The Children’s Place, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the thirteen weeks ended May 4, 2019 (First Quarter 2019), not 2018 Q1. Comparisons below are with the thirteen weeks ended May 5, 2018. Amounts are in U.S. dollars.
Business context
The Children’s Place is a North American children’s apparel retailer, with U.S. and international segments and retail, e-commerce, wholesale, and franchise operations. At quarter-end it operated 971 stores and had 212 international franchise-operated points of distribution. The quarter’s results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $412.4 million | $436.3 million |
| Gross profit / margin | $152.0 million / 36.9% | $160.2 million / 36.7% |
| Operating income / margin | $5.0 million / 1.2% | $23.1 million / 5.3% |
| Net income | $4.5 million | $31.5 million |
| Diluted EPS | $0.28 | $1.78 |
| Operating cash flow | $21.2 million provided | $12.7 million used |
| Capital expenditures | $11.0 million | $11.1 million |
Comparable retail sales declined 4.6%; sales fell 5.5% overall. SG&A increased to $128.0 million, or 31.0% of sales, from $118.5 million, or 27.2%. Interest expense rose to $1.8 million from $0.7 million. The income-tax benefit was $1.2 million versus $8.8 million; the effective tax rate was (35.0)% versus (38.6)%. The smaller benefit primarily reflected lower excess tax benefits from vested equity awards.
Balance sheet, liquidity, and capital allocation
At May 4, 2019, cash was $66.1 million, inventory $341.2 million, and revolving borrowings $153.1 million. The $250 million asset-based facility had $90.6 million of borrowing availability after outstanding letters of credit. Working capital was a deficit of $126.2 million; the filing attributes the deterioration in part to the Gymboree acquisition and adoption of the new lease standard. The lease-standard adoption added $458.7 million of right-of-use assets and $501.1 million of lease liabilities, including $133.8 million current and $367.3 million long-term. These balance-sheet additions make comparison with prior periods less direct.
Cash declined by $3.0 million to $66.1 million. Investing cash use was $86.5 million, including the $76.0 million Gymboree asset acquisition. Financing provided $62.0 million, including net revolving borrowings. The company repurchased about 0.3 million shares for $33.3 million and paid $8.9 million in dividends. The board declared another $0.56-per-share dividend for June 28, 2019.
Changes, outlook, and risks
- Management attributed weak sales to competitor inventory liquidations and delayed income-tax refunds. U.S. sales declined 5.3%; international sales declined 6.9%.
- Reported gross margin rose 20 basis points, but excluding restructuring and fleet-optimization items it fell 30 basis points to 36.7%. Management cited fixed-cost deleverage and greater e-commerce mix as pressures, partly offset by stronger merchandise margins, inventory management, lower product costs, and higher realized pricing.
- On April 4, 2019, the company acquired Gymboree and Crazy 8 intellectual property and related assets for $76 million, funded with cash and revolver borrowings. Management planned a Gymboree brand relaunch and approximately 10 new stores in fiscal 2019, while remaining a net store closer. It planned to close approximately 300 stores through fiscal 2020, including 213 already closed since the initiative began.
- Management expected fiscal 2019 capital expenditures of approximately $75 million, mainly for technology transformation, Gymboree integration, and new stores. It said cash, operating cash flow, and facility availability should meet foreseeable requirements; no earnings or sales forecast is provided in this filing.
- On May 9, 2019, after quarter-end, the revolving facility was amended to $325 million and extended to May 2024. On May 10, tariffs on certain Chinese imports rose from 10% to 25%; management expected minimal adverse impact on affected accessories, but warned that proposed 25% tariffs on remaining Chinese imports, including apparel and footwear, would adversely affect results if imposed.
- Key risks include fashion and consumer-demand uncertainty, competition, supply-chain disruption, import duties and tariffs, foreign-exchange exposure, weather, store impairment, and litigation. A consumer-protection class-action settlement remained subject to court approval; the company had previously recorded a $5.0 million reserve. Management said other ordinary-course legal matters were not expected to materially affect the company.
- The filing reports no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material quarter-specific change in internal control over financial reporting.
Most important facts to verify
- Whether sales and comparable-sales weakness persisted beyond Q1, and whether management’s cited temporary pressures eased.
- The earnings and cash-flow effects of the Gymboree acquisition, brand relaunch, store closures, and planned capital spending.
- Actual borrowing availability, seasonal inventory funding needs, and the impact of lease obligations on liquidity.
- Whether proposed broader tariffs were imposed and how the company managed sourcing costs and pricing.
- Progress on the store-closure plan, dividend sustainability, and remaining share-repurchase authorization.
- The status and potential cost of the proposed consumer class-action settlement.