The Children’s Place, Inc. — FY2013 Form 10-K Summary
Business context and reporting period: The filing covers the 52 weeks ended February 1, 2014. The company operated 1,107 North American stores and an e-commerce business, selling children’s apparel, footwear and accessories. Fiscal 2012 was a 53-week year, so annual comparisons are affected by the extra week; the company also provides a comparable 52-week sales comparison.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,765.8 million | $1,809.5 million |
| Gross profit / gross margin | $655.5 million / 37.1% | $691.4 million / 38.2% |
| Operating income / margin | $76.3 million / 4.3% | $89.7 million / 5.0% |
| Net income | $53.0 million | $63.2 million |
| Diluted EPS | $2.32 | $2.61 |
| Cash from operations | $173.5 million | $205.0 million |
Fourth quarter: Net sales were $467.5 million versus $509.2 million in the prior-year quarter; net income was $15.7 million versus $19.1 million, and diluted EPS was $0.69 versus $0.80. The quarter included $7.9 million of asset impairment charges and $2.0 million of additional store-disposition costs.
Liquidity and debt: At February 1, 2014, cash and cash equivalents were $174.0 million, short-term investments were $62.5 million, and working capital was $358.0 million. The company had no revolver borrowings and $138.9 million of availability under its $150 million asset-based credit facility, after outstanding letters of credit. Long-term debt was zero. About $124.4 million of cash was held in foreign subsidiaries; repatriation could trigger U.S. taxes.
Changes and material items
- Sales declined 2.4% year over year. On a comparable 52-week basis, sales declined $17.6 million; comparable retail sales fell 2.8%. The reported decline reflected weaker comparable sales and unfavorable Canadian currency translation, partly offset by new-store sales.
- Gross margin contracted 110 basis points, primarily from fixed-cost deleverage on lower comparable sales and higher supply-chain costs. SG&A fell to 27.5% of sales from 28.2%, reflecting expense controls, partly offset by higher performance-based compensation.
- Asset impairment charges rose to $29.6 million from $2.3 million. They included $20.5 million related to 127 underperforming stores and $9.1 million for obsolete systems and previously capitalized IT development costs.
- Operating cash flow decreased $31.5 million, mainly due to higher inventory and lower net income. Inventory rose to $322.4 million from $267.0 million.
- The company repurchased approximately 1.3 million shares for $65.7 million during FY2013. After year-end, it authorized an additional $100 million repurchase program and a quarterly dividend of $0.1325 per share.
Outlook, management commentary and risks
Management cited weak U.S. and Canadian retail conditions, promotional pressure, lower traffic, and severe cold and storms late in the year as headwinds. For FY2014, it planned approximately 35 new stores, 51 remodels and about 30 closures, as part of a broader plan to close approximately 125 underperforming stores through 2016. It forecast capital expenditures of $80–$85 million and expected e-commerce sales to continue growing.
Growth priorities included improving product, completing ERP and vendor-portal implementations, expanding e-commerce, wholesale and international franchising, and optimizing the store fleet. Franchisees had 35 Middle East stores at year-end; management expected roughly twice that number by FY2014 year-end. The March 2014 credit-facility amendment increased the revolver to $200 million, extended it to August 2018, and permitted dividends.
Principal risks include fashion and demand forecasting, inventory and markdown exposure, intense retail competition and economic weakness, reliance on Asian contract manufacturers and transportation providers, foreign-exchange movements, IT/ERP implementation and cybersecurity, product safety and sourcing compliance, and dependence on key distribution centers. The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Investor verification points
- Check the 52-week versus 53-week comparison and the underlying comparable-sales trends, especially the sharper decline in Canada.
- Assess whether the elevated store and systems impairment charges are largely one-time, and whether store closures improve ongoing profitability.
- Monitor inventory growth, gross-margin recovery, operating cash generation and the cash held overseas.
- Verify execution and costs of ERP upgrades, store-fleet optimization, planned capital spending and international/wholesale expansion.
- Review the amended credit-facility terms and the sustainability of share repurchases and the new dividend amid lower earnings.