The Children’s Place, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 4, 2018, not 2017 Q2 as stated in the request. Comparatives are the periods ended July 29, 2017. Amounts below are in U.S. dollars.
Business context and reporting period
The Children’s Place is a children’s apparel retailer operating stores, e-commerce, wholesale and franchise businesses. At August 4, 2018, it operated 992 North American stores and had 211 international points of distribution through franchise partners. The filing reports U.S. and International segments. Results are seasonal, and year-to-date performance is not necessarily indicative of the full year.
Financial performance
| Metric | Q2 2018 | Q2 2017 | 26 weeks 2018 | 26 weeks 2017 |
|---|---|---|---|---|
| Net sales | $448.7m | $373.6m | $885.0m | $810.3m |
| Gross profit / margin | $154.8m / 34.5% | $128.4m / 34.4% | $315.0m / 35.6% | $299.0m / 36.9% |
| Operating income / margin | $10.0m / 2.2% | $3.2m / 0.9% | $33.1m / 3.7% | $45.5m / 5.6% |
| Net income | $7.5m | $14.3m | $39.0m | $50.5m |
| Diluted EPS | $0.45 | $0.79 | $2.27 | $2.76 |
Q2 comparable retail sales increased 13.2%; year-to-date comparable retail sales rose 5.1%. Q2 sales increased 20.1%, including an estimated $22.0m benefit from the prior-year 53rd-week calendar shift and the effect of adopting the new revenue standard. Year-to-date sales rose 9.2%. Q2 U.S. sales were $399.3m and International sales were $49.4m; year-to-date amounts were $795.1m and $90.0m, respectively.
Q2 gross margin improved 10 basis points, reflecting fixed-cost leverage and revenue-standard presentation changes, partly offset by lower merchandise margins and e-commerce mix. Year-to-date gross margin declined 130 basis points, principally due to higher e-commerce penetration and fulfillment costs. Q2 SG&A was $124.2m, or 27.7% of sales, versus 29.0% a year earlier; year-to-date SG&A was $242.7m, or 27.4%, versus 27.2%. Q2 impairment charges were $4.0m, including $3.4m for IT systems; year-to-date charges were $5.2m.
Q2 net income and EPS fell despite higher sales and operating income, mainly because the prior-year quarter included substantially larger excess tax benefits from share-based award vesting. Year-to-date operating income and net income also declined, reflecting gross-margin pressure, higher transformation spending and impairment charges. Share repurchases reduced weighted-average shares and partly offset the EPS decline.
Cash flow, liquidity and capital allocation
- For the first 26 weeks, operating cash flow was $11.3m, down from $71.4m, primarily due to inventory-purchase timing and lower operating income. Capital expenditures were $27.8m.
- Investing cash use was $13.3m; financing cash use was $136.4m, including $187.5m of share repurchases and $16.7m of cash dividends.
- Cash and cash equivalents were $106.4m at August 4, 2018, compared with $244.5m at February 3, 2018. Short-term investments were zero. Inventory was $366.5m.
- Revolving borrowings were $89.3m, with $153.7m of borrowing availability and $7.0m of letters of credit outstanding. The $250m asset-based facility expires in September 2020. The filing reports working capital of $126.4m, down $133.5m from the prior-year comparable date.
- The company repurchased approximately 1.5m shares for $187.5m year-to-date; $307.0m remained authorized under the 2017 and 2018 repurchase programs. A $0.50-per-share quarterly dividend was declared for payment in September 2018.
Outlook, management commentary and risks
Management provided no specific sales or earnings guidance in the supplied filing. It expected fiscal 2018 capital expenditures of approximately $75–85m, primarily for business transformation initiatives, versus $59m in fiscal 2017, and said cash, operating cash flow and credit availability should fund foreseeable requirements. The company planned to close approximately 300 stores through fiscal 2020, including 191 already closed, while investing in digital capabilities, inventory management and other sales channels.
Management cited risks including changing fashion preferences, competition and consumer spending, execution of strategic initiatives, supply-chain disruption, input-cost increases, import duties and tariffs, weather, foreign-exchange movements and litigation. The company imports most merchandise from foreign countries. It had $93.8m of cash held abroad and used foreign-exchange forwards with $23.9m notional value and a $2.6m fair-value asset.
The proposed settlement of the Rael consumer-protection class action remains subject to court approval and is stayed pending an appellate ruling in a separate case. A $5.0m reserve was recorded in 2017; rejection of the settlement could return the matter to litigation. The estimated Tax Act transition tax was $37.6m, payable over eight years; $19.1m remained recorded as long-term income taxes payable. Adoption of the new revenue standard had no material overall impact, although it changed the timing and classification of certain revenue and expenses. Management expected the upcoming lease standard to result in material right-of-use assets and lease liabilities. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period: the filing covers Q2 and the first half of fiscal 2018, despite the request’s 2017 Q2 label.
- Assess whether sales growth is sustainable after accounting for the estimated $22.0m calendar-shift benefit and revenue-standard adoption, and monitor comparable sales trends.
- Track year-to-date gross-margin compression, cash conversion, seasonal inventory needs and revolver usage.
- Review the scale and returns of planned transformation investment, store closures and fiscal 2018 capital expenditures.
- Monitor share repurchases, dividends, facility covenants and liquidity, as well as the class-action settlement and remaining transition-tax payments.