TMCnet News

CHILDRENS PLACE RETAIL STORES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[December 05, 2013]

CHILDRENS PLACE RETAIL STORES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "plan," "project," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. These forward-looking statements of The Children's Place Retail Stores, Inc. (the "Company") are based upon the Company's current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company's filings with the Securities and Exchange Commission, including in the "Risk Factors" section of its Annual Report on Form 10-K for the fiscal year ended February 2, 2013. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company's business and its dependence on consumer spending patterns, which may be affected by the continued weakness in the economy or by other factors such as increases in the cost of gasoline and food, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, and the uncertainty of weather patterns. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



The following discussion should be read in conjunction with the Company's unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 2, 2013.

Terms that are commonly used in our management's discussion and analysis of financial condition and results of operations are defined as follows: • Third Quarter 2013 - The thirteen weeks ended November 2, 2013.


• Third Quarter 2012 - The thirteen weeks ended October 27, 2012.

• Year-To-Date 2013 - The thirty-nine weeks ended November 2, 2013.

• Year-To-Date 2012 - The thirty-nine weeks ended October 27, 2012.

• Comparable Retail Sales - Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce stores, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from comparable retail sales in the period in which management commits to closure. Stores that temporarily close for non- substantial remodeling will be excluded from comparable retail sales for only the period that they were closed. A store is considered substantially remodeled if it has been relocated or materially changed in size.

• Gross Margin - Gross profit expressed as a percentage of net sales.

• SG&A - Selling, general and administrative expenses.

• FASB - Financial Accounting Standards Board.

• SEC - U.S. Securities and Exchange Commission.

• U.S. GAAP - Generally Accepted Accounting Principles in the United States.

• FASB ASC - FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants.

Our Business We are the largest pure-play children's specialty apparel retailer in North America. We design, contract to manufacture and sell fashionable, high-quality, value-priced merchandise, virtually all of which is under our proprietary "The Children's Place", "Place" and "Baby Place" brand names. Our objective is to deliver high-quality merchandise at value prices. As of November 2, 2013, we operated 1,123 stores throughout North America and our e-commerce business at www.childrensplace.com.

17-------------------------------------------------------------------------------- Table of Contents Segment Reporting In accordance with the "Segment Reporting" topic of the FASB ASC, we report segment data based on geography: The Children's Place U.S. and The Children's Place International. Each segment includes an e-commerce business located at www.childrensplace.com. Included in The Children's Place U.S. segment are our U.S. and Puerto Rico based stores. Included in The Children's Place International segment are our Canadian based stores, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services are managed by The Children's Place U.S.

segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children's Place International segment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales from external customers are derived from merchandise sales and we have no major customers that account for more than 10% of our net sales. As of November 2, 2013, The Children's Place U.S. operated 990 stores and The Children's Place International operated 133 stores. As of October 27, 2012, The Children's Place U.S. operated 973 stores and The Children's Place International operated 129 stores.

Operating Highlights Net sales Year-To-Date 2013 decreased by $2.0 million, or 0.2%, to $1,298.3 million from $1,300.3 million during Year-To-Date 2012. Our Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, decreased 2.3% during Year-To-Date 2013 compared to a 0.3% increase during Year-To-Date 2012.

As a percentage of net sales, SG&A decreased 50 basis points to 28.3% during Year-To-Date 2013 from 28.8% during Year-To-Date 2012. Managing company-wide expenses has been a key focus for the entire organization, and we were able to manage store and administrative payroll effectively during Year-To-Date 2013, particularly during the slow traffic weeks in the stores.

We reported net income of $37.4 million, or $1.63 per diluted share during Year-To-Date 2013, compared to net income of $44.1 million, or $1.80 per diluted share, during Year-To-Date 2012.

During Year-To-Date 2013, we opened 45 The Children's Place stores and closed 17. During Year-To-Date 2012, we opened 60 The Children's Place stores and closed seven.

We continued our international store expansion program with our franchise partners opening 16 additional stores in the Middle East during Year-To-Date 2013, bringing our total store count to 32. Additionally, during the second quarter of 2013, we signed a franchise agreement with the Fox Group to open stores in Israel beginning in 2014.

During the first quarter of fiscal 2013, our business was adversely impacted by unfavorable weather conditions. Our performance strengthened during the second quarter of fiscal 2013 as the weather became more typical. After a strong back-to-school period, the onset of warmer weather and the uncertainty surrounding the government shut-down made for a challenging mid-quarter.

However, with cooler temperatures and a temporary end to the controversy in Washington, sales accelerated significantly throughout October.

During the second quarter of fiscal 2013, we made progress on two important strategic initiatives underway to enhance profitability and improve overall operating results. We completed a comprehensive review of our store portfolio after which store impairment charges of $12.7 million were recorded in the second quarter of fiscal 2013 because of revenue and/or gross margins not meeting targeted levels and accelerated store lease termination dates.

Additionally, we are devoting significant time and resources to the ongoing implementation of our long term systems plan, including enhancing system capabilities to incorporate industry best practices, and to meet the requirements of our international franchisees and wholesale customers. During the second quarter of fiscal 2013, we recorded a $10.3 million charge for asset impairment and SG&A expenses associated with the write-down of certain development costs and obsolete systems that were no longer relevant.

18-------------------------------------------------------------------------------- Table of Contents We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars. The table below summarizes those average translation rates that most impact our operating results: Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, October 27, November 2, October 27, 2013 2012 2013 2012 Average Translation Rates (1) Canadian Dollar 0.9641 1.0121 0.9738 1.0009 Hong Kong Dollar 0.1290 0.1290 0.1289 0.1289 China Yuan Renminbi 0.1635 0.1579 0.1624 0.1580 __________________________________________________ (1) The average translation rates are the average of the monthly translation rates used during each period to translate the respective income statements.

The rates represent the U.S. dollar equivalent of a unit of each foreign currency.

For the Third Quarter 2013, the effects of these translation rate changes on net sales, gross profit and income before income taxes were decreases of approximately $3.3 million, $1.6 million and $0.5 million, respectively. For Year-To-Date 2013, the effects of these translation rate changes on net sales, gross profit and income before income taxes were decreases of approximately $5.0 million, $2.4 million and $0.7 million, respectively. Net sales are affected only by the Canadian dollar translation rates. In addition to the translation rate changes, the gross profit of our Canadian subsidiary is also impacted by its purchases of inventory, which are priced in U.S. dollars. The effects of these purchases on our gross profit were decreases of approximately $2.8 million and $3.9 million during the Third Quarter 2013 and Year-To-Date 2013, respectively.

CRITICAL ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reported period. In many cases, there are alternative policies or estimation techniques that could be used. We continuously review the application of our accounting policies and evaluate the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ from our estimates.

The accounting policies and estimates discussed below include those that we believe are the most critical to aid in fully understanding and evaluating our financial results. Senior management has discussed the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors, which has reviewed our related disclosures herein.

Inventory Valuation- We value inventory at the lower of cost or market ("LCM"), with cost determined using an average cost method. We capitalize supply chain costs in inventory and these costs are reflected in cost of sales as the inventories are sold. We review our inventory levels in order to identify slow-moving merchandise and use markdowns to clear merchandise. We record an adjustment when future estimated selling price is less than cost. Our LCM adjustment calculation requires management to make assumptions to estimate the selling price and amount of slow-moving merchandise subject to markdowns, which is dependent upon factors such as historical trends with similar merchandise, inventory aging, forecasted consumer demand, and the promotional environment. In the LCM calculation any inability to provide the proper quantity of appropriate merchandise in a timely manner, or to correctly estimate the sell-through rate, could have a material impact on our consolidated financial statements. Our historical estimates have not differed materially from actual results and a 10% difference in our LCM reserve as of November 2, 2013 would have impacted net income by approximately $0.2 million. Our reserve balance at November 2, 2013 was approximately $2.4 million compared to $0.6 million at October 27, 2012.

Additionally, we adjust our inventory based upon an annual physical inventory, which is taken during the last quarter of the fiscal year. Based on the results of our historical physical inventories, an estimated shrink rate is used for each successive quarter until the next annual physical inventory, or sooner if facts or circumstances should indicate differently. A 1% difference in our shrinkage rate at retail could impact each quarter's net income by approximately $0.9 million.

Stock-Based Compensation- We account for stock-based compensation according to the provisions of the "Compensation-Stock Compensation" topic of the FASB ASC.

19-------------------------------------------------------------------------------- Table of Contents Time Vesting and Performance-Based Awards We generally grant time vesting and performance-based stock awards to employees at management levels and above. We also grant time vesting stock awards to our non-employee directors. Time vesting awards are granted in the form of restricted stock units that require each recipient to complete a service period ("Deferred Awards"). Deferred Awards granted to employees generally vest ratably over three years. Deferred Awards granted to non-employee directors generally vest after one year. Performance-based stock awards are granted in the form of restricted stock units which have a performance criteria that must be achieved for the awards to be earned, and these awards have an additional service period requirement ("Performance Awards"). Each Performance Award has a defined number of shares that an employee can earn (the "Target Shares") and based on the performance level achieved, the employee can earn up to 200% of their Target Shares. Performance Awards generally cliff vest after a three year service period. The fair value of all awards issued prior to May 20, 2011 was based on the average of the high and low selling price of our common stock on the grant date. Effective with the adoption of the 2011 Equity Plan, the fair value of all awards granted on or after May 20, 2011 is based on the closing price of our common stock on the grant date. Compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover. While actual forfeitures could vary significantly from those estimated, a 10% change in our estimated forfeiture rate would impact our fiscal 2013 net income by approximately $0.6 million. In addition, the number of performance shares earned is dependent upon our operating results over a specified time period. The expense for performance shares is based on the number of shares we estimate will vest as a result of our earnings-to-date plus our estimate of future earnings for the performance periods. To the extent that actual operating results for the rest of this fiscal year and future years differ from our estimates, future performance share compensation expense could be significantly different. A 25% increase or decrease in our annual projected operating income for fiscal 2013 would have caused an approximate $3.7 million increase or a $3.8 million decrease, respectively, to stock-based compensation expense for Year-To-Date 2013.

Stock Options We have not issued stock options since fiscal 2008; however, certain issued stock options remain outstanding. The fair value of all outstanding stock options was estimated using the Black-Scholes option pricing model based on a Monte Carlo simulation, which requires extensive use of accounting judgment and financial estimates, including estimates of how long employees will hold their vested stock options before exercise, the estimated volatility of our common stock over the expected term, and the number of options that will be forfeited prior to the completion of vesting requirements. All exercise prices were based on the average of the high and low of the selling price of our common stock on the grant date. There is no unamortized stock compensation at November 2, 2013.

Insurance and Self-Insurance Liabilities- Based on our assessment of risk and cost efficiency, we self-insure as well as purchase insurance policies to provide for workers' compensation, general liability, and property losses, as well as directors' and officers' liability, vehicle liability and employee medical benefits. We estimate risks and record a liability based upon historical claim experience, insurance deductibles, severity factors and other actuarial assumptions. These estimates include inherent uncertainties due to the variability of the factors involved, including type of injury or claim, required services by the providers, healing time, age of claimant, case management costs, location of the claimant, and governmental regulations. While we believe that our risk assessments are appropriate, these uncertainties or a deviation in future claims trends from recent historical patterns could result in our recording additional or reduced expenses, which may be material to our results of operations. Our historical estimates have not differed materially from actual results and a 10% difference in our insurance reserves as of November 2, 2013 would have impacted net income by approximately $0.7 million.

Impairment of Long-Lived Assets- We periodically review our long-lived assets when events indicate that their carrying value may not be recoverable. Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, we group our long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In that regard, we group our assets into two categories: corporate-related and store-related. Corporate-related assets consist of those associated with our corporate offices, distribution centers and our information technology systems. Store-related assets consist of leasehold improvements, furniture and fixtures, certain computer equipment and lease related assets associated with individual stores.

For store-related assets, we review all stores that have been open for at least two years, or sooner if circumstances should dictate, on at least an annual basis. We believe waiting two years allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed.

For each store that shows indications of operating losses, we project future cash flows over the remaining life of the lease and compare the total undiscounted cash flows to the net book value of the related long-lived assets.

If the undiscounted cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. We primarily determine fair market value to be the discounted future cash flows associated with those assets. In evaluating future cash flows, we consider external and internal factors. External factors comprise the local environment in which the store resides, including mall traffic, competition, and their effect on sales trends. Internal factors include our ability to gauge the fashion taste of our customers, control variable costs such as cost of 20-------------------------------------------------------------------------------- Table of Contents sales and payroll, and in certain cases, our ability to renegotiate lease costs. With the exception of the current fleet optimization program, historically, less than 2% of our stores required impairment charges in any one year. If external factors should change unfavorably, if actual sales should differ from our projections, or if our ability to control costs is insufficient to sustain the necessary cash flows, future impairment charges could be material. At November 2, 2013, the average net book value per store was approximately $0.2 million.

Income Taxes- We utilize the liability method of accounting for income taxes as set forth in the "Income Taxes" topic of the FASB ASC. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If, in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

Fair Value Measurement and Financial Instruments- The "Fair Value Measurements and Disclosure" topic of the FASB ASC provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.

This topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows: • Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities • Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly • Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities Our cash and cash equivalents, short-term investments, accounts receivable, accounts payable and credit facility are all short-term in nature. As such, their carrying amounts approximate fair value and fall within Level 1 of the fair value hierarchy. The underlying assets and liabilities of our Deferred Compensation Plan fall within Level 1 of the fair value hierarchy.

Recently Adopted Accounting Standards In February 2013, the FASB issued guidance finalizing the reporting of amounts reclassified out of accumulated other comprehensive income. The new standard requires the registrant to disclose either in a single note or parenthetically on the face of the financial statements the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. In the first quarter of 2013, we adopted the guidance and determined that there were no significant amounts reclassified in the current period or prior periods that would require enhanced disclosure.

RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of net sales. We primarily evaluate the results of our operations as a percentage of net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of net sales (i.e. "basis points"). For example, our SG&A expenses decreased approximately 120 basis points to 25.1% of net sales during the Third Quarter 2013 from 26.3% during the Third Quarter 2012. Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e. "leveraging"), the more efficiently we have utilized the investments we have made in our business. Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e. "de-leveraging"), we have less efficiently utilized the investments we have made in our business.

21-------------------------------------------------------------------------------- Table of Contents Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, October 27, November 2, October 27, 2013 2012 2013 2012 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (exclusive of depreciation and amortization) 59.0 58.2 62.2 61.3 Gross profit 41.0 41.8 37.8 38.7 Selling, general and administrative expenses 25.1 26.3 28.3 28.8 Asset impairment charge - 0.1 1.7 0.2 Other costs - 0.1 (0.1 ) 0.3 Depreciation and amortization 3.3 4.6 3.8 4.4 Operating income (loss) 12.5 10.7 4.2 4.9 Interest (expense), net - - - - Income (loss) before income taxes 12.5 10.7 4.2 4.9 Provision (benefit) for income taxes 4.0 3.2 1.3 1.5 Net income (loss) 8.5 % 7.4 % 2.9 % 3.4 % Number of stores, end of period 1,123 1,102 1,123 1,102 ____________________________________________ Table may not add due to rounding.

The following tables set forth by segment, for the periods indicated, net sales, gross profit and Gross Margin (dollars in thousands).

Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, October 27, November 2, October 27, 2013 2012 2013 2012 Net sales: The Children's Place U.S. $ 421,070 $ 424,854 $ 1,124,676 $ 1,119,690 The Children's Place International 71,610 76,074 173,616 180,572 Total net sales $ 492,680 $ 500,928 $ 1,298,292 $ 1,300,262 Gross profit: The Children's Place U.S. $ 168,753 $ 173,384 $ 419,243 $ 425,394 The Children's Place International 33,008 36,149 71,968 77,489 Total gross profit $ 201,761 $ 209,533 $ 491,211 $ 502,883 Gross Margin: The Children's Place U.S. 40.1 % 40.8 % 37.3 % 38.0 % The Children's Place International 46.1 % 47.5 % 41.5 % 42.9 % Total gross margin 41.0 % 41.8 % 37.8 % 38.7 % The Third Quarter 2013 Compared to the Third Quarter 2012 Net sales decreased by $8.2 million, or 1.6%, to $492.7 million during the Third Quarter 2013 from $500.9 million during the Third Quarter 2012. Our net sales decrease resulted from a $12 million unfavorable impact from a timing shift resulting from the 53rd week in fiscal 2012, $3.3 million from unfavorable changes in the Canadian exchange rate and a Comparable Retail Sales decrease of $3.2 million, partially offset by a $10.3 million increase in sales from new stores, as well as other sales that did not qualify as comparable sales.

Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, declined 0.7% in the Third Quarter 2013, due to a 0.6% decline in average dollar transaction size and a 0.1% decline in the number of transactions. Total e-commerce sales, which include postage and handling, increased to 14.8% of sales in the Third Quarter 2013 from 12.6% in the Third Quarter 2012.

The Children's Place U.S. net sales decreased $3.8 million, or 0.9%, to $421.1 million in the Third Quarter 2013 compared to $424.9 million in the Third Quarter 2012. This decrease resulted from a $12 million unfavorable impact from a timing shift resulting from the 53rd week in fiscal 2012 and a Comparable Retail Sales decrease of $1.0 million, partially offset by a $9.2 million increase in sales from new stores, as well as other sales that did not qualify as comparable sales. U.S. Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, decreased 0.4% as an approximate 0.7% decrease in the average dollar transaction size was partially offset by a 0.3% increase in the number of transactions. Total 22-------------------------------------------------------------------------------- Table of Contents U.S. e-commerce sales, which include postage and handling, increased to 15.8% of U.S. sales in the Third Quarter 2013 from 13.8% in the Third Quarter 2012.

The Children's Place International net sales decreased $4.5 million, or 5.9%, to $71.6 million in the Third Quarter 2013 compared to $76.1 million in the Third Quarter 2012. The decrease resulted from a $3.3 million decrease resulting from unfavorable changes in the Canadian exchange rates and a Canadian Comparable Retail Sales decrease of $2.2 million, partially offset by a $1.0 million increase in sales from new stores, as well as other sales that did not qualify as comparable sales. Canadian Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, declined 2.9% in Third Quarter 2013 due to an approximate 2.9% decrease in the number of transactions. Average dollar transaction size was flat. Total International e-commerce sales, which include postage and handling, increased to 8.4% of International sales in the Third Quarter 2013 from 5.5% in the Third Quarter 2012.

During the Third Quarter 2013, we opened 10 stores, all in the United States.

During the Third Quarter 2012 we opened 23 stores, consisting of 20 in the United States and three in Canada.

Gross profit decreased by $7.7 million to $201.8 million during the Third Quarter 2013 from $209.5 million during the Third Quarter 2012. Consolidated Gross Margin decreased 80 basis points to 41.0% during the Third Quarter 2013 from 41.8% during the Third Quarter 2012. The decrease in consolidated Gross Margin resulted primarily from a de-leverage of fixed costs due to negative Comparable Retail Sales and higher supply chain costs partially offset by lower cost of goods sold as a percentage of net sales.

Gross Margin at The Children's Place U.S. decreased 70 basis points from 40.8% in the Third Quarter 2012 to 40.1% in the Third Quarter 2013. The decrease in consolidated Gross Margin resulted primarily from a de-leverage of fixed costs due to negative Comparable Retail Sales and higher supply chain costs partially offset by lower cost of goods sold as a percentage of net sales.

Gross Margin at The Children's Place International decreased 140 basis points from 47.5% in the Third Quarter 2012 to 46.1% in the Third Quarter 2013. The decrease in Gross Margin resulted primarily from a de-leverage of fixed costs due to negative Canadian Comparable Retail Sales and higher supply chain costs partially offset by higher margins from international franchisees and lower cost of goods sold as a percentage of net sales.

Selling, general and administrative expenses decreased $8.4 million to $123.5 million during the Third Quarter 2013 from $131.9 million during the Third Quarter 2012. As a percentage of net sales SG&A decreased 120 basis points to 25.1% during the Third Quarter 2013 from 26.3% during the Third Quarter 2012 and included the following variances: • store expenses decreased approximately $7.6 million, or 120 basis points, primarily due to expense reduction initiatives in payroll, supplies and maintenance costs; • marketing expenses decreased approximately $2.0 million, or 40 basis points, resulting from decreased direct mailings, signage advertising, radio advertising and the timing of certain promotions; partially offset by • an increase in performance-based compensation of approximately $2.1 million, or 40 basis points.

Asset impairment charges were zero during the Third Quarter 2013 and $0.5 million related to two underperforming stores during the Third Quarter 2012.

Depreciation and amortization was $16.5 million, or 3.3% of net sales, during the Third Quarter 2013, compared to $23.0 million, or 4.6% of net sales, during the Third Quarter 2012. The decrease primarily relates to $5.7 million of accelerated depreciation associated with the closing of a distribution center and $0.3 million of accelerated depreciation associated with early remodels of certain Canadian stores during the Third Quarter 2012.

Provision for income taxes was $19.9 million during the Third Quarter 2013 compared to $16.2 million during the Third Quarter 2012. Our effective tax rate was 32.3% and 30.3% during the Third Quarter 2013 and the Third Quarter 2012, respectively. The increase in rate primarily relates to the anticipated mix of income between high tax jurisdictions and low taxed jurisdictions used in calculating the effective tax rates in 2013 compared to 2012.

Net income was $41.7 million during the Third Quarter 2013 compared to $37.3 million during the Third Quarter 2012, due to the factors discussed above.

Earnings per diluted share was $1.84 in the Third Quarter 2013 compared to $1.54 in the Third Quarter 2012. This increase in earnings per share is due to the increase in net income for the quarter and to a lower weighted average common shares outstanding of approximately 1.7 million, which is primarily the result of our share repurchase programs.

Year-To-Date 2013 Compared to Year-To-Date 2012 Net sales decreased by $2.0 million, or 0.2%, to $1,298.3 million during Year-To-Date 2013 from $1,300.3 million during Year-To-Date 2012. Our net sales decrease resulted from a Comparable Retail Sales decrease of $20.9 million and $5.0 23-------------------------------------------------------------------------------- Table of Contents million from unfavorable changes in the Canadian exchange rate, partially offset by a $23.9 million increase in sales from new stores, as well as other sales that did not qualify as comparable sales. Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, declined 2.3% during Year-To-Date 2013 due to an approximate 1.5% decrease in the number of transactions and an approximate 0.8% decline in the average dollar transaction size. Total e-commerce sales, which include postage and handling, increased to 13.7% of sales during Year-To-Date 2013 from 11.6% during Year-To-Date 2012.

The Children's Place U.S. net sales increased $5.0 million, or 0.4%, to $1,124.7 million during Year-To-Date 2013 compared to $1,119.7 million during Year-To-Date 2012. This increase resulted from a $19.7 million increase in sales from new stores, as well as other sales that did not qualify as comparable sales, partially offset by a U.S. Comparable Retail Sales decrease of $14.7 million. U.S. Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, declined 1.7% during Year-To-Date 2013. The decrease in U.S. Comparable Retail Sales was due to an approximate 0.9% decrease in the number of transactions and an approximate 0.8% decrease in the average dollar transaction size. Total U.S. e-commerce sales, which include postage and handling, increased to 14.6% of U.S. sales during Year-To-Date 2013 from 12.6% during Year-To-Date 2012.

The Children's Place International net sales decreased $7.0 million, or 3.9%, to $173.6 million during Year-To-Date 2013 compared to $180.6 million during Year-To-Date 2012. The decrease resulted primarily from a Canadian Comparable Retail Sales decrease of $6.2 million and $5.0 million decrease resulting from unfavorable changes in the Canadian exchange rates, partially offset by a $4.2 million increase in sales from new stores and other sales that did not qualify as comparable sales. Canadian Comparable Retail Sales, adjusted to compare similar calendar weeks in 2013 and 2012, declined 6.3%. The decrease in Canadian Comparable Retail Sales was primarily the result of an approximate 5.4% decrease in the number of transactions and an approximate 1.0% decrease in the average dollar transaction size. Total International e-commerce sales, which include postage and handling, increased to 7.5% of International sales during Year-To-Date 2013 from 4.6% during Year-To-Date 2012.

During Year-To-Date 2013, we opened 45 stores, consisting of 41 in the United States and four in Canada. During Year-To-Date 2012 we opened 60 stores, consisting of 54 in the United States and six in Canada.

Gross profit decreased by $11.7 million to $491.2 million during Year-To-Date 2013 from $502.9 million during Year-To-Date 2012. Consolidated Gross Margin decreased 90 basis points to 37.8% during Year-To-Date 2013 from 38.7% during Year-To-Date 2012. The decrease in consolidated Gross Margin resulted primarily from a de-leverage of fixed costs due to negative Comparable Retail Sales and higher supply chain costs.

Gross Margin at The Children's Place U.S. decreased 70 basis points from 38.0% during Year-To-Date 2012 to 37.3% during Year-To-Date 2013. The decrease in Gross Margin resulted primarily from a de-leverage of fixed costs due to negative U.S. Comparable Retail Sales and higher supply chain costs partially offset by lower cost of goods sold as a percentage of net sales.

Gross Margin at The Children's Place International decreased 140 basis points from 42.9% during Year-To-Date 2012 to 41.5% during Year-To-Date 2013. The decrease in Gross Margin resulted primarily from a de-leverage of fixed costs due to negative Comparable Retail Sales and higher supply chain costs partially offset by lower cost of goods sold as a percentage of net sales.

Selling, general and administrative expenses decreased $7.9 million to $366.9 million during Year-To-Date 2013 from $374.8 million during Year-To-Date 2012.

As a percentage of net sales SG&A decreased 50 basis points to 28.3% during Year-To-Date 2013 from 28.8% during Year-To-Date 2012. The comparability of our SG&A was affected by the following items: • during Year-To-Date 2013 we restructured certain store and corporate operations which resulted in costs of approximately $1.3 million and we incurred costs of approximately $1.2 million in connection with the development of our strategic, long-term systems plan; and • during Year-To-Date 2012 we streamlined our field workforce and eliminated certain positions in our corporate headquarters which resulted in severance expense of approximately $2.0 million, we incurred approximately $1.1 million of expense related to a legal settlement and as part of a continuing store fleet review and we identified certain store fixtures and supplies that would no longer be used, which resulted in a write-off charge of approximately $0.9 million.

Excluding the effect of the above, SG&A decreased approximately $6.5 million, or 40 basis points, and included the following variances: • store expenses decreased approximately $9.6 million, or 70 basis points, primarily due to expense reduction initiatives in payroll, supplies and maintenance costs; • marketing expenses decreased approximately $3.2 million, or 20 basis points, resulting from decreased direct mailings, signage advertising, radio advertising and the timing of certain promotions; partially offset by 24-------------------------------------------------------------------------------- Table of Contents • an increase in performance-based compensation of approximately $8.3 million, or 50 basis points.

Asset impairment charges were $21.8 million during Year-To-Date 2013, $12.7 million of which related to 75 stores, 48 of which were fully impaired and 27 of which were partially impaired. These store impairment charges were recorded as a result of revenue and/or gross margins not meeting targeted levels and accelerated store lease termination dates. Additionally, we recorded asset impairment charges of $9.1 million related to a determination that certain development costs previously incurred were no longer relevant and that certain systems were obsolete. Asset impairment charges were $2.1 million related to five underperforming stores during Year-To-Date 2012.

Depreciation and amortization was $48.9 million, or 3.8% of net sales, during Year-To-Date 2013, compared to $57.7 million, or 4.4% of net sales, during Year-To-Date 2012. The decrease primarily relates to $5.7 million of accelerated depreciation associated with the closing of a distribution center and $1.6 million of accelerated depreciation associated with early remodels of certain Canadian stores during Year-To-Date 2012.

Provision for income taxes was $17.1 million during Year-To-Date 2013 compared to $19.6 million during Year-To-Date 2012. Our effective tax rate was 31.4% and 30.7% during Year-To-Date 2013 and Year-To-Date 2012, respectively. The increase in rate for Year-To-Date 2013 compared to Year-To-Date 2012 primarily relates to the anticipated mix of income between high tax jurisdictions and low taxed jurisdictions used in calculating the effective tax rates in 2013 compared to 2012.

Net income was $37.4 million during Year-To-Date 2013 compared to $44.1 million during Year-To-Date 2012, due to the factors discussed above. Earnings per diluted share was $1.63 during Year-To-Date 2013 compared to $1.80 during Year-To-Date 2012. This decrease in earnings per share is due to the decrease in net income partially offset by a lower weighted average common shares outstanding of approximately 1.6 million, which is primarily the result of our share repurchase programs.

LIQUIDITY AND CAPITAL RESOURCES Liquidity Our working capital needs follow a seasonal pattern, peaking during the third quarter when inventory is purchased for the back-to-school and holiday selling seasons. Our primary uses of cash are the financing of new store openings, other capital projects, the repurchases of our common stock and working capital requirements, which are principally inventory purchases.

Our working capital decreased $2.6 million to $354.3 million at November 2, 2013 compared to $356.9 million at October 27, 2012. This change is due to higher inventory balances offset by increased accounts payable and accrued expenses and other current liabilities. During Year-To-Date 2013, under our share repurchase programs, we repurchased approximately 1.1 million shares for approximately $54.7 million. Subsequent to November 2, 2013 and through December 3, 2013, we repurchased less than 0.1 million shares for approximately $1.0 million.

Our credit facility provides for borrowings up to the lesser of $150.0 million or our borrowing base, as defined by the credit facility agreement (see "Credit Facility" below). At November 2, 2013, our borrowing base was $150.0 million, we had no outstanding borrowings and there were $13.9 million of outstanding letters of credit, with $136.1 million of availability for borrowings and a sublimit availability for letters of credit of $111.1 million.

As of November 2, 2013, we had $141.7 million of cash and cash equivalents, of which $120.7 million of cash and cash equivalents were held in foreign subsidiaries, of which approximately $87.6 million was in our Canadian subsidiaries, $24.3 million was in our Hong Kong subsidiaries and $8.8 million was in other foreign subsidiaries. As of November 2, 2013 we also had a short-term investment of $52.5 million in Hong Kong. Because all of our investments in our foreign subsidiaries are considered permanently and fully reinvested, any repatriation of cash from these subsidiaries would require the accrual and payment of U.S. federal and certain state taxes. Due to the complexities associated with the hypothetical calculation, including the availability of foreign tax credits, we have concluded it is not practicable to determine the unrecognized deferred tax liability related to the undistributed earnings. We currently do not intend to repatriate cash from any of these foreign subsidiaries.

We expect to be able to meet our working capital and capital expenditure requirements principally by using our cash on hand, cash flows from operations and availability under our credit facility.

Credit Facility We and certain of our domestic subsidiaries maintain a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A. as lenders 25-------------------------------------------------------------------------------- Table of Contents (collectively, the "Lenders") and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender (the "Credit Agreement"). The Credit Agreement has been amended from time to time and the provisions below reflect all amendments.

The Credit Agreement, which expires in August 2017, consists of a $150 million asset based revolving credit facility, with a $125 million sublimit for standby and documentary letters of credit and an accordion feature that could provide up to $75 million of additional availability, of which $25 million is committed.

Revolving credit loans outstanding under the Credit Agreement bear interest, at the Company's option, at: (i) the prime rate plus a margin of 0.50% to 0.75% based on the amount of our average excess availability under the facility; or (ii) the London InterBank Offered Rate, or "LIBOR", for an interest period of one, two, three or six months, as selected by us, plus a margin of 1.50% to 1.75% based on the amount of our average excess availability under the facility.

We are charged an unused line fee of 0.25% on the unused portion of the commitments. Letter of credit fees range from 0.75% to 0.875% for commercial letters of credit and range from 1.00% to 1.25% for standby letters of credit.

Letter of credit fees are determined based on the amount of our average excess availability under the facility. The amount available for loans and letters of credit under the Credit Agreement is determined by a borrowing base consisting of certain credit card receivables, certain inventory and the fair market value of certain real estate, subject to certain reserves.

The outstanding obligations under the Credit Agreement may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. We are not subject to any early termination fees.

The Credit Agreement contains covenants, which include limitations on stock buybacks and the payment of cash dividends or similar payments. Credit extended under the Credit Agreement is secured by a first priority security interest in substantially all of our U.S. assets excluding intellectual property, software, equipment and fixtures.

On December 20, 2012, the Credit Agreement was amended to provide for, among other things, an extension of the term of the Credit Agreement, a reduction in various rates charged under the Agreement as reflected above and the elimination of a first priority security interest in substantially all of our U.S.

intellectual property, software, equipment and fixtures. This amendment also provided for the replacement of certain restrictive limits with an availability test, which must be met in order to permit the taking of certain actions. In conjunction with this amendment, we paid approximately $0.4 million in additional deferred financing costs.

As of November 2, 2013, we have capitalized an aggregate of approximately $3.7 million in deferred financing costs related to the Credit Agreement. The unamortized balance of deferred financing costs at November 2, 2013 was approximately $1.4 million. Unamortized deferred financing costs are amortized on a straight-line basis over the remaining term of the Credit Agreement.

Cash Flows/Capital Expenditures During Year-To-Date 2013, cash flows provided by operating activities were $99.2 million compared to $143.5 million during Year-To-Date 2012. The net decrease of $44.3 million in cash from operating activities resulted primarily from the timing of payments on accounts payable and other current liabilities and by higher inventories, primarily due to the timing of inventory receipts.

During Year-To-Date 2013 cash flows used in investing activities were $94.7 million compared to $71.4 million during Year-To-Date 2012. This increase was due to the purchase of a $37.5 million short-term investment partially offset by a $14.2 million decrease in purchases of property and equipment.

During Year-To-Date 2013, cash flows used in financing activities were $53.4 million compared to $45.5 million during Year-To-Date 2012. The increase primarily resulted from purchases of $54.8 million of our common stock, pursuant to our share repurchase programs during Year-To-Date 2013 compared to purchases of $47.7 million of our common stock during Year-To-Date 2012, and a $0.8 million decrease in proceeds from the exercise of stock options.

We anticipate that total capital expenditures will be in the range of approximately $80 to $85 million in fiscal 2013. During Year-To-Date 2013, we opened 45 stores and remodeled 70 at an aggregate cost of approximately $39.2 million, of which approximately $6.9 million relates to our Canadian operations. We have spent approximately $17.5 million on information technology, our corporate offices and other strategic initiatives and approximately $0.5 million on projects in our distribution centers. Over the next quarter, we anticipate additional capital expenditures of approximately $13.0 million on store projects, approximately $12.0 million on information technology, including enterprise resource planning and e-commerce 26-------------------------------------------------------------------------------- Table of Contents systems, and approximately $1.0 million on projects in our distribution centers.

Of these expenditures, approximately $0.5 million relates to our Canadian operations.

Our ability to continue to meet our capital requirements in fiscal 2013 depends on our cash on hand, our ability to generate cash flows from operations and our available borrowings under our credit facility. Cash flow generated from operations depends on our ability to achieve our financial plans. During Year-To-Date 2013, we were able to fund our capital expenditures with cash generated from operating activities supplemented by funds from our credit facility. We believe that our existing cash on hand, cash generated from operations and funds available to us through our credit facility will be sufficient to fund our capital and other cash requirements over the next 12 months. Further, we do not expect the current economic conditions to preclude us from meeting our cash requirements.

Historically, we have funded our capital expenditures primarily from operations.

With a domestic cash balance of $21.0 million, $136.1 million of availability on our credit facility, $24.3 million in our Hong Kong subsidiaries, $8.8 million in other foreign subsidiaries and a Canadian cash balance of $87.6 million at November 2, 2013, we expect to meet our capital requirements for the remainder of fiscal 2013.

[ Back To TMCnet.com's Homepage ]