Business context and reporting period
The filing is The Children’s Place Retail Stores, Inc.’s Form 10-Q for the quarter ended July 31, 2010 (13 weeks), with year-to-date results for the 26 weeks ended that date. This conflicts with the request metadata’s “2009 Q2”; the filing itself reports 2010 Q2. The company operates children’s apparel stores and e-commerce in the U.S. and Canada, with 977 stores at quarter-end.
Key financial metrics
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net sales | $345.3 | $315.7 | $767.4 | $717.6 |
| Gross profit / margin | $113.6 / 32.9% | $105.3 / 33.4% | $293.3 / 38.2% | $271.8 / 37.9% |
| Operating income (loss) | $(13.1) | $(18.7) | $34.6 | $17.3 |
| Net income (loss) | $(8.2) | $(7.1) | $19.7 | $16.5 |
| Diluted EPS | $(0.30) | $(0.24) | $0.70 | $0.55 |
- YTD operating cash flow was $66.8 million, versus cash used of $6.9 million in 2009; capital expenditures were $47.0 million, versus $27.1 million. Cash increased $27.7 million to $196.0 million.
- At July 31, cash was $196.0 million, restricted cash $2.2 million, working capital $363.2 million, and total liabilities $267.4 million. No term-loan or revolving-credit borrowings were outstanding. Revolver availability was $121.8 million, subject to borrowing-base limits; letters of credit used $48.0 million of the facility.
- There is no separate debt balance reported at quarter-end; the $200 million asset-based revolving facility expires July 2013. It is secured by substantially all company assets and includes covenants.
Material changes versus comparable periods
- Q2 sales grew 9.4%; comparable retail sales rose 4.7%, following an 8.5% decline in Q2 2009. YTD sales grew 6.9%; comparable retail sales rose 1.7%, versus a 3.3% decline the prior year.
- Q2 gross margin fell 50 basis points, chiefly from higher markdowns, partly offset by lower relative distribution, occupancy, production/design costs and improved initial markup. YTD margin improved 30 basis points, with higher initial markup and cost leverage mostly offset by markdowns.
- SG&A rose in dollars but fell as a share of sales: 31.1% versus 33.6% for Q2 and 28.8% versus 30.4% YTD. Q2 operating loss narrowed, but net loss widened to $8.2 million from $7.1 million.
- YTD net income rose despite prior-year tax and other unusual benefits. 2009 comparisons included tax benefits from an IRS audit settlement and foreign tax credits, an IRS employment-tax settlement gain, proxy-contest fees, restructuring costs, and term-loan repayment expenses.
- Canada sales benefited from favorable currency translation; the stronger Canadian dollar increased YTD sales by $12.6 million and pretax income by $3.0 million, according to management. U.S. comparable store sales were positive YTD, while Canada comparable store sales declined 2.0%.
Outlook, commentary, risks and unusual items
- Management said it was on plan to open 65 stores in fiscal 2010, versus 38 in fiscal 2009. It expected fiscal-2010 capital expenditures of approximately $80–$85 million; $47.0 million had been spent in the first half.
- Management expected cash on hand, operating cash flow and revolver availability to cover capital and other cash requirements over the next 12 months. The business is seasonal, with working-capital needs peaking in Q3.
- Management cited continued weakness in U.S. and Canadian economies, markdown exposure, inventory planning, store performance, foreign-exchange fluctuations, and dependence on China for merchandise sourcing. It reported 33% less carryover inventory per square foot entering Q3 after more aggressive summer markdowns.
- On August 18, 2010, the board authorized a $100 million share-repurchase program and amended the credit agreement to permit greater buybacks, subject to restrictions. By August 31, 635,000 shares had been repurchased for $28.2 million ($44.33 per share) and retired.
- A stockholder derivative lawsuit remained unresolved; the court denied defendants’ motion to dismiss, and the company said potential loss could not be estimated. A separate credit-card disclosure class-action settlement of $0.3 million was accrued, pending final approval. The company also had $2.2 million of restricted cash tied to a disputed Quebec sales-tax assessment.
- Q2 2010 impairment charges were $1.2 million, primarily for three underperforming stores; YTD charges were $2.2 million. Management disclosed no material change in risk factors, and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the period mismatch: the supplied metadata says 2009 Q2, but the filing is for the quarter ended July 31, 2010.
- Assess whether Q2 markdown pressure and weaker gross margin are temporary, and whether the more aggressive clearance strategy improves inventory quality and subsequent margins.
- Review the cash and borrowing-base availability against planned capital spending, seasonal inventory needs, and the $100 million repurchase authorization.
- Track comparable sales, store openings, e-commerce contribution, Canadian currency effects, and performance by U.S. and Canada segments.
- Monitor the unresolved litigation and Quebec tax assessment, along with the company’s exposure to currency movements and China-based sourcing.