The Children’s Place, Inc. — Form 10-Q Summary
Period: The filing is for the 13 and 26 weeks ended August 1, 2020, not 2019 Q2 as stated in the request metadata. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
The company operates children’s apparel retail, e-commerce, wholesale, and franchise businesses under The Children’s Place and other brands. At August 1, 2020, it operated 824 stores and had 276 international points of distribution through eight franchise partners. COVID-19-related closures and reduced consumer demand substantially affected the quarter and year-to-date results.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $368.9 | $420.5 | $624.1 | $832.9 |
| Gross profit / margin | $67.1 / 18.2% | $138.8 / 33.0% | $47.4 / 7.6% | $290.8 / 34.9% |
| Operating income (loss) | ($64.5) | $3.8 | ($237.6) | $8.9 |
| Net income (loss) | ($46.6) | $1.5 | ($161.4) | $6.0 |
| Diluted EPS | ($3.19) | $0.10 | ($11.04) | $0.38 |
- Q2 sales declined 12.3% year over year; first-half sales declined 25.1%. E-commerce rose to 71.0% of Q2 sales and 63.6% of first-half sales, compared with 28.6% and 28.9%, respectively, a year earlier.
- First-half operating cash flow was negative $83.2 million, versus positive $23.3 million a year earlier. Investing cash outflow was $14.1 million and financing cash inflow was $64.6 million. Cash fell to $36.1 million from $68.5 million at fiscal year-end.
- At August 1, revolving borrowings were $250.8 million, with $69.7 million of borrowing availability; facility utilization was $257.0 million including letters of credit. The facility’s period-end interest rate was 4.1%.
- Current assets were $469.9 million and current liabilities $809.5 million. The filing reports a working-capital deficit of $339.7 million, compared with $152.8 million at August 3, 2019. Stockholders’ equity was $61.5 million.
- No dividends were declared in the first half of 2020; the company suspended dividends and share repurchases in March 2020.
Material changes versus the prior comparable period
- Temporary store closures, weaker back-to-school sales, and lower franchise revenue drove sales declines; increased e-commerce partially offset the impact. At quarter-end, 771 of 824 stores were open.
- First-half gross profit included an approximately $63.2 million inventory provision, $47.1 million of occupancy expense for temporarily closed stores, and $4.4 million of incremental expenses including protective equipment and incentive pay. Excluding those specified charges, management said gross margin deleveraged 890 basis points.
- First-half asset impairment charges rose to $37.6 million, primarily for 418 stores, from $0.5 million a year earlier. Charges reflected reduced revenue and cash-flow projections associated with COVID-19.
- SG&A decreased $31.6 million in the first half, to $212.8 million, but included specified COVID-related, restructuring, payroll, and receivable-write-off costs. Share repurchases were $15.4 million in the first half, versus $60.4 million in 2019.
Outlook, management commentary, risks, and contingencies
- The filing provides no quantified earnings or sales guidance. Management said cash on hand, operating cash flows, and available credit were expected to fund working-capital, capital, and other cash requirements for the foreseeable future; outcomes remain highly uncertain.
- The company targeted 300 store closures through fiscal 2021: 200 in fiscal 2020, including 102 already closed in the first half, and 100 in fiscal 2021. It reported 373 closures since announcing its fleet optimization initiative.
- Management cited reduced or deferred nonessential spending and capital expenditures, extended vendor terms, modified rent payments, and furloughs/pay reductions as liquidity measures. Most furloughed employees had returned and affected executive and corporate salaries were restored to pre-reduction levels effective June 28, 2020.
- The revolving facility was increased from $325 million to $360 million for one year under an amendment; capacity is subject to the borrowing base and reduces to $325 million in April 2021. The facility expires in May 2024 and is secured by substantially all U.S. and Canadian assets other than specified exclusions.
- Risks include renewed or continued pandemic disruptions to store traffic, demand and supply chains; increased e-commerce fulfillment costs; inventory and asset impairment; lease negotiations and suspended or modified rent payments; and uncertainty around school models and consumer spending. Management was negotiating with landlords over rent payments.
- A proposed settlement in the Rael consumer class action had received preliminary approval; the final fairness hearing occurred July 31, 2020, but the court’s final order was pending. The company had recorded a $5.0 million reserve in 2017. Other ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- The CARES Act contributed to the first-half income tax benefit, including through tax provisions described in the filing. The first-half tax benefit was $80.7 million; deferred income taxes on the balance sheet were $91.9 million.
Most important facts for investors to verify
- Whether store reopenings, consumer demand, and e-commerce growth can support sales and margins, and whether the store-closure targets are achieved.
- Available borrowing-base capacity, cash usage, and compliance with credit-facility terms as the facility’s temporary increase expires.
- Final landlord arrangements for deferred or modified rent, and any resulting cash obligations or litigation.
- Whether inventory and store-asset carrying values require further provisions or impairments as conditions change.
- The court’s final decision on the Rael settlement and any developments in other material contingencies.