Childrens Place, Inc. quarterly report, Q2 FY2015

Business context and reporting period

The Children’s Place, Inc. is a children’s apparel retailer operating stores, e-commerce, wholesale and franchise channels. This filing covers the 13 and 26 weeks ended August 1, 2015, compared with periods ended August 2, 2014. The request metadata says 2014 Q2, but the filing itself is for 2015 Q2. Results are seasonal and interim performance may not indicate full-year results.

Key financial metrics

Amounts below are in millions of dollars except per-share data, percentages and store counts.

• Q2 comparable retail sales fell 3.5%; YTD comparable retail sales fell 1.3%. E-commerce sales, including shipping and handling, rose to 17.4% of Q2 sales and 17.8% YTD, from 15.3% and 15.5%, respectively.
• YTD operating cash flow was $40.1 million, versus $13.9 million; capital expenditures were $20.1 million, versus $30.8 million. Cash declined $27.5 million to $145.8 million. Short-term investments were $59.6 million.
• At August 1, 2015, revolving borrowings were $29.6 million, with $163.3 million available; the facility expires in August 2018. Current assets were $616.3 million and current liabilities $345.2 million. Working capital was $271.0 million, down $56.2 million from a year earlier.
• YTD cash returned to shareholders included $61.7 million of share repurchases and $6.2 million of cash dividends. The quarterly dividend was $0.15 per share.

Material changes versus comparable periods

• Q2 sales declined 4.7%; management attributed the decline to lower comparable sales and $6.5 million of unfavorable Canadian currency translation. YTD sales declined 3.0%, including $11.2 million of currency impact, $9.0 million from lower comparable sales and $3.3 million from fewer new-store and other sales.
• Gross margin improved 40 basis points in Q2 and 100 basis points YTD, primarily from merchandise margin leverage and higher average unit retail prices. However, lower sales drove fixed-cost deleverage in Q2.
• Q2 SG&A rose $1.2 million and its sales ratio increased 190 basis points. Reported comparability included approximately $9.8 million of Q2 costs for a class-action wage-and-hour settlement, proxy contest, sales-tax audit and restructuring. Excluding identified comparability items, management said SG&A declined approximately $7.4 million and leveraged 60 basis points. YTD comparable costs were approximately $12.9 million in 2015 versus $3.4 million in 2014.
• Q2 impairment charges were $1.5 million for 10 stores, compared with $3.0 million for 30 stores a year earlier. The U.S. segment recorded a Q2 operating loss of $23.0 million; International segment operating income was $2.9 million.
• YTD net income and diluted EPS declined despite higher operating cash flow. Management attributed much of the cash-flow increase to timing of payments and more favorable vendor terms.

Outlook, management commentary and risks

• No full-year earnings or sales guidance is provided in the supplied filing text. Management expects fiscal 2015 capital expenditures of $65–70 million and approximately 100 international franchise stores by year-end.
• The company planned five store openings and approximately 30 closures in fiscal 2015; it intends to close approximately 200 underperforming stores through fiscal 2017, including closures already completed in 2013–2015. Management expects fleet optimization to improve margins through sales transfer and removal of underperforming locations.
• Management said cash, operating cash flow and borrowing availability should fund working capital and capital needs for the foreseeable future. Seasonal working-capital needs peak in Q3. Approximately $132.3 million of cash was held in foreign subsidiaries, and the company said it did not intend to repatriate that cash; repatriation would entail U.S. federal and certain state taxes.
• Management cited weaker consumer traffic, intensified promotions and West Coast port disruptions. Key risks include fashion and consumer-preference execution, competition and consumer spending, weather, input costs, strategic initiatives, foreign exchange and disruption in sourcing countries. Most merchandise is imported, primarily from China and Bangladesh.
• The company began using foreign-exchange forwards in Q2 to hedge some forecast Canadian inventory purchases; notional value was $10.7 million and fair value was a $0.3 million asset. It does not hedge all foreign-currency transactions.
• Management reported no material new legal proceedings or material developments to previously reported proceedings; it believes ordinary-course matters will not materially affect the company. The filing reports no material change to previously disclosed risk factors. Disclosure controls were assessed as effective at a reasonable-assurance level.

Most important facts for investors to verify

• Confirm the intended reporting period: the filing is for the quarter ended August 1, 2015, not 2014 Q2.
• Assess whether sales and traffic weakness, promotional intensity and currency pressure persist, and whether margin gains can offset lower sales and fixed costs.
• Review the nature, settlement status and cash impact of the wage-and-hour matter, proxy contest, sales-tax audit and restructuring costs; the supplied text does not give a clear breakdown of each item’s final or future cash impact.
• Monitor inventory, vendor-payment timing and seasonal Q3 borrowing needs, including available borrowing-base capacity and credit-agreement covenants.
• Evaluate the execution and financial effects of planned store closures, transformation initiatives, e-commerce growth and international franchise expansion.
• Track buybacks and dividends against liquidity, foreign cash availability, capital expenditure plans and credit-facility restrictions.