The Children’s Place, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 5, 2018 (the company’s first quarter of fiscal 2018). The request metadata says “2017 Q1,” but the filing covers 2018 Q1 and compares it with the thirteen weeks ended April 29, 2017. Amounts below are in U.S. dollars.
Business context and results
The Children’s Place is a children’s apparel retailer operating stores and e-commerce in the U.S., Canada and internationally through franchise partners. At quarter-end it operated 1,002 stores and reported 200 international franchise distribution points in 20 countries.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $436.3 million | $436.7 million |
| Gross profit / margin | $160.2 million / 36.7% | $170.6 million / 39.1% |
| Operating income / margin | $23.1 million / 5.3% | $42.3 million / 9.7% |
| Net income | $31.5 million | $36.2 million |
| Diluted EPS | $1.78 | $1.97 |
| Operating cash flow | $(12.7) million | $29.2 million |
| Capital expenditures | $11.1 million | $13.3 million |
Liquidity, debt and capital allocation
- May 5 cash and cash equivalents were $90.1 million, down from $244.5 million at February 3, 2018. The company also had $46.8 million outstanding on its revolving facility and $196.2 million of borrowing availability; the facility expires in September 2020.
- Current assets were $526.3 million and current liabilities were $365.1 million. Working capital was $161.2 million, compared with $255.1 million at April 29, 2017.
- Financing cash outflow was $145.3 million, mainly reflecting $162.2 million of share repurchases and $8.4 million of cash dividends, partly offset by net revolving-loan borrowings. The company repatriated $175 million from foreign subsidiaries during the quarter.
- The quarterly dividend was $0.50 per share. The company said it expected cash on hand, operating cash flow and facility availability to meet foreseeable requirements.
Material changes and management commentary
- Comparable retail sales fell 1.8%; U.S. comps declined 1.4% and international comps declined 7.1%. Management attributed weak results in part to winter storms and unseasonably cold weather in major U.S. and Canadian markets.
- Sales were nearly flat year over year, but gross margin declined 240 basis points. Management cited lower traffic and promotional pricing to clear merchandise, fixed-cost deleverage, and a higher e-commerce mix with greater fulfillment costs.
- SG&A rose to $118.5 million from $112.1 million; as a share of sales it increased to 27.2% from 25.7%. Management cited continued investment in transformation initiatives and accounting presentation changes. Prior-year comparison included $5.3 million of legal-settlement and restructuring costs; the current quarter included $0.3 million of insurance proceeds and restructuring effects.
- Operating cash flow turned negative, which management attributed primarily to the timing of inventory purchases and payments and an additional rent payment related to the fiscal calendar shift.
- The company plans fiscal 2018 capital expenditures of approximately $75–85 million, mainly for business transformation. Its fleet optimization plan targets about 300 store closures through fiscal 2020, including 181 already closed.
Outlook, risks and unusual items
- The filing does not provide a specific sales or earnings forecast. Management described ongoing initiatives in product, technology and digital capabilities, alternate distribution channels and store-fleet optimization. It planned a Greater China franchise launch and an Amazon brand store during fiscal 2018.
- The Q1 tax benefit was $8.8 million, versus tax expense of $6.0 million a year earlier; the effective tax rate was (38.6)% versus 14.2%. Management attributed the current-period benefit primarily to $14.2 million of excess tax benefits from equity vesting and the lower U.S. tax rate under the Tax Act. This boosted reported earnings and should be distinguished from operating performance.
- The company estimated a $37.6 million one-time Tax Act transition tax, payable over eight years; $34.6 million was recorded as a long-term liability. The calculation remained provisional. Adoption of the new revenue standard had no material overall impact, though it increased reported Q1 sales by $4.2 million versus the prior accounting method.
- A proposed settlement in the Rael consumer-advertising class action remains subject to court approval; the matter is stayed pending an appellate ruling in another case. The company had recorded a $5.0 million reserve in Q1 2017. Management said other ordinary-course proceedings were not expected to have a material adverse effect.
- Management identified risks including changing fashion preferences, competition and consumer spending, supply-chain disruption, input-cost increases, weather, foreign exchange exposure and the execution of strategic initiatives. The company expects lease-accounting changes effective in fiscal 2019 to create material right-of-use assets and lease liabilities.
Important facts for investors to verify
- Whether comparable sales and gross margin recover after the weather-affected quarter, and whether promotional activity continues to pressure margins.
- How much of the earnings decline reflects underlying operations versus tax benefits, Topic 606 presentation changes and prior-year unusual charges.
- Inventory levels, seasonal cash needs and the sustainability of negative Q1 operating cash flow; verify borrowing-base availability and facility covenant constraints.
- Execution and returns on the planned $75–85 million of capital spending, digital investments, store closures and international expansion.
- Completion of the accelerated repurchase, ongoing buybacks and dividends, and the final Tax Act transition-tax calculation and class-action settlement outcome.