Business context and reporting period
The Children’s Place Retail Stores, Inc. designs and sells children’s apparel through its branded stores and e-commerce business. This 10-Q reports the thirteen weeks ended April 28, 2012, compared with the thirteen weeks ended April 30, 2011. The filing is for 2012 Q1, notwithstanding the request metadata’s “2011 Q1” label. The company operated 1,062 stores at quarter-end: 937 in the U.S. and 125 in Canada. The company notes that its seasonal first-quarter results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $438.5 million | $430.8 million |
| Gross profit / gross margin | $176.8 million / 40.3% | $183.6 million / 42.6% |
| Operating income / operating margin | $35.3 million / 8.1% | $48.8 million / 11.3% |
| Net income | $23.6 million | $29.1 million |
| Diluted EPS | $0.96 | $1.10 |
| Cash provided by operations | $67.9 million | $57.2 million |
| Capital expenditures | $22.0 million | $24.5 million |
Revenue increased 1.8%, while net income declined about 19%. Gross margin contracted 230 basis points. SG&A rose to $122.2 million, or 27.9% of sales, from $116.7 million, or 27.1%. The effective tax rate fell to 33.1% from 40.0%, primarily because the company asserted that Asian subsidiary earnings would be indefinitely reinvested and stopped providing U.S. deferred taxes on those earnings.
Liquidity, cash flow and capital
Cash and cash equivalents were $204.8 million at April 28, 2012, including $124.1 million held in foreign subsidiaries. Working capital was $346.3 million, down from $373.2 million at April 30, 2011. The company had no revolving borrowings; letters of credit used $31.9 million of its $150 million asset-based facility, leaving $118.1 million available. The facility expires in August 2016. No funded debt was outstanding at quarter-end.
Operating cash flow rose $10.7 million year over year, primarily due to timing of payments on accounts payable and other current liabilities. Investing activities used $22.1 million; financing activities used $19.2 million, including $19.2 million of share repurchases. The company repurchased a further $7.4 million of shares through May 29, 2012. Management expected fiscal 2012 capital expenditures of approximately $80–$85 million and said cash, operating cash flow and facility availability should cover requirements over the next 12 months.
Material changes and management commentary
- Comparable Retail Sales declined 0.7%, versus a 3.2% decline a year earlier. The decline reflected 3% fewer transactions, partly offset by a 2% increase in average transaction size. Comparable e-commerce sales increased 21%; e-commerce reached 11.2% of sales versus 9.7%.
- Higher Spring and Summer product costs and promotional markdowns pressured margins. U.S. gross margin declined to 40.2% from 41.9%; Canada declined to 40.8% from 48.2%, reflecting higher product costs, markdowns and occupancy/distribution deleverage.
- Management approved closing the Ontario, California distribution center and transferring operations to Fort Payne, Alabama. The facility ceased use in May 2012; estimated total exit costs are approximately $4.0 million, with $0.8 million recognized in Q1.
- Other unusual Q1 charges included approximately $2.0 million of workforce and corporate-position severance, $1.3 million of store impairment, $0.9 million of accelerated depreciation for seven Canadian store remodels, and $0.7 million of fixture and supply write-offs.
- The company opened 18 stores and closed five in Q1, compared with 42 openings and five closures in Q1 2011. It completed the 2011 share repurchase program and had a new $50 million authorization.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management’s capital spending outlook was $80–$85 million for fiscal 2012. Key disclosed risks include fashion and consumer-preference shifts, competition and consumer-spending weakness, weather uncertainty, and rising raw-material, energy or product costs. Foreign exchange is also a risk: management estimated that a 10% currency-rate change could move quarterly sales by approximately $5.3 million and total costs and expenses by approximately $5.9 million. The company does not hedge its foreign net investments or use derivatives for currency risk.
The credit facility restricts cash dividends and limits share repurchases; it is secured by substantially all company assets. Management reported no material legal proceedings and believed ordinary-course matters would not materially affect financial position, results or cash flows. It reported disclosure controls effective at the reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filed quarter ended April 28, 2012, not a 2011 Q1 period.
- Track whether product costs and promotional markdowns continue to pressure gross margins, particularly in Canada.
- Monitor delivery of the distribution-center consolidation, including the approximately $4.0 million estimated exit cost and anticipated savings, which are not quantified here.
- Assess the planned $80–$85 million fiscal 2012 capital expenditure program against cash generation and the company’s continued share repurchases.
- Consider the location and tax implications of foreign cash: the company said repatriation could trigger U.S. federal and certain state taxes and that it did not currently intend to repatriate it.