The Children’s Place Retail Stores, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended July 28, 2012, and year-to-date results for the 26 weeks ended July 28, 2012, compared with the corresponding 2011 periods. The filing period conflicts with the request metadata’s “2011 Q2” label; the filing itself is for 2012 Q2.
Business context and results
The company operated 1,080 stores in the U.S., Puerto Rico, and Canada and an e-commerce business. It designs and sells children’s apparel under its proprietary brands. The business is seasonal, with working-capital needs typically peaking in the third quarter.
| Metric | Q2 2012 | Q2 2011 | 26 weeks 2012 | 26 weeks 2011 |
|---|---|---|---|---|
| Net sales | $360.8m | $343.5m | $799.3m | $774.3m |
| Gross profit / margin | $114.2m / 31.7% | $115.6m / 33.6% | $291.0m / 36.4% | $299.2m / 38.6% |
| Operating income (loss) | $(26.9)m | $(15.8)m | $8.4m | $33.0m |
| Net income (loss) | $(18.0)m | $(9.8)m | $5.6m | $19.3m |
| Diluted EPS | $(0.74) | $(0.38) | $0.23 | $0.74 |
Q2 comparable retail sales rose 3.4%; comparable e-commerce sales rose 21.2%, and e-commerce reached 10.5% of sales. Year-to-date comparable retail sales rose 1.1%, while comparable e-commerce sales rose 21.1%; e-commerce was 10.9% of sales. The U.S. and Canada segments both experienced year-to-date gross-margin declines, with Canada’s margin falling to 38.8% from 46.8%.
Cash, debt, and liquidity
- Cash and cash equivalents were $158.6m at July 28, 2012, versus $151.5m at July 30, 2011; $125.2m was held in foreign subsidiaries and management did not intend to repatriate it.
- Year-to-date operating cash flow was $60.6m, investing cash outflow was $44.3m, and financing cash outflow was $33.9m. Cash decreased $18.0m from the fiscal-year start.
- The company had no revolving-credit borrowings; $36.9m of letters of credit were outstanding and $113.1m of borrowing availability remained under its $150m asset-based facility, which expires in August 2016.
- Working capital was $318.3m, down $11.9m from the prior-year comparable date. Year-to-date share repurchases totaled approximately $34.8m; an additional $3.3m of repurchases occurred through August 28.
Changes, outlook, and risks
- Sales increased year over year, but gross profit and earnings declined. Management attributed margin pressure primarily to higher Spring and Summer product costs and markdowns; Q2 SG&A also rose, including legal-settlement and growth-investment costs.
- The company completed its exit from the Ontario, California distribution center, recording $3.9m of year-to-date costs. In August, it approved closing the Dayton, New Jersey distribution center and moving operations to Fort Payne, Alabama; expected fiscal 2012 exit costs are approximately $16m, including about $5m in Q3 and $11m in Q4.
- Management expected fiscal 2012 capital expenditures of approximately $85m–$90m and believed cash, operating cash flow, and credit-facility availability would meet requirements over the next 12 months. This is management’s stated expectation, not a guarantee.
- Key disclosed risks include changing fashion preferences, competition and consumer spending, economic weakness, weather, foreign-exchange movements, and exposure to merchandise sourcing and policy changes in China. The company did not hedge foreign-currency exposure.
- Management reported no material recent legal-proceeding developments and no material changes to previously disclosed risk factors. The filing identifies no material control changes and states disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether cost, pricing, and markdown pressures continue to weigh on gross margins, particularly in Canada.
- Whether the Dayton distribution-center closure achieves expected benefits and whether exit costs remain within the approximately $16m estimate.
- How much cash is practically available given the substantial balance held in foreign subsidiaries and potential repatriation taxes.
- Whether planned capital spending, store openings, and share repurchases remain supportable from operating cash flow and available credit.
- Whether comparable sales, e-commerce growth, and inventory markdown and shrink estimates develop as management expects.