increased e-commerce penetration, partially offset by increased merchandise margins238 - Fiscal 2019 vs. Fiscal 2018: Operating income decreased by $14.9 million (13.4%) to $96.4 million, and as a percentage of net sales, decreased by 50 basis points to 5.2%243 - Fiscal 2019 vs. Fiscal 2018: Net income was $73.3 million compared to $101.0 million. Diluted EPS was $4.68 vs. $6.01245 LIQUIDITY AND CAPITAL RESOURCES COVID-19 impacted liquidity, leading to a working capital deficit, mitigated by expense cuts, credit facility amendments, and an $80 million term loan - Working capital deficit increased by $26.3 million to $171.4 million at January 30, 2021, primarily due to COVID-19 impact, partially offset by strategic cash management248 - In Fiscal 2020, repurchased 0.3 million shares for $15.5 million (prior to suspension). In Fiscal 2019, repurchased 1.6 million shares for $131.4 million and paid $34.9 million in dividends248 - ABL Credit Facility increased borrowing capacity from $325 million to $360 million for one year (until April 2021), then reverts to $325 million. Expires May 2024252 - As of January 30, 2021, $169.8 million outstanding borrowings and $104.2 million available under the ABL Credit Facility249 - Secured an $80 million Term Loan on October 5, 2020, with net proceeds used to pay down revolving credit facility borrowings. The Term Loan matures October 5, 2025, or May 2024 (ABL maturity)252261262 - Cash flows used in operating activities were $35.7 million in Fiscal 2020 (vs. $177.9 million provided in Fiscal 2019) due to net loss from COVID-19, partially offset by working capital management266 - Cash flows used in investing activities were $30.4 million in Fiscal 2020 (vs. $134.4 million in Fiscal 2019), primarily due to lower capital expenditures and the Gymboree acquisition in Fiscal 2019268 - Cash flows provided by financing activities were $60.9 million in Fiscal 2020 (vs. $44.4 million used in Fiscal 2019), driven by Term Loan proceeds, decreased stock repurchases, and suspended dividends269 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Total contractual obligations and commercial commitments were $805.3 million, including leases, a term loan, and purchase commitments Contractual Obligations and Other Commercial Commitments as of January 30, 2021 (dollars in thousands) | Obligation Type | Total | 1 year or less | 1-3 years | 3-5 years | More than 5 years | | :------------------------------------------ | :------ | :------------- | :---------- | :---------- | :---------------- | | Operating leases | $425,602 | $189,481 | $155,352 | $47,164 | $33,605 | | Term Loan | $80,000 | $3,000 | $13,000 | $64,000 | $— | | Purchase commitments--merchandise | $276,397 | $276,397 | $— | $— | $— | | Purchase commitments--non-merchandise | $15,142 | $15,142 | $— | $— | $— | | Standby letters of credit | $8,200 | $8,200 | $— | $— | $— | | Total | $805,341 | $492,220 | $168,352 | $111,164 | $33,605 | - Insurance reserves of approximately $2.2 million are included in other long-term liabilities, with the long-term portion not estimable by period272 - Unrecognized tax benefits of approximately $6.3 million (including interest and penalties) are included in long-term liabilities, with future payment amounts and periods not reasonably estimable274 Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements - No off-balance sheet arrangements275 QUARTERLY RESULTS AND SEASONALITY Quarterly results fluctuate due to seasonality and economic factors, with COVID-19 causing significant losses in early Fiscal 2020 - Quarterly results fluctuate due to economic conditions, store changes, comparable retail sales, weather, holidays, and merchandise mix276 - Fiscal 2020 results were significantly impacted by the COVID-19 pandemic, including government-mandated temporary store closures276 Quarterly Consolidated Statements of Income (Fiscal Year Ended January 30, 2021) (in thousands, except earnings per share) | Metric | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | | :------------------------------------------ | :------------ | :------------- | :------------ | :------------- | | Net sales | $255,207 | $368,923 | $425,571 | $472,897 | | Gross profit (loss) | $(19,673) | $67,080 | $146,065 | $139,779 | | Selling, general, and administrative expenses | $98,491 | $114,312 | $106,639 | $108,792 | | Asset impairment charges | $37,091 | $544 | $294 | $598 | | Depreciation and amortization | $17,888 | $16,708 | $15,809 | $16,000 | | Operating income (loss) | $(173,143) | $(64,484) | $23,323 | $14,389 | | Net income (loss) | $(114,810) | $(46,639) | $13,320 | $7,764 | | Diluted (loss) earnings per share | $(7.86) | $(3.19) | $0.91 | $0.53 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk Exposed to market risks from interest rate and foreign currency fluctuations, particularly for Canadian dollar transactions and imports - Financial position and results are subject to market risk from interest rate movements on borrowings and investments, and currency rate movements on non-U.S. dollar denominated items278 - Cash and cash equivalents are invested in short-term instruments, so interest rate changes would not materially affect their fair value280 - ABL Credit Facility and Term Loan bear floating interest rates (prime/LIBOR plus spread). A 10% change in these rates would not materially impact interest expense281282 - Foreign assets and liabilities are primarily in Canada and Hong Kong. A 10% change in Canadian or Hong Kong Dollars would increase/decrease net investment by $3.0 million and $4.2 million, respectively283 - As of January 30, 2021, $58.4 million of cash and cash equivalents were held in foreign subsidiaries ($21.1 million in Canada, $34.5 million in Hong Kong, $2.8 million in other)284 - Foreign exchange rate exposure primarily from Canadian dollar-denominated revenues and expenses. A 10% change in rates could decrease/increase Fiscal 2020 net sales by $13.7 million and total costs/expenses by $18.4 million285 - Significant or sudden changes in political, foreign trade, financial, banking, or currency policies in countries like Bangladesh, Cambodia, China, Ethiopia, Vietnam, and Indonesia (where merchandise is imported) could materially impact the business286 Item 8. Financial Statements and Supplementary Data Incorporates consolidated financial statements and supplementary data by reference from Item 15 of Part IV - Information required by this Item is incorporated by reference to "Item 15-Exhibits and Financial Statement Schedules" of Part IV287 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure to report - Not applicable288 Item 9A. Controls and Procedures Management and auditors concluded disclosure controls and internal control over financial reporting were effective as of January 30, 2021 - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of January 30, 2021290 - Management concluded that internal control over financial reporting was effective as of January 30, 2021, based on the COSO framework292 - Ernst & Young LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting296 - No changes in internal control over financial reporting occurred during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting293 Item 9B. Other Information No other information to report under this item - None304 PART III Item 10. Directors and Executive Officers of the Registrant and Corporate Governance Information incorporated by reference from the Definitive Proxy Statement for the May 12, 2021 Annual Meeting - Information incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2021306 Item 11. Executive Compensation Information incorporated by reference from the Definitive Proxy Statement for the May 12, 2021 Annual Meeting - Information incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2021307 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information incorporated by reference from the Definitive Proxy Statement for the May 12, 2021 Annual Meeting - Information incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2021308 Item 13. Certain Relationships and Related Transactions and Director Independence Information incorporated by reference from the Definitive Proxy Statement for the May 12, 2021 Annual Meeting - Information incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2021309 Item 14. Principal Accountant Fees and Services Information incorporated by reference from the Definitive Proxy Statement for the May 12, 2021 Annual Meeting - Information incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2021310 PART IV Item 15. Exhibits and Financial Statement Schedules Lists all financial statements, supplementary data, and exhibits filed as part of the 10-K report - Includes Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Changes in Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements312 - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements for the three years ended January 30, 2021314 - The company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), effective February 3, 2019, using the modified retrospective transition method316 Consolidated Balance Sheets (In thousands) | Asset/Liability/Equity | January 30, 2021 | February 1, 2020 | | :------------------------------------------ | :--------------- | :--------------- | | ASSETS: | | | | Cash and cash equivalents | $63,548 | $68,487 | | Accounts receivable | $39,534 | $32,812 | | Inventories | $388,141 | $327,165 | | Prepaid expenses and other current assets | $55,860 | $21,416 | | Total current assets | $547,083 | $449,880 | | Property and equipment, net | $181,801 | $236,898 | | Right-of-use assets | $283,624 | $393,820 | | Tradenames, net | $72,492 | $73,291 | | Deferred income taxes | $45,579 | $12,941 | | Other assets | $9,548 | $14,567 | | Total assets | $1,140,127 | $1,181,397 | | LIABILITIES: | | | | Revolving loan | $169,778 | $170,808 | | Accounts payable | $252,124 | $213,115 | | Current lease liabilities | $174,585 | $121,868 | | Income taxes payable (current) | $5,508 | $5,607 | | Accrued expenses and other current liabilities | $116,504 | $83,609 | | Total current liabilities | $718,499 | $595,007 | | Long-term debt | $75,346 | $— | | Long-term lease liabilities | $214,173 | $311,908 | | Other tax liabilities | $6,304 | $6,782 | | Income taxes payable (long-term) | $14,939 | $17,589 | | Other long-term liabilities | $17,489 | $14,924 | | Total liabilities | $1,046,750 | $946,210 | | STOCKHOLDERS' EQUITY: | | | | Common stock | $1,464 | $1,476 | | Additional paid-in capital | $148,519 | $139,041 | | Treasury stock, at cost | $(3,164) | $(2,956) | | Deferred compensation | $3,164 | $2,956 | | Accumulated other comprehensive loss | $(13,816) | $(13,545) | | Retained earnings (deficit) | $(42,790) | $108,215 | | Total stockholders' equity | $93,377 | $235,187 | | Total liabilities and stockholders' equity | $1,140,127 | $1,181,397 | Consolidated Statements of Operations (In thousands, except earnings per share) | Metric | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,522,598 | $1,870,667 | $1,938,084 | | Cost of sales (exclusive of depreciation and amortization) | $1,189,347 | $1,215,362 | $1,254,488 | | Gross profit | $333,251 | $655,305 | $683,596 | | Selling, general, and administrative expenses | $428,234 | $478,120 | $498,343 | | Depreciation and amortization | $66,405 | $74,788 | $68,884 | | Asset impairment charges | $38,527 | $6,039 | $6,096 | | Other income | $— | $— | $(1,055) | | Operating income (loss) | $(199,915) | $96,358 | $111,328 | | Interest expense | $(11,906) | $(8,194) | $(3,534) | | Interest income | $63 | $253 | $730 | | Income (loss) before provision for income taxes | $(211,758) | $88,417 | $108,524 | | Provision (benefit) for income taxes | $(71,393) | $15,117 | $7,564 | | Net income (loss) | $(140,365) | $73,300 | $100,960 | | Earnings (loss) per common share - Basic | $(9.59) | $4.71 | $6.10 | | Earnings (loss) per common share - Diluted | $(9.59) | $4.68 | $6.01 | | Weighted average common shares outstanding - Basic | 14,631 | 15,547 | 16,542 | | Weighted average common shares outstanding - Diluted | 14,631 | 15,653 | 16,805 | Consolidated Statements of Comprehensive Income (Loss) (In thousands) | Metric | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(140,365) | $73,300 | $100,960 | | Other comprehensive income (loss): | | | | | Foreign currency translation adjustment | $477 | $1,388 | $(2,178) | | Change in fair value of cash flow hedges, net of income taxes | $(748) | $1 | $75 | | Total comprehensive income (loss) | $(140,636) | $74,689 | $98,857 | Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | Fiscal Year Ended Jan 30, 2021 | Fiscal Year Ended Feb 1, 2020 | Fiscal Year Ended Feb 2, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $(35,717) | $177,902 | $139,914 | | Net cash used in investing activities | $(30,374) | $(134,350) | $(56,863) | | Net cash provided by (used in) financing activities | $60,929 | $(44,374) | $(259,183) | | Effect of exchange rate changes on cash and cash equivalents | $223 | $173 | $749 | | Net decrease in cash and cash equivalents | $(4,939) | $(649) | $(175,383) | | Cash and cash equivalents, beginning of period | $68,487 | $69,136 | $244,519 | | Cash and cash equivalents, end of period | $63,548 | $68,487 | $69,136 | (a)(1) Financial Statements Includes audited consolidated financial statements: Balance Sheets, Statements of Operations, Comprehensive Income, Equity, Cash Flows, and Notes 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines business, fiscal year, segments, estimates, consolidation, and specific accounting policies for various financial items - The company is the largest pure-play children's specialty apparel retailer in North America, with two segments: The Children's Place U.S. and The Children's Place International344345 - Fiscal years are 52-week or 53-week periods ending on the Saturday nearest January 31. Fiscal 2020, 2019, and 2018 were 52-week years346 - Significant estimates include inventory realizability, litigation reserves, useful lives and impairments of long-lived assets, fair value measurements, income taxes, insurance reserves, intangible assets, and stock-based compensation347 - Adopted FASB ASC 842—Leases on February 3, 2019, requiring all leases over 12 months to be recorded on the balance sheet as right-of-use assets with corresponding liabilities351 - Inventory is stated at the lower of cost or net realizable value, using an average cost basis, capitalizing certain buying, design, and supply chain costs352 - Cost of sales includes inventory cost, buying, design, distribution expenses, shipping/handling, and letter of credit fees. All occupancy costs are in cost of sales, except administrative office buildings353 - Stock-based compensation is expensed at fair value over vesting periods, including a forfeiture estimate. Performance-based awards reflect changes in probability of achieving performance criteria355 - Long-lived assets are reviewed for impairment when events indicate carrying value may not be recoverable, comparing undiscounted cash flows to net book value and writing down to fair market value if impaired364365 - Intangible assets include indefinite-lived trademarks/trade names (tested annually for impairment using relief-from-royalty method) and finite-lived customer lists/acquisition-related assets (amortized over useful lives and reviewed for impairment)366 - Income taxes are accounted for using the liability method, with deferred taxes based on temporary differences. A valuation allowance is recorded if deferred tax assets are unlikely to be realized370 - Fair value measurement uses a three-level hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), Level 3 (unobservable inputs)380 - Recently adopted accounting updates in Fiscal 2020 for cloud computing, fair value measurement disclosures, and financial instrument credit losses did not have a material impact385386387 2. REVENUES Revenue recognized upon transfer of control, net of returns, including e-commerce, credit card, loyalty, gift card, and franchisee sales - Revenue is recognized when control of promised goods or services is transferred to customers, net of coupon redemptions and anticipated sales returns391 - E-commerce revenue is recognized when the customer receives the product391 Revenues Disaggregated by Geography (In thousands) | Geography | January 30, 2021 | February 1, 2020 | February 2, 2019 | | :---------------- | :--------------- | :--------------- | :--------------- | | South | $579,348 | $659,519 | $670,232 | | Northeast | $325,124 | $429,857 | $460,682 | | West | $219,686 | $290,290 | $300,225 | | Midwest | $197,697 | $234,621 | $245,954 | | International and other | $200,743 | $256,380 | $260,991 | | Total net sales | $1,522,598 | $1,870,667 | $1,938,084 | - Private label credit card revenue is allocated between brand obligation (recognized straight-line over term) and reward obligation (recognized point-in-time as redemptions occur)393394 - Points-based loyalty program creates a contract liability (deferred revenue) based on standalone selling price of benefits and redemption experience395 - Gift card revenue is recognized upon redemption. Breakage income is recognized proportionally when expected and no legal obligation to remit398 Reconciliation of Contract Liability Related to Gift Cards (In thousands) | Metric | Amount | | :-------------------------- | :----- | | Balance at February 1, 2020 | $16,099 | | Gift cards sold | $19,760 | | Gift cards redeemed | $(19,289) | | Gift card breakage | $(2,936) | | Balance at January 30, 2021 | $13,634 | - International franchisee revenue from product sales (when ownership transfers) and sales royalties (when franchisee sells to customers). Territorial fees are deferred and amortized over the agreement life398 3. LEASES Adopted ASC 842 in Fiscal 2019, recognizing ROU assets and lease liabilities for operating leases, with COVID-19 rent concessions - Adopted FASB ASC 842—Leases on February 3, 2019, using the modified retrospective method, resulting in a $1.7 million cumulative-effect charge to retained earnings399400 - Operating leases for retail stores, corporate offices, distribution facilities, and equipment have terms up to 10 years, with renewal/termination options402 - Lease liability is present value of unpaid lease payments; ROU asset is lease liability plus initial direct costs, less accrued payments and unamortized incentives403 - Elected not to apply recognition requirements of Topic 842 to leases with initial terms of 12 months or less, expensing them straight-line406 - Elected to account for lease and non-lease components as a single component for all asset classes407 - COVID-19 related rent concessions are accounted for as reductions to variable lease cost, not requiring reassessment of lease modification guidance411412 Components of Lease Expense (In thousands) | Lease Component | January 30, 2021 | February 1, 2020 | | :---------------- | :--------------- | :--------------- | | Operating lease cost | $128,373 | $149,006 | | Variable lease cost | $44,085 | $64,228 | | Total lease cost | $172,458 | $213,234 | - Variable lease cost for Fiscal 2020 includes approximately $12.9 million in lease abatements under the COVID-19 expedient414 - As of January 3