The Children’s Place Retail Stores, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies “2010 Q2,” this filing reports the thirteen and twenty-six weeks ended July 30, 2011, compared with periods ended July 31, 2010. Amounts below are in U.S. dollars.
Business context and reporting period
The company operates children’s apparel stores and e-commerce businesses in the U.S. and Canada. At July 30, 2011, it operated 1,060 stores: 944 in the U.S. and 116 in Canada. The business is seasonal, and interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Year-to-date 2011 | Year-to-date 2010 |
|---|---|---|---|---|
| Net sales | $343.5 million | $345.3 million | $774.3 million | $767.4 million |
| Gross profit / margin | $115.6 million / 33.6% | $113.6 million / 32.9% | $299.2 million / 38.6% | $293.3 million / 38.2% |
| Operating income (loss) | $(15.8) million | $(13.1) million | $33.0 million | $34.6 million |
| Net income (loss) | $(9.8) million | $(8.2) million | $19.3 million | $19.7 million |
| Diluted EPS | $(0.38) | $(0.30) | $0.74 | $0.70 |
| Operating cash flow | — | — | $47.5 million | $66.9 million |
Q2 SG&A rose to $111.9 million, or 32.6% of sales, from $107.3 million, or 31.1%. Year-to-date SG&A was $228.6 million, or 29.5% of sales, versus $220.7 million, or 28.8%. Net interest expense was $0.3 million for Q2 and $0.6 million year-to-date.
At July 30, cash and cash equivalents were $151.5 million; current assets were $482.9 million and current liabilities were $152.7 million. Working capital was $330.2 million, down from $363.2 million a year earlier. The company had no revolving-credit borrowings; letters of credit used $35.3 million of the facility, and reported availability under the then-existing facility was $133.6 million. The August amendment later reduced the facility maximum to $150 million and extended its term to August 2016; management reported approximately $114.7 million of availability under the amended facility. No funded debt balance was reported.
Year-to-date investing cash use was $44.6 million, including $46.7 million of property, equipment, lease-acquisition and software spending. Financing cash use was $37.8 million, including $47.4 million for share repurchases, partly offset by option proceeds and related tax benefits. Cash declined $32.2 million to $151.5 million.
Material changes versus the comparable period
- Q2 sales fell 0.5%, while comparable retail sales declined 5.6%; lower transaction counts were partly offset by higher average transaction size and new-store sales. Year-to-date sales rose 0.9%, despite comparable retail sales falling 4.3%.
- Q2 gross margin improved 70 basis points, primarily from lower markdowns and higher initial markup, partly offset by distribution and occupancy deleverage. Year-to-date gross margin improved 40 basis points.
- Q2 net loss widened to $9.8 million from $8.2 million. Year-to-date net income edged down to $19.3 million from $19.7 million; diluted EPS rose because weighted-average shares declined following repurchases.
- Year-to-date operating cash flow fell $19.4 million, primarily reflecting inventory timing and higher inventory costs, partly offset by timing of payments on accounts payable and other current liabilities.
- E-commerce sales increased to 9.1% of Q2 sales from 8.3%, and to 9.4% year-to-date from 8.2%. The company repurchased approximately 1.0 million shares for $46.6 million year-to-date and a further 0.3 million shares for $11.2 million through August 31.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2011 capital expenditures of approximately $85–$90 million and stated that cash, operating cash flow and facility availability should cover capital and other cash needs over the next 12 months.
- Management cited risks from changing fashion preferences, competition and consumer spending, economic weakness, higher food and gasoline costs, and raw-material or energy cost increases. The company also disclosed foreign-exchange exposure and dependence on merchandise imported from China; it did not use derivatives to hedge currency exposure.
- Comparable sales weakness was broad: Q2 U.S. comparable-store sales declined 6.3% and Canada declined 13.4%; year-to-date declines were 5.5% and 11.5%, respectively. Newborn was the weakest department, while Accessories was strongest.
- Q2 impairment charges were $1.0 million, primarily for four underperforming stores; year-to-date charges were $1.4 million for six stores. No new material legal proceedings or material changes to previously disclosed risk factors were reported. Management said ordinary-course legal matters were not expected to materially affect financial condition; tax audit outcomes remain uncertain.
- The August 16, 2011 credit-facility amendment extended maturity, changed borrowing limits and pricing, reduced certain fees, and eliminated the maximum capital-expenditure covenant. It was a subsequent event, not a quarter-end facility term.
Key facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for Q2 2011, not Q2 2010.
- Track comparable-sales trends, transaction counts and whether e-commerce growth can offset store weakness.
- Assess inventory levels, markdown reserves and the effect of inventory costs on operating cash flow and margins.
- Verify cash use and remaining authorization under the share-repurchase program against planned capital spending and liquidity.
- Review borrowing availability and covenant terms under the amended credit facility, and monitor currency and China sourcing exposure.