The Children’s Place, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2015 Q2, but the supplied filing is for the 13 and 26 weeks ended July 30, 2016 (second quarter and year-to-date fiscal 2016), compared with periods ended August 1, 2015. The company notes that its seasonal interim results are not necessarily indicative of full-year results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and operating results
The company is a children’s apparel retailer, wholesaler and licensor. At quarter-end it operated 1,064 stores in the U.S., Puerto Rico and Canada and had 123 franchise-operated international points of distribution in 16 countries, in addition to e-commerce.
| Metric | 13 weeks ended July 30, 2016 | 13 weeks ended August 1, 2015 | 26 weeks ended July 30, 2016 | 26 weeks ended August 1, 2015 |
|---|---|---|---|---|
| Net sales | $371.4 | $366.5 | $790.8 | $771.3 |
| Gross profit / margin | $123.9 / 33.4% | $115.0 / 31.4% | $289.2 / 36.6% | $267.1 / 34.6% |
| Operating income (loss) | $(2.9) | $(20.1) | $36.7 | $3.1 |
| Net income (loss) | $(2.0) | $(13.7) | $24.0 | $1.9 |
| Diluted EPS | $(0.11) | $(0.67) | $1.24 | $0.09 |
Quarterly comparable retail sales increased 2.4%; year-to-date comparable sales rose 3.8%. Quarter sales growth of 1.3% included a $1.7 million adverse Canadian currency effect and a $1.5 million impact from operating fewer stores. Year-to-date sales grew 2.5%, partly offset by $3.9 million of adverse currency translation and $4.2 million from fewer stores and other non-comparable sales effects.
Gross margin expanded 200 basis points in both periods. Management attributed improvement primarily to merchandise margin leverage, higher average unit retail, lower average unit cost and fixed-cost leverage from positive comparable sales. SG&A fell to 29.1% of sales for the quarter from 32.3%, and to 27.5% year to date from 30.2%. Prior-year SG&A included significant proxy contest, wage-and-hour settlement, sales-tax audit and restructuring costs; excluding these items, management reported more modest expense reductions and leverage.
Cash flow, balance sheet and capital allocation
- Operating cash flow: $75.2 million year to date, versus $40.1 million a year earlier. The company reported a $16.7 million decrease in cash during the period, ending with $170.8 million in cash and cash equivalents.
- Investing and financing: Investing used $51.2 million, including net purchases of short-term investments; financing used $46.5 million, including share repurchases and dividends. Capital expenditures were $16.0 million year to date.
- Liquidity: At July 30, cash was $170.8 million and short-term investments were $75.1 million. Working capital was $268.4 million. Cash and investments included substantial foreign-held balances: $156.5 million of cash was held in foreign subsidiaries and $75.1 million of short-term investments in Hong Kong. Management said it did not intend to repatriate foreign subsidiary earnings.
- Debt and facility: Revolver borrowings were $43.9 million, with $197.4 million available under the $250 million asset-based facility, which expires in September 2020. The period-end interest rate was 2.0%; facility covenants include conditions on buybacks and dividends.
- Capital returns: Year-to-date share repurchases were $78.7 million; $192.0 million remained under the authorized $250 million program at quarter-end. The company paid $7.6 million in dividends and declared a further $0.20-per-share dividend. It repurchased an additional 0.2 million shares for about $14.5 million through August 29, 2016.
Material changes, outlook and risks
- Year-to-date net income rose to $24.0 million from $1.9 million, while the second-quarter loss narrowed to $2.0 million from $13.7 million. The results reflect stronger sales and gross margin, lower SG&A and fewer prior-year unusual costs; diluted weighted-average shares also declined following repurchases.
- Quarterly impairment charges were $2.8 million: $1.5 million for 12 stores and $1.3 million for obsolete systems and previously capitalized technology costs. The filing reports $2.8 million for the 26-week period as well.
- Management expected fiscal 2016 capital expenditures of $50–55 million, mainly for business transformation initiatives. It planned approximately seven store openings and 30 closures in fiscal 2016, and approximately 200 underperforming store closures through fiscal 2017, including prior-year closures. It expected about 40 new franchise points of distribution in fiscal 2016 and accelerated investment to support online selling in China in late 2016 or early 2017.
- Management cited progress from assortment planning, allocation and replenishment tools, and planned pilots for size-and-pack optimization, order planning and forecasting, and markdown optimization. Mobile-site improvements launched during the quarter; an initial omnichannel pilot was planned for the second half of fiscal 2016.
- Principal disclosed risks include fashion and consumer-preference shifts, competition and consumer spending, execution of sales- and margin-improvement initiatives, supply-chain disruption, raw-material and energy costs, weather, and foreign-currency movements. The company imports most merchandise, primarily from China, Bangladesh and Vietnam. It uses forward contracts to hedge some Canadian-dollar exposure to U.S.-dollar inventory purchases, but does not hedge all foreign-currency transactions.
- There were no material changes to the risk factors in the preceding annual report and no material legal-proceeding developments reported for the quarter. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the source is a July 30, 2016 10-Q, not a 2015 Q2 filing.
- Assess whether comparable-sales growth and 200-basis-point gross-margin expansion persist, including after currency effects and store closures.
- Track inventory, seasonal working-capital needs, revolver usage and availability, and the concentration of cash and investments outside the U.S.
- Evaluate the returns and funding impact of planned technology spending, store closures, China e-commerce investment, buybacks and dividends.
- Review the estimates underlying store and technology impairments, inventory markdown and shrink reserves, and performance-based stock compensation.