The Children’s Place, Inc. — Form 10-Q Summary
Reporting period: First quarter fiscal 2017, the 13 weeks ended April 29, 2017. The filing is a quarterly report for 2017, despite the request metadata identifying 2016 Q1. Comparisons are with the 13 weeks ended April 30, 2016. Amounts below are in U.S. dollars.
Business context and operating results
The company is a North American children’s apparel retailer with U.S. and international segments, e-commerce, wholesale and franchise operations. At quarter-end it operated 1,033 stores and had 156 international franchise distribution points in 18 countries.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $436.7 million | $419.4 million | Up 4.1% |
| Comparable retail sales | Up 6.1% | — | U.S. comps up 6.8%; Canada down 1.4% |
| Gross profit / margin | $170.6 million / 39.1% | $165.4 million / 39.4% | Margin down 30 bps |
| Operating income / margin | $42.3 million / 9.7% | $39.6 million / 9.4% | Margin up 30 bps |
| Net income | $36.2 million | $26.0 million | Up 39.4% |
| Diluted EPS | $1.97 | $1.33 | Up 48.1% |
| Operating cash flow | $29.2 million | $28.3 million | Up $0.9 million |
Sales growth primarily reflected comparable-sales gains, partly offset by $7.8 million from operating fewer stores and $0.4 million of unfavorable Canadian currency effects. Gross margin declined mainly because e-commerce represented a larger share of sales. SG&A was $112.1 million, or 25.7% of sales versus 26.0%; excluding current- and prior-period settlement/restructuring effects, SG&A decreased $2.8 million and leveraged 160 bps.
Cash, debt and liquidity
- Cash and equivalents were $175.6 million; short-term investments were $55.8 million. Cash plus investments totaled $231.4 million, while $27.4 million was drawn on the revolving facility. The company reported $180.0 million of remaining borrowing availability.
- Cash and investments include substantial foreign-held balances: approximately $163.0 million of cash was held outside the U.S., plus $55.8 million of short-term investments in Hong Kong. The company said foreign earnings are permanently reinvested and repatriation would require U.S. federal and certain state taxes.
- Working capital was $255.1 million, down $50.9 million from April 30, 2016; the company attributed part of the decline to the prospective reclassification of deferred tax assets as noncurrent.
- Operating cash flow was $29.2 million; capital expenditures were $13.3 million, implying approximate operating cash flow less capex of $15.9 million. Investing activities used $20.2 million and financing activities used $27.8 million. Cash declined $18.1 million during the quarter.
- The $250 million asset-based revolving credit facility expires in September 2020. Its borrowing base was $214.5 million; $7.1 million of letters of credit were outstanding. The facility is secured by substantially all U.S. assets, subject to stated exclusions, and includes conditions on repurchases and dividends.
Material changes, outlook and notable items
- Net income and EPS benefited from a 14.2% effective tax rate versus 34.3% a year earlier. The lower rate included approximately $3.5 million of excess stock-compensation tax benefits and a $4.0 million release of an uncertain-tax-position reserve. These items materially contributed to the year-over-year earnings increase.
- The quarter included a $5.0 million reserve for a proposed class-action settlement and approximately $0.6 million of restructuring costs; the company also recorded $0.5 million of impairment charges for six stores. The proposed settlement requires court approval and would provide merchandise vouchers to eligible claimants and cover legal and administration costs.
- The company repurchased approximately 0.3 million shares for $32.8 million and paid $7.0 million in cash dividends. About $343.8 million remained under its active repurchase authorizations. A quarterly dividend of $0.40 per share was declared for payment July 10, 2017.
- Management expected fiscal 2017 capital expenditures of approximately $60 million, primarily for business-transformation initiatives, compared with $35 million in fiscal 2016. It said cash, operating cash flows and facility availability should fund foreseeable working-capital and capital needs.
- Strategic priorities include product, inventory-management and digital initiatives, alternate distribution channels and fleet optimization. Buy Online Pick Up In Store was planned for launch later in Q2, with digital upgrades expected through the rest of 2017. Management planned to close approximately 300 stores through fiscal 2020, including 149 already closed since the initiative was announced.
- No specific sales or earnings guidance was provided in the supplied filing text. Management cautioned that results are seasonal and not necessarily indicative of the full year.
- Key risks cited include changing fashion preferences, competition and consumer spending, execution of sales and margin initiatives, supply-chain disruption, input-cost increases, weather and foreign-exchange exposure. The company imports most merchandise, primarily from China, Bangladesh, Indonesia and Vietnam. It uses currency forwards for some Canadian inventory-purchase exposure but does not hedge all foreign-currency transactions.
- Adoption of new lease accounting was expected to result in material right-of-use assets and lease liabilities when effective for the company in fiscal 2019. The company was evaluating the effects of the revenue-recognition standard, planned for adoption in fiscal 2018.
Important facts for investors to verify
- How much of earnings and EPS growth is sustainable after the $3.5 million stock-compensation tax benefit, $4.0 million tax-reserve release, and lower share count?
- Whether the proposed $5.0 million class-action settlement receives court approval and whether its final terms differ from the agreement in principle.
- Whether comparable-sales growth continues, particularly given weaker Canadian comps and lower gross margin associated with e-commerce mix.
- Progress and returns on the planned $60 million fiscal 2017 capital program, digital initiatives and store-closure plan.
- Liquidity and capital-return capacity in light of foreign-held cash, potential repatriation taxes, seasonal working-capital needs, facility covenants and repurchases/dividends.