The Children’s Place, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2017 Q3, but the supplied filing is for the 13 and 39 weeks ended November 3, 2018 (Q3 and year-to-date 2018), compared with periods ended October 28, 2017. The filing was signed December 6, 2018. Amounts below are in U.S. dollars.
Business context
The Children’s Place is a children’s apparel retailer operating stores, e-commerce, wholesale and franchise businesses. At quarter-end it operated 988 stores across North America and had 211 international franchise distribution points in 20 countries. Results are seasonal and the year-to-date figures are not necessarily indicative of full-year results.
Financial results
| Metric | Q3 2018 | Q3 2017 | Year-to-date 2018 | Year-to-date 2017 |
|---|---|---|---|---|
| Net sales | $522.5 million | $490.0 million | $1,407.5 million | $1,300.3 million |
| Gross profit / margin | $204.4 million / 39.1% | $202.4 million / 41.3% | $519.4 million / 36.9% | $501.4 million / 38.6% |
| Operating income / margin | $64.6 million / 12.4% | $64.1 million / 13.1% | $97.7 million / 6.9% | $109.7 million / 8.4% |
| Net income / net margin | $49.9 million / 9.6% | $44.1 million / 9.0% | $88.9 million / 6.3% | $94.6 million / 7.3% |
| Diluted EPS | $3.03 | $2.44 | $5.24 | $5.19 |
| Operating cash flow | — | $83.5 million | $129.9 million |
Q3 sales increased 6.6%; comparable retail sales rose 9.5%. Year-to-date sales increased 8.2%; comparable retail sales rose 6.7%. E-commerce represented approximately 29% of Q3 sales and 27% year to date, versus 22% and 23%, respectively, a year earlier.
Gross margin declined 220 basis points in Q3 and 170 basis points year to date, primarily from lower merchandise margins associated with greater e-commerce penetration. In Q3, SG&A rose to $123.2 million but fell to 23.6% of sales from 24.1%. Year-to-date SG&A was $365.9 million and 26.0% of sales, flat as a percentage of sales. Q3 diluted EPS benefited from approximately 1.6 million fewer weighted-average shares; year-to-date diluted EPS was slightly higher despite lower net income, also aided by share repurchases.
Financial position, liquidity and capital allocation
- At November 3, 2018, cash and cash equivalents were $93.0 million; there were no short-term investments. The company had $65.0 million drawn on its $250 million asset-based revolving facility, $178.0 million available to borrow, and $7.0 million of letters of credit outstanding. The facility expires in September 2020.
- Working capital was $135.6 million, down from $262.5 million at October 28, 2017; management attributed the decrease primarily to share repurchases. Current assets were $547.4 million and current liabilities $411.8 million.
- Year-to-date operating cash flow was $83.5 million, investing cash outflow $41.1 million and financing cash outflow $194.5 million. Cash fell $151.6 million from the fiscal-year opening balance. Capital expenditures were $55.5 million, versus $37.9 million a year earlier.
- The company repurchased approximately 1.7 million shares for $213.1 million year to date and paid $24.9 million in cash dividends. Approximately $281.3 million remained under the 2017 and 2018 repurchase programs at quarter-end. A $0.50-per-share dividend was declared for payment in December 2018.
- Year-to-date interest expense was $2.6 million. Management said a 10% change in prime or LIBOR rates would not have materially affected interest expense.
Outlook, management commentary and risks
- Management expected fiscal 2018 capital expenditures of approximately $70–75 million, primarily for business transformation initiatives, compared with $59 million in fiscal 2017. It said cash, operating cash flows and credit-facility availability should fund foreseeable working-capital, capital and other cash needs.
- The company planned to close approximately 300 stores through fiscal 2020, including 195 already closed since the fleet-optimization initiative began. Strategic priorities include product, technology and digital transformation, alternate distribution channels and store productivity.
- Management cited risks from changing fashion preferences and consumer spending, competition, execution of strategic initiatives, supply-chain disruptions, higher material or energy costs, foreign sourcing and trade policy, tariffs, weather, currency fluctuations and litigation. The filing reported no material changes to the risk factors in the prior Form 10-K.
- Q3 other income of approximately $1.2 million related to a distribution-center lease settlement. Year-to-date impairment charges were $5.6 million, including $4.4 million for information-technology systems and $1.2 million primarily for nine stores.
- The company reported an estimated $37.6 million Tax Act transition-tax liability, payable over eight years; $19.1 million remained unpaid and was reported as a long-term liability. The Q3 effective tax rate was 21.7% versus 31.2%; the year-to-date rate was 7.0% versus 13.4%, reflecting the lower U.S. federal rate and foreign income mix, among other factors.
- A proposed settlement in the Rael consumer class action remains subject to court approval; the company had recorded a $5.0 million reserve in 2017. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
- The company expected adoption of the new lease standard in fiscal 2019 to create material right-of-use assets and lease liabilities. Revenue-standard adoption in fiscal 2018 had no material overall impact, though it affected reported sales and expenses and increased opening retained earnings by approximately $0.9 million.
- In November 2018, the CFO left; COO Michael Scarpa reassumed CFO duties, and Robert Helm became principal accounting officer. The President of Global Product also left, with CEO Jane Elfers reassuming those duties.
Key facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2018, not Q3 2017.
- Assess whether sales growth and higher comparable sales can offset continued gross-margin pressure as e-commerce grows.
- Review cash generation, seasonal inventory needs, rising facility borrowings and the scale of repurchases and dividends relative to available liquidity.
- Track execution and returns on technology investment, planned store closures and the stated fiscal 2018 capital-expenditure range.
- Monitor lease-standard implementation, the tax transition liability and the status of the proposed class-action settlement.