Business context and reporting period
The Children’s Place Retail Stores, Inc. operates children’s apparel stores and e-commerce businesses in the U.S. and Canada. This Form 10-Q covers the 13 and 39 weeks ended October 29, 2011, compared with periods ended October 30, 2010. Although the request metadata says 2010 Q3, the filing itself reports fiscal 2011 Q3.
At period-end, the company operated 1,076 stores: 953 in the U.S. and 123 in Canada. Results are seasonal and may not indicate full-year performance.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Net sales | $484.1 million | $453.4 million | $1,258.4 million | $1,220.8 million |
| Gross profit / margin | $200.1 million / 41.3% | $182.3 million / 40.2% | $499.3 million / 39.7% | $475.6 million / 39.0% |
| Operating income / margin | $54.4 million / 11.2% | $50.0 million / 11.0% | $87.4 million / 6.9% | $84.6 million / 6.9% |
| Net income | $33.7 million | $31.3 million | $53.0 million | $51.0 million |
| Diluted EPS | $1.33 | $1.15 | $2.05 | $1.84 |
For the 39 weeks, operating cash flow was $94.7 million, down from $135.7 million; capital expenditures were $63.9 million, versus $63.3 million. Cash and cash equivalents were $152.6 million at October 29, 2011. The company had no credit-facility borrowings, $28.0 million of letters of credit outstanding and $122.0 million of facility availability. The $150 million asset-based revolver expires in August 2016. No material funded debt was reported.
Inventory was $256.4 million, versus $232.9 million a year earlier. Working capital was $340.2 million, up $19.8 million year over year. The company held about $113.4 million of cash in foreign subsidiaries and said repatriating some of it could trigger U.S. taxes. Cash dividends are restricted under the credit facility.
Material changes versus prior comparable periods
- Q3 sales increased 6.8%; year-to-date sales increased 3.1%. Year-to-date comparable retail sales declined 2.4%, while Q3 comparable retail sales rose 0.9%. Q3 comparable e-commerce sales grew 27.4%; year-to-date growth was 22.7%.
- Q3 gross margin improved 110 basis points, mainly from higher initial markups, lower markdowns and better distribution and occupancy-cost leverage. Year-to-date margin rose 70 basis points.
- Year-to-date SG&A increased to $355.3 million from $334.9 million and to 28.2% of sales from 27.4%, reflecting growth investments and store-opening costs. Q3 SG&A rose to 26.2% of sales from 25.2%.
- Year-to-date diluted EPS increased to $2.05 from $1.84, supported by higher earnings and about 1.9 million fewer diluted weighted-average shares, primarily from repurchases.
- Year-to-date operating cash flow fell by $41.0 million, primarily due to increased inventory cash outflows and lower cash inflows from accounts payable and other current liabilities.
Outlook, risks, contingencies and unusual items
Management expected fiscal 2011 capital expenditures of approximately $85–$90 million, including about $14 million for store projects and $9 million for IT and other initiatives in the following quarter. It said cash on hand, operating cash flow and credit availability should cover capital and other cash requirements for the next 12 months.
Risks highlighted include changing fashion preferences, competition and consumer spending, higher raw-material or energy costs, foreign-exchange movements and exposure to sourcing from China. The company does not hedge its foreign net investments or use derivatives for foreign-currency risk; approximately 12% of sales and total costs and expenses are transacted in foreign currencies. A 10% exchange-rate change could affect year-to-date sales by about $16.7 million and costs and expenses by about $15.9 million.
A stockholder derivative action was subject to a proposed settlement; the final approval hearing was scheduled for December 14, 2011. The company expected insurance to cover the settlement and did not expect a material financial effect. It reported no material changes to previously disclosed risk factors. Management identified estimation sensitivities in inventory markdowns, shrinkage, insurance reserves and performance-based stock compensation.
The company repurchased approximately 1.6 million shares for $74.5 million during the 39 weeks and a further 0.1 million shares for $4.7 million through November 29, 2011. It amended its credit facility in August 2011, extending the term, reducing facility capacity and certain fees, and eliminating the maximum capital-expenditure covenant.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q3 2011, not Q3 2010.
- Assess whether weaker year-to-date comparable sales, including Canada’s 12.0% decline, and lower transaction counts persist.
- Evaluate inventory levels and the cash-flow effect of seasonal inventory purchases and payment timing.
- Verify planned capital spending, repurchase activity and remaining liquidity under the borrowing-base facility.
- Monitor foreign-currency exposure, cash held overseas, tax-audit outcomes and the derivative-action settlement approval.