The Children’s Place, Inc. — Form 10-Q Summary
Period and filing: The filing covers the 13 weeks ended May 2, 2020 (First Quarter 2020), compared with the 13 weeks ended May 4, 2019. Although the request metadata says 2019 Q1, the filing itself is for 2020 Q1.
Business context
The Children’s Place is a children’s apparel retailer operating company stores, e-commerce, wholesale and franchise businesses. At quarter-end it had 920 stores and 266 international franchise points of distribution. COVID-19-related store closures and consumer disruption materially affected results; all U.S. and Canadian stores were temporarily closed beginning March 18, 2020. E-commerce represented 53.0% of net sales, versus 29.2% a year earlier.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $255.2 million | $412.4 million |
| Gross profit (loss) | $(19.7) million | $152.0 million |
| Gross margin | (7.7)% | 36.9% |
| Operating income (loss) | $(173.1) million | $5.0 million |
| Net income (loss) | $(114.8) million | $4.5 million |
| Diluted EPS | $(7.86) | $0.28 |
| Cash from (used in) operations | $(40.5) million | $21.2 million |
| Cash and cash equivalents at period-end | $71.8 million | $66.1 million |
Sales fell 38.1% year over year, primarily due to temporary store closures. Gross results included an approximately $63.2 million inventory provision, $23.1 million of occupancy expense for temporarily closed stores, and $1.7 million of incremental costs, primarily protective equipment and associate incentive pay. Excluding these cited charges, gross margin still de-leveraged 990 basis points. SG&A declined to $98.5 million from $128.0 million, but increased as a share of sales to 38.6% from 31.0%.
Liquidity, debt and cash flow
At May 2, 2020, current assets were $468.2 million and current liabilities were $759.0 million, a working capital deficit of approximately $290.8 million. The company had $234.6 million outstanding under its asset-based revolving credit facility, $88.4 million of borrowing availability and $6.2 million of letters of credit outstanding. The facility’s stated maximum was increased from $325 million to $360 million for one year; it expires in May 2024. Cash used in investing activities was $5.6 million, including $5.7 million of capital expenditures. Financing activities provided $49.2 million, mainly reflecting net revolver borrowing.
Lease liabilities were $432.3 million in present value, including $150.5 million current and $281.8 million long-term. The company reported $37.1 million of asset impairment charges, primarily relating to 412 stores.
Material changes, outlook and risks
- COVID-19 caused significant disruption to retail demand and supply chains. The company reduced or deferred non-essential expenses and capital spending, negotiated vendor payment terms, suspended rent payments, furloughed employees, reduced leadership and corporate pay, and suspended dividends and share repurchases.
- Management targeted approximately 300 additional store closures by the end of fiscal 2021, including approximately 200 in fiscal 2020. Stores reopened in 10 states on May 19, 2020, with further phased reopenings subject to local conditions.
- The company stated that cash on hand, operating cash flows and revolver availability were expected to fund working capital and capital requirements for the foreseeable future. It provided no specific sales, earnings or margin guidance and emphasized that the pandemic’s duration and financial effects were uncertain.
- Key risks include further store closures or weak store traffic, reduced discretionary spending, supply-chain disruption, additional asset or inventory impairments, and the company’s ability to maintain liquidity. The filing also notes foreign-exchange exposure and dependence on overseas sourcing.
- A proposed class-action settlement in Rael v. The Children’s Place received preliminary court approval; final approval was scheduled for July 31, 2020. A $5.0 million reserve had been recorded in 2017. Management said other ordinary-course proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether store reopening and the planned store-closure program proceeded as described, and how these affected sales and cash generation.
- Subsequent revolver availability, borrowing-base capacity, covenant compliance and the status of suspended rent payments.
- Whether inventory values, lease-related assets and other assets required further impairments as demand and store plans evolved.
- The final outcome and any financial effect of the proposed class-action settlement.
- Whether the company’s liquidity expectation remained supportable given the working capital deficit and negative operating cash flow.