The Children’s Place Retail Stores, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 2, 2013, compared with the periods ended October 27, 2012. Although the request metadata labels this “2012 Q3,” the filing itself is for fiscal 2013 Q3. Amounts below are in U.S. dollars; financial statements are unaudited. The company operates children’s apparel stores and e-commerce businesses in the U.S., Puerto Rico, Canada, and through international franchisees; it had 1,123 stores at quarter-end.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $492.7 million | $500.9 million | $1,298.3 million | $1,300.3 million |
| Gross profit / margin | $201.8 million / 41.0% | $209.5 million / 41.8% | $491.2 million / 37.8% | $502.9 million / 38.7% |
| Operating income / margin | $61.6 million / 12.5% | $53.5 million / 10.7% | $54.4 million / 4.2% | $63.8 million / 4.9% |
| Net income | $41.7 million | $37.3 million | $37.4 million | $44.1 million |
| Diluted EPS | $1.84 | $1.54 | $1.63 | $1.80 |
Quarterly SG&A declined to $123.5 million (25.1% of sales) from $131.9 million (26.3%). Year-to-date SG&A was $366.9 million (28.3% of sales), versus $374.8 million (28.8%). Q3 sales fell 1.6%; comparable retail sales declined 0.7%. Year-to-date sales were down 0.2%, while comparable sales fell 2.3%. E-commerce, including postage and handling, increased to 14.8% of Q3 sales and 13.7% year to date.
Cash flow and liquidity: Year-to-date operating cash flow was $99.2 million, down from $143.5 million. Investing cash outflow was $94.7 million, including a $37.5 million short-term investment purchase; financing cash outflow was $53.4 million, including $54.8 million of share repurchases. Cash and cash equivalents were $141.7 million at November 2, 2013, with an additional $52.5 million in short-term investments. Working capital was $354.3 million. The company had no revolver borrowings, $13.9 million of letters of credit outstanding, and $136.1 million of borrowing availability under its $150 million facility, which expires in August 2017.
Debt and balance sheet: No borrowings were outstanding under the credit facility. Total liabilities were $359.2 million and stockholders’ equity was $615.5 million at quarter-end. Cash and cash equivalents included $120.7 million held in foreign subsidiaries; the company said it did not currently intend to repatriate foreign cash.
Material changes and unusual items
- Q3 net income and diluted EPS increased year over year despite lower sales and gross margin, supported by lower SG&A and reduced depreciation and amortization. The lower diluted share count, primarily from repurchases, also benefited EPS.
- Year-to-date net income declined from $44.1 million to $37.4 million. Gross margin contracted 90 basis points, and operating income included $21.8 million of impairment charges versus $2.1 million in the prior-year period.
- Year-to-date 2013 impairment charges included $12.7 million for 75 stores and $9.1 million for obsolete systems and previously capitalized development costs. The company also recorded $1.2 million of SG&A related to its systems plan. No impairment charge was recorded in Q3 2013.
- Foreign exchange reduced year-to-date sales by about $5.0 million and gross profit by $2.4 million; U.S.-dollar-priced inventory purchases reduced Canadian gross profit by a further $3.9 million.
- The company repurchased approximately 1.1 million shares for $54.7 million year to date. Approximately $25.7 million remained under its $100 million repurchase authorization at November 2.
Outlook, commentary, and risks
Management attributed first-quarter weakness to unfavorable weather and said results improved in Q2; sales accelerated during October after a challenging mid-quarter. Management planned approximately $80–$85 million of fiscal 2013 capital expenditures and expected to fund requirements with cash, operating cash flow, and credit-facility availability. It expected available liquidity to cover capital and other cash needs for the next 12 months. The company planned to close approximately 110 underperforming stores through fiscal 2016, including about 40 in fiscal 2013. No earnings or sales guidance was provided in the supplied filing text.
Risks highlighted include fashion and consumer-preference execution, competition and consumer spending, weather, raw-material and energy costs, foreign-exchange movements, and exposure to sourcing and policy changes in China. The company does not hedge its foreign net investments or use derivatives to manage currency risk. Store impairment estimates depend on projected sales, margins, costs, and lease assumptions. Cash dividends are restricted under the credit facility; the facility also limits share repurchases and other payments. Management reported no material change to previously disclosed risk factors, no material legal-proceeding developments, and effective disclosure controls as of November 2, 2013.
Important facts for investors to verify
- Whether weak comparable sales and lower gross margins persist, especially in Canada and internationally.
- Whether planned store closures and systems investments improve operating performance, and whether further impairment charges arise.
- Whether operating cash flow recovers after higher inventory and payment-timing pressures, while planned capital spending and repurchases continue.
- How much of the reported cash is practically available for U.S. needs given foreign-cash tax implications and the company’s stated non-repatriation intent.
- Whether currency exposure, sourcing risks, and inventory markdown or shrink assumptions materially affect future results.