The Children’s Place Retail Stores, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2011 Q3, this filing reports the quarter ended October 27, 2012, and compares it with the quarter ended October 29, 2011. Year-to-date figures cover 39 weeks. The company operates children’s apparel stores and e-commerce businesses in the U.S. and Canada, with international franchise revenue beginning in fiscal 2012.
Financial performance
| Metric | 13 weeks ended Oct. 27, 2012 | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 27, 2012 | 39 weeks ended Oct. 29, 2011 |
|---|---|---|---|---|
| Net sales | $500.9 million | $484.1 million | $1,300.3 million | $1,258.4 million |
| Gross profit / margin | $206.2 million / 41.2% | $200.1 million / 41.3% | $497.2 million / 38.2% | $499.3 million / 39.7% |
| Operating income / margin | $50.2 million / 10.0% | $54.4 million / 11.2% | $58.7 million / 4.5% | $87.4 million / 6.9% |
| Net income | $35.0 million | $33.7 million | $40.6 million | $53.0 million |
| Diluted EPS | $1.44 | $1.33 | $1.66 | $2.05 |
| Operating cash flow | Not separately presented by quarter | $143.5 million | $94.7 million |
Quarterly sales grew 3.5% and net income rose, while operating income declined. Year-to-date sales grew 3.3%, but gross profit, operating income and net income fell. The year-to-date effective tax rate declined to 30.6% from 38.9%, primarily after the company asserted that earnings in Asian subsidiaries would be permanently reinvested, reducing U.S. deferred tax expense.
At October 27, 2012, cash and cash equivalents were $203.1 million, inventory was $266.4 million, working capital was approximately $337.8 million, and total liabilities were $324.7 million. The company had no revolving-credit borrowings; $35.2 million of letters of credit were outstanding and $114.8 million remained available under its $150 million facility, which expires in August 2016. Cash held in foreign subsidiaries was $152.0 million, and repatriation could trigger U.S. federal and certain state taxes.
Year-to-date investing cash outflow was $71.4 million, mainly capital expenditures; financing cash outflow was $45.5 million, including $47.7 million of share repurchases. Cash increased $26.4 million from the beginning of the fiscal year.
Material changes and operating drivers
- Comparable retail sales increased 1.1% in both the quarter and year to date. Comparable e-commerce sales grew 12.8% in the quarter and 17.5% year to date; e-commerce represented 12.6% of quarterly sales, including postage and handling, versus 11.6% a year earlier.
- Year-to-date gross margin contracted 150 basis points. Management cited higher markdowns and distribution, production, design and occupancy cost deleverage. Canada’s year-to-date gross margin fell to 42.4% from 48.7%; U.S. margin declined to 37.6% from 38.3%.
- Year-to-date SG&A increased to $374.3 million from $355.3 million and rose to 28.8% of sales from 28.2%. Reported comparability items included approximately $2.0 million severance, $1.1 million related to a legal settlement, and a $0.9 million write-off of store fixtures and supplies.
- The company operated 1,102 stores at quarter end, versus 1,076 a year earlier. It opened 60 stores and closed seven year to date.
- Share repurchases reduced weighted-average shares. The company spent $47.7 million year to date and repurchased a further $18.6 million through November 27. A new $100 million repurchase authorization was announced November 26.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management expected fiscal 2012 capital expenditures of approximately $85 million to $90 million and stated that cash, operating cash flow and facility availability should meet capital and other cash needs over the next 12 months.
- Distribution-center consolidation is a significant expense: the West Coast facility exit incurred approximately $4.2 million year to date. The Northeast facility closure is expected to cost approximately $13 million in total; $5.7 million accelerated depreciation and $0.3 million severance were recorded in the quarter, with substantially all remaining costs expected in Q4 fiscal 2012.
- Hurricane Sandy affected approximately 280 stores and the Northeast e-commerce business to varying degrees. Those locations represent approximately 31% of annual net sales; two stores remained closed as of November 27. The filing does not quantify the storm’s eventual financial impact.
- The CFO departed effective November 26, 2012; interim finance officers were appointed, and a new CFO was announced to begin December 3.
- Management cited fashion-trend and consumer-preference execution, competition, weak economic conditions, promotional retailing, consumer spending, weather, foreign-exchange movements and dependence on China sourcing as risks. No material changes to previously disclosed risk factors were reported. No material new legal proceedings were reported.
- Foreign-exchange exposure is not hedged with derivatives. Management estimated that a 10% currency movement could change year-to-date net sales by approximately $17.5 million and total costs and expenses by approximately $19.0 million.
Important facts for investors to verify
- Confirm the correct reporting period: this is the 2012 third-quarter filing, not a 2011 Q3 filing.
- Assess whether the margin and operating-income pressure persists, particularly in Canada and from markdowns and operating-cost deleverage.
- Track the Northeast distribution-center closure costs against the approximately $13 million estimate and the stated Q4 timing.
- Monitor Sandy-related store and e-commerce recovery and any quantified sales or earnings effects.
- Review the use of cash for repurchases, the new authorization, foreign cash availability and credit-facility covenants.
- Evaluate capital spending against the $85 million–$90 million fiscal-year estimate and execution of the ERP and e-commerce projects.