The Children’s Place Retail Stores, Inc. — Form 10-Q Summary
Period: The filing covers the thirteen weeks ended April 30, 2011, compared with the thirteen weeks ended May 1, 2010. This is the company’s first quarter of fiscal 2011; the request metadata’s “2010 Q1” does not match the filing period. Financial amounts below are in U.S. dollars.
Business context and results
The company designs and sells children’s apparel under The Children’s Place brand through stores and e-commerce. At quarter-end it operated 1,032 stores: 922 in the U.S. and 110 in Canada. It opened 42 stores, remodeled 12 and closed five during the quarter.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $430.8 million | $422.1 million | Up $8.7 million, or 2.1% |
| Gross profit / margin | $183.6 million / 42.6% | $179.7 million / 42.6% | Gross profit increased; margin flat |
| Operating income / margin | $48.8 million / 11.3% | $47.7 million / 11.3% | Operating income increased |
| Net income | $29.1 million | $27.9 million | Up $1.2 million |
| Diluted EPS | $1.10 | $1.00 | Up $0.10 |
| Cash from operating activities | $57.2 million | $71.8 million | Down $14.6 million |
| Capital expenditures | $24.5 million | $23.9 million | Up $0.6 million |
Comparable Retail Sales declined 3.2%, compared with a 0.5% decline in Q1 2010. The company attributed the decline primarily to 6% fewer transactions, partly offset by a 3% increase in average transaction size. E-commerce sales were 9.7% of net sales, up from 8.1%.
Gross margin was unchanged: higher initial markup was offset by increased buying, distribution and occupancy costs and higher markdowns. SG&A rose to $116.7 million from $113.5 million and to 27.1% of sales from 26.9%, primarily reflecting higher store-opening costs. U.S. operating margin improved to 10.8% from 10.5%; Canada’s fell to 15.0% from 17.1%.
Financial position and liquidity
At April 30, 2011, cash and cash equivalents were $212.3 million, inventory was $192.7 million and working capital was $373.2 million. Total assets were $865.0 million and total liabilities were $229.4 million. The company had no revolver borrowings; its $200 million asset-based facility had a $150.6 million borrowing base, $30.5 million utilized for letters of credit and $120.1 million available. The facility expires July 31, 2013 and is secured by substantially all company assets.
Operating cash flow declined year over year, principally due to the timing of payments on payables and other current liabilities and higher inventory purchases. Investing activities used $22.3 million; financing activities used $10.0 million, including $19.3 million for stock purchases, partly offset by option-exercise proceeds and related tax benefits. Cash increased $28.7 million during the quarter.
Outlook, risks and unusual items
- The company maintained its fiscal 2011 capital expenditure expectation of approximately $85–$90 million. It expected about $45 million of additional store-project spending and $20 million for IT and other initiatives over the remaining three quarters.
- Management said cash on hand, operating cash flow and available credit were expected to meet capital and other cash needs over the next 12 months. It noted seasonal cash use in Q2 as revenue is lowest and inventory is built for back-to-school.
- No earnings or sales guidance was provided in the filing. Management cautioned that results are seasonal and may be affected by fashion trends, competition, consumer spending, economic conditions, fuel and raw-material costs, and foreign exchange rates.
- Foreign currency translation increased Q1 sales by $2.6 million, gross profit by $1.2 million and pretax income by $0.5 million. The company did not use derivatives to hedge foreign currency risk; approximately 12% of sales and costs were transacted in foreign currencies.
- The company repurchased approximately 0.4 million shares for $18.4 million during the quarter. A new $100 million repurchase authorization was approved in March; an additional 0.2 million shares costing $8.2 million were repurchased through June 1.
- A previously reported shareholder derivative suit reached a settlement memorandum; the company expected insurance to cover the settlement and did not expect a material adverse financial effect. A Quebec sales-tax matter was settled during the quarter at a net cost of approximately $0.3 million, releasing restricted cash.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material change to the prior annual report’s risk factors was reported.
Important facts for investors to verify
- Confirm the reporting period: the filing is Q1 fiscal 2011, not Q1 2010.
- Monitor comparable-sales trends, transaction counts and the contrast between U.S. and Canadian segment performance.
- Assess whether cash generation can sustain planned capital spending and share repurchases through the seasonally weaker second quarter.
- Review the remaining repurchase authorization, facility availability and covenants, and the company’s substantial foreign-currency exposure.
- Check subsequent court approval and final terms of the derivative-litigation settlement and whether insurance covers the full settlement amount.