NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Description of Business
The Children's Place, Inc. and subsidiaries (the “Company”) is the largest pure-play children's specialty apparel retailer in North America. The Company provides apparel, accessories, footwear, and other items for children. The Company designs, contracts to manufacture, sells at retail and wholesale and licenses to sell trend right, high-quality merchandise at value prices, the substantial majority of which is under its proprietary “The Children's Place”, "Place" and "Baby Place" brand names.
The Company classifies its business into two segments: The Children’s Place U.S. and The Children’s Place International. Included in The Children’s Place U.S. segment are the Company's U.S. and Puerto Rico-based stores and revenue from its U.S.- based wholesale business. Included in The Children's Place International segment are its Canadian-based stores, revenue from the Company's Canada wholesale business, as well as revenue from international franchisees. Each segment includes an e-commerce business located at
www.childrensplace.com.
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of The Children’s Place, Inc. (the “Company”) as of
August 4, 2018
and
July 29, 2017
and the results of its consolidated operations for the thirteen and twenty-six weeks ended
August 4, 2018
and
July 29, 2017
and cash flows for the twenty-six weeks ended
August 4, 2018
and
July 29, 2017
. The consolidated financial position as of
February 3, 2018
was derived from audited financial statements. Due to the seasonal nature of the Company’s business, the results of operations for the twenty-six weeks ended
August 4, 2018
and
July 29, 2017
are not necessarily indicative of operating results for a full fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
February 3, 2018
.
Terms that are commonly used in the Company’s notes to consolidated financial statements are defined as follows:
|
|
•
|
Second Quarter 2018
— The thirteen weeks ended
August 4, 2018
|
|
|
•
|
Second Quarter 2017
— The thirteen weeks ended
July 29, 2017
|
|
|
•
|
Year-To-Date 2018
— The twenty-six weeks ended
August 4, 2018
|
|
|
•
|
Year-To-Date 2017
— The twenty-six weeks ended
July 29, 2017
|
|
|
•
|
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
|
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. Intercompany balances and transactions have been eliminated. FASB ASC 810--
Consolidation
is considered when determining whether an entity is subject to consolidation.
Fiscal Year
The Company's fiscal year is a 52-week or 53-week period ending on the Saturday on or nearest to January 31.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and amounts of revenues and expenses reported during the period. Actual results could differ from the assumptions used and estimates made by management, which could have a material impact on the Company's financial position or results of operations. Significant estimates inherent in the preparation of the consolidated financial statements include: reserves for the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived assets; fair value measurements; accounting for income taxes and related uncertain tax positions; insurance reserves; valuation of stock-based compensation awards and related estimated forfeiture rates, among others.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Short-term Investments
Short-term investments consist of investments which the Company expects to convert into cash within one year, including time deposits, which have original maturities greater than 90 days. The Company classifies its investments in securities at the time of purchase as held-to-maturity and reevaluates such classifications on a quarterly basis. Held-to-maturity investments consist of securities that the Company has the intent and ability to retain until maturity. These securities are recorded at cost and adjusted for the amortization of premiums and discounts, which approximates fair value. Cash inflows and outflows related to the sale and purchase of investments are classified as investing activities in the Company's consolidated statements of cash flows. All of the Company's short-term investments are U.S. dollar denominated time deposits with banking institutions in Hong Kong that have six month maturity dates from inception.
Revenue Recognition
The Company adopted Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers” ("Topic 606") as of the beginning of fiscal 2018 using the modified retrospective transition method. Topic 606 requires the use of a five-step model to recognize revenue.
See Note 2 "
Revenues"
for further details on the Company's adoption of Topic 606.
Inventories
Inventories, which consist primarily of finished goods, are stated at the lower of cost or net realizable value, with cost determined on an average cost basis. The Company capitalizes certain supply chain costs in inventory and these costs are reflected within cost of sales as the inventories are sold. Inventory shrinkage is estimated in interim periods based upon the historical results of physical inventory counts in the context of current year facts and circumstances.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets when events indicate that their carrying value may not be recoverable. Such events include historical trends or projected trend of cash flow losses or a future expectation that the Company will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, the Company groups its 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.
The Company reviews all stores that have reached comparable sales status, or sooner if circumstances should dictate, on at least an annual basis. The Company believes waiting this period of time 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, the Company projects future cash flows over the remaining life of the lease and compares 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. The Company primarily determines fair market value to be the discounted future cash flows directly associated with those assets. In evaluating future cash flows, the Company considers 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 the Company's ability to gauge the fashion taste of its customers, control variable costs such as cost of sales and payroll and, in certain cases, its ability to renegotiate lease costs.
Stock-based Compensation
The Company generally grants time vesting stock awards ("Deferred Awards") and performance-based stock awards ("Performance Awards") to employees at management levels. The Company also grants Deferred Awards to its non-employee directors. Deferred Awards are granted in the form of a defined number of restricted stock units that require each recipient to complete a service period. Deferred Awards generally vest ratably over
three
years, except for those granted to non-employee directors, which generally vest after
one
year. Performance Awards are granted in the form of restricted stock units which have performance criteria that must be achieved for the awards to vest (the "Target Shares") in addition to a service period
requirement. For Performance Awards issued during fiscal 2015 (the “2015 Performance Awards”), an employee may earn from 0% to 300% of their Target Shares based on the adjusted earnings per share achieved for a cumulative three-fiscal year performance period and our 3-year total shareholder return (“TSR”) relative to that of companies in our peer group. The 2015 Performance Awards cliff vested after completion of the applicable three year performance period at 300%. The 2015 Performance Awards grant date fair value was estimated using a Monte Carlo simulation covering the period from the valuation date through the end of the applicable performance period using our simulated stock price as well as the TSR of companies in our peer group. For Performance Awards issued during fiscal 2016 and 2017 (the “2016 and 2017 Performance Awards”), an employee may earn from 0% to 200% of their Target Shares based on the achievement of cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period and adjusted return on invested capital ("adjusted ROIC") achieved as of the end of the performance period. The 2016 and 2017 Performance Awards cliff vest, if earned, after completion of the three-year performance period. The fair value of the 2016 and 2017 Performance Awards granted is based on the closing price of our common stock on the grant date. For Performance Awards issued during fiscal 2018 (the “2018 Performance Awards”), an employee may earn from 0% to 250% of their Target Shares based on cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period, adjusted ROIC achieved as of the end of the performance period, and the ranking of our adjusted ROIC relative to that of companies in our peer group as of the end of the performance period. The 2018 Performance Awards cliff vest, if earned, after completion of the three-year performance period. The fair value of the 2018 Performance Awards granted is based on the closing price of our common stock on the grant date.
Stock-based 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. Stock-based compensation expense, as it relates to Performance Awards, is also adjusted based on the Company's estimate of adjusted earnings per share and adjusted operating margin expansion, and adjusted return on invested capital as they occur.
Deferred Compensation Plan
The Company has a deferred compensation plan (the “Deferred Compensation Plan”), which is a nonqualified plan, for eligible senior level employees. Under the plan, participants may elect to defer up to
80%
of his or her base salary and/or up to
100%
of his or her bonus to be earned for the year following the year in which the deferral election is made. The Deferred Compensation Plan also permits members of the Board of Directors to elect to defer payment of all or a portion of their retainer and other fees to be earned for the year following the year in which a deferral election is made. In addition, eligible employees and directors of the Company may also elect to defer payment of any shares of Company stock that is earned with respect to stock-based awards. Directors may elect to have all or a certain portion of their fees earned for their service on the Board invested in shares of the Company’s common stock. Such elections are irrevocable. The Company is not required to contribute to the Deferred Compensation Plan, but at its sole discretion, can make additional contributions on behalf of the participants. Deferred amounts are not subject to forfeiture and are deemed invested among investment funds offered under the Deferred Compensation Plan, as directed by each participant. Payments of deferred amounts (as adjusted for earnings and losses) are payable following separation from service or at a date or dates elected by the participant at the time the deferral is elected. Payments of deferred amounts are generally made in either a lump sum or in annual installments over a period not exceeding 15 years. All deferred amounts are payable in the form in which they were made, except for board fees invested in shares of the Company's common stock, which will be settled in shares of Company common stock. Earlier distributions are not permitted except in the case of an unforeseen hardship.
The Company has established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The assets of the rabbi trust are general assets of the Company and as such, would be subject to the claims of creditors in the event of bankruptcy or insolvency. Investments of the rabbi trust consist of mutual funds and Company common stock. The Deferred Compensation Plan liability, excluding Company common stock, is included within other long-term liabilities and changes in the balance, except those relating to payments, are recognized as compensation expense within selling, general, and administrative expenses. The value of the mutual funds is included in other assets and related earnings and losses are recognized as investment income or loss, which is included within selling, general, and administrative expenses. Company stock deferrals are included within the equity section of the Company’s consolidated balance sheet as treasury stock and as a deferred compensation liability. Deferred stock is recorded at fair market value at the time of deferral and any subsequent changes in fair market value are not recognized.
Fair Value Measurement and Financial Instruments
FASB ASC 820--
Fair Value Measurements and Disclosure
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
|
The Company’s cash and cash equivalents, short-term investments, assets of the Company’s Deferred Compensation Plan, accounts receivable, accounts payable, and revolving loan 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 Company stock that is included in the Deferred Compensation Plan is not subject to fair value measurement.
The Company's assets and liabilities include foreign exchange forward contracts that are measured at fair value using observable market inputs such as forward rates, the Company's credit risk, and our counterparties’ credit risks. Based on these inputs, the Company's derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
The Company’s assets measured at fair value on a nonrecurring basis include long-lived assets. The Company reviews the carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to fall within Level 3 of the fair value hierarchy.
Recently Issued Accounting Standards
Adopted in Fiscal 2018
In May 2014, the FASB issued guidance relating to revenue recognition from contracts with customers. This guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted this guidance in the first quarter of 2018 using the modified retrospective method. This adoption did not have a material impact on the Company’s consolidated financial statements. Refer to Note 2, "
Revenues"
, for additional information.
To Be Adopted After Fiscal 2018
In August 2017, the FASB issued guidance relating to the accounting for hedging activities. This guidance aims to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in the guidance expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The standard is effective for the Company beginning in its fiscal year 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently reviewing the potential impact of this standard.
In February 2016, the FASB issued guidance relating to the accounting for leases. This guidance applies a right of use model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. The lease term is the noncancellable period of the lease, and includes both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option. The standard is effective for the Company beginning in its fiscal year 2019, including interim periods within those fiscal years, and early adoption is permitted. We are executing against our implementation plan and gathering information to assess which of our real estate, personal property and other arrangements may meet the definition of a lease as contemplated in the guidance. While we are currently reviewing the potential impact of this standard, we would expect that the adoption of this standard will require us to recognize right-of-use assets and lease liabilities that will be material to our consolidated balance sheet given the extent of our lease portfolio.
2. REVENUES
Adoption of ASC Topic 606, "
Revenue from Contracts with Customers
"
On February 4, 2018, the Company adopted Topic 606 "Revenue from Contracts with Customers" using the modified retrospective method. Results for reporting periods beginning February 4, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605 "Revenue Recognition". Upon adoption of this guidance, there was no material impact to the Company's consolidated financial statements.
We recorded a net increase to opening retained earnings, net of taxes, of approximately
$0.9 million
as of February 4, 2018 due to the cumulative impact of adopting Topic 606. The impact primarily related to the accounting for gift card breakage of approximately $2.3 million, partially offset by our private label credit card program of approximately $1.1 million, net of taxes of $0.3 million:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Adjustments
|
|
February 4, 2018
|
|
(As reported)
|
|
|
|
(As amended)
|
|
(In thousands)
|
Retained earnings
|
$
|
226,303
|
|
|
875
|
|
|
$
|
227,178
|
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated balance sheet and income statement were as follows, with the impact primarily related to the accounting for our private label credit card program and gift card breakage:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended August 4, 2018
|
Balance Sheet
|
As reported
|
|
Balances without adoption of Topic 606
|
|
Effect of adoption
Higher/(Lower)
|
|
(In thousands)
|
Property and equipment, net
|
$
|
257,055
|
|
|
256,305
|
|
|
$
|
750
|
|
Deferred income taxes
|
$
|
8,484
|
|
|
8,891
|
|
|
$
|
(407
|
)
|
Other assets
|
$
|
15,093
|
|
|
14,794
|
|
|
$
|
299
|
|
Accrued expenses and other current liabilities
|
$
|
103,244
|
|
|
102,239
|
|
|
$
|
1,005
|
|
Other long-term liabilities
|
$
|
12,989
|
|
|
14,579
|
|
|
$
|
(1,590
|
)
|
Retained earnings
|
$
|
198,581
|
|
|
197,354
|
|
|
$
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 weeks ended August 4, 2018
|
|
For the 26 weeks ended August 4, 2018
|
Income Statement
|
As reported
|
|
Amounts without adoption of Topic 606
|
|
Effect of adoption
Higher/(Lower)
|
|
As reported
|
|
Amounts without adoption of Topic 606
|
|
Effect of adoption
Higher/(Lower)
|
|
(In thousands)
|
|
(In thousands)
|
Net sales
|
$
|
448,718
|
|
|
443,806
|
|
|
$
|
4,912
|
|
|
$
|
885,031
|
|
|
876,124
|
|
|
$
|
8,907
|
|
Selling, general, and administrative expenses
|
$
|
124,210
|
|
|
119,606
|
|
|
$
|
4,604
|
|
|
$
|
242,680
|
|
|
234,310
|
|
|
$
|
8,370
|
|
Depreciation and amortization
|
$
|
16,595
|
|
|
16,560
|
|
|
$
|
35
|
|
|
$
|
34,001
|
|
|
33,931
|
|
|
$
|
70
|
|
Operating income
|
$
|
10,022
|
|
|
9,749
|
|
|
$
|
273
|
|
|
$
|
33,080
|
|
|
32,613
|
|
|
$
|
467
|
|
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents our revenues disaggregated by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
August 4,
2018
|
|
July 29,
2017
|
|
August 4,
2018
|
|
July 29,
2017
|
Net sales:
|
(In thousands)
|
South
|
$
|
159,770
|
|
|
$
|
122,543
|
|
|
$
|
313,534
|
|
|
$
|
276,937
|
|
Northeast
|
101,939
|
|
|
90,859
|
|
|
207,817
|
|
|
196,571
|
|
West
|
70,894
|
|
|
58,948
|
|
|
137,499
|
|
|
123,871
|
|
Midwest
|
52,884
|
|
|
43,678
|
|
|
110,385
|
|
|
103,423
|
|
International and other
|
63,231
|
|
|
57,573
|
|
|
115,796
|
|
|
109,475
|
|
Total net sales
|
$
|
448,718
|
|
|
$
|
373,601
|
|
|
$
|
885,031
|
|
|
$
|
810,277
|
|
The Company recognizes revenue, including shipping and handling fees billed to customers, upon purchase at the Company's retail stores or when received by the customer if the product was purchased via e-commerce, net of coupon redemptions and anticipated sales returns. The Company deferred approximately
$5.4 million
and
$4.3 million
as of
August 4, 2018
and
July 29, 2017
, respectively, based upon estimated time of delivery, at which point control passes to the customer, and is recorded in accrued expenses and other current liabilities. Sales tax collected from customers is excluded from revenue.
For the sale of goods with a right of return, the Company recognizes revenue for the consideration it expects to be entitled to and calculates an allowance for estimated sales returns based upon the Company's sales return experience. Adjustments to the allowance for estimated sales returns in subsequent periods are generally not material based on historical data, thereby reducing the uncertainty inherent in such estimates. The allowance for estimated sales returns, which is recorded in accrued expenses and other current liabilities, was approximately
$2.3 million
and
$3.0 million
as of
August 4, 2018
and
July 29, 2017
, respectively.
Our private label credit card is issued to our customers for use exclusively at The Children's Place stores and online at
www.childrensplace.com
, and credit is extended to such customers by a third-party financial institution on a non-recourse basis to us. The private label credit card includes multiple performance obligations, including marketing and promoting the program on behalf of the bank and the operation of the loyalty rewards program. Included in the agreement with the third-party financial institution was an upfront bonus paid to the Company. The upfront bonus is recognized as revenue and allocated between brand and reward obligations. As the license of the Company’s brand is the predominant item in the performance obligation, the amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur.
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration, such as additional bonuses, including profit-sharing, over the life of the program. Similar to the upfront bonus, the usage-based royalties and bonuses are recognized as revenue and allocated between the brand and reward obligations. The amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In addition, the annual profit-sharing amount is estimated and recognized quarterly within an annual period when earned. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets. The Company deferred approximately
$0.9 million
as of
August 4, 2018
in relation to its private label credit card performance obligations.
The Company has a points-based customer loyalty program, in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within accrued expenses and other current liabilities. The total contract liability related to this program was
$1.2 million
and
$3.6 million
as of
August 4, 2018
and
July 29, 2017
, respectively. The following table provides the reconciliation of the contract liability related to this program:
|
|
|
|
|
|
Contract Liability
|
|
(In thousands)
|
Balance at February 3, 2018
|
$
|
4,138
|
|
Loyalty points earned
|
11,781
|
|
Loyalty points redeemed and expired
|
(14,685
|
)
|
Balance at August 4, 2018
|
$
|
1,234
|
|
The Company's policy with respect to gift cards is to record revenue as and when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. With the adoption of Topic 606, gift card breakage is recorded within net sales during
Year-To-Date 2018
and within selling, general, and administrative expenses during
Year-To-Date 2017
prior to adoption of Topic 606. Prior to their redemption, gift cards are recorded as a liability, included within accrued expenses and other current liabilities. The total contract liability related to gift cards issued was
$16.2 million
and
$17.0 million
as of
August 4, 2018
and
July 29, 2017
, respectively. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:
|
|
|
|
|
|
Contract Liability
|
|
(In thousands)
|
Balance at February 3, 2018
|
$
|
16,145
|
|
Gift cards sold
|
15,647
|
|
Gift cards redeemed
|
(14,099
|
)
|
Gift card breakage
|
(1,541
|
)
|
Balance at August 4, 2018
|
$
|
16,152
|
|
The Company has an international expansion program through territorial agreements with franchisees. The Company generates revenues from the franchisees from the sale of product and, in certain cases, sales royalties. The Company records net sales and cost of goods sold on the sale of product to franchisees when the franchisee takes ownership of the product. The Company records net sales for royalties when the applicable franchisee sells the product to their customers. Under certain agreements, the Company receives a fee from each franchisee for exclusive territorial rights and based on the opening of new stores. The Company records these territorial fees as deferred revenue and amortizes the fee into gross sales over the life of the territorial agreement.
Share Repurchase Programs
The Company's Board of Directors has authorized the following share repurchase programs which were active during
Year-To-Date 2018
and
Year-To-Date 2017
: (1) $250 million in December 2015 (the "2015 $250 Million Share Repurchase Program"); (2) $250 million in March 2017 (the "2017 Share Repurchase Program"); and (3) $250 million in March 2018 (the "2018 Share Repurchase Program"). The 2015 $250 Million Share Repurchase Program has been completed. At
August 4, 2018
, there was approximately
$307.0 million
in the aggregate remaining on the 2017 and 2018 Share Repurchase Programs. Under these programs, the Company may repurchase shares in the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under a program will depend on a variety of factors including price, corporate and regulatory requirements and other market and business conditions. The Company may suspend or discontinue a program at any time, and may thereafter reinstitute purchases, all without prior announcement.
As part of its share repurchase programs, the Company entered into an accelerated share repurchase program with Goldman Sachs & Co. LLC in March 2018 under which it repurchased and retired approximately 1.0 million shares for $125.0 million. The accelerated share repurchase program was completed during the
Second Quarter 2018
.
Pursuant to the Company's practice, including due to restrictions imposed by the Company's insider trading policy during black-out periods, the Company withholds and repurchases shares of vesting stock awards and makes payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. The Company's payment of the withholding taxes in exchange for the surrendered shares constitutes a purchase of its common stock. The Company also acquires shares of its common stock in conjunction with liabilities owed under the Company's Deferred Compensation Plan, which are held in treasury.
The following table summarizes the Company's share repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six Weeks Ended
|
|
|
August 4, 2018
|
|
July 29, 2017
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
|
(In thousands)
|
Shares repurchases related to:
|
|
|
|
|
|
|
|
|
2015 $250 Million Share Repurchase Program
(1)
|
|
—
|
|
|
$
|
—
|
|
|
507
|
|
|
57,380
|
|
2017 Share Repurchase Program
(2)(3)
|
|
1,474
|
|
|
$
|
187,522
|
|
|
—
|
|
|
—
|
|
Shares acquired and held in treasury under Deferred Compensation Plan
|
|
0.9
|
|
|
$
|
124
|
|
|
1.2
|
|
|
$
|
124
|
|
|
|
(1)
|
Inclusive of 0.3 million and $31.7 million during
Year-To-Date 2017
withheld to cover taxes in conjunction with the vesting of stock awards.
|
|
|
(2)
|
Inclusive of 0.3 million shares for approximately $42.9 million during
Year-To-Date 2018
withheld to cover taxes in conjunction with the vesting of stock awards. Inclusive of approximately 1.0 million shares for $125.0 million repurchased pursuant to an accelerated repurchase program.
|
|
|
(3)
|
Subsequent to
August 4, 2018
and through August 24, 2018, the Company repurchased approximately 40 thousand shares for approximately $5.7 million.
|
In accordance with the FASB ASC 505--
Equity
, the par value of the shares retired is charged against common stock and the remaining purchase price is allocated between additional paid-in capital and retained earnings. The portion charged against additional paid-in capital is determined using a pro-rata allocation based on total shares outstanding. Related to all shares retired during
Year-To-Date 2018
and
Year-To-Date 2017
, approximately
$50.2 million
and
$50.3 million
, respectively, were charged to retained earnings.
Dividends
The
Second Quarter 2018
dividend of $0.50 per share was paid on June 29, 2018 to shareholders of record on the close of business on June 18, 2018. During
Year-To-Date 2018
,
$17.4 million
was charged to retained earnings, of which
$16.7 million
related to cash dividends paid and
$0.7 million
related to dividend share equivalents on unvested Deferred Awards and Performance Awards. During
Year-To-Date 2017
,
$14.9 million
was charged to retained earnings, of which
$14.1 million
related to cash dividends paid and
$0.8 million
related to dividend share equivalents on unvested Deferred Awards and Performance Awards.
The Company's Board of Directors declared a quarterly cash dividend of
$0.50
per share to be paid September 17, 2018 to shareholders of record at the close of business on September 5, 2018. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Company’s Board of Directors based on a number of factors, including business and market conditions, the Company’s future financial performance and other investment priorities.
|
|
4.
|
STOCK-BASED COMPENSATION
|
The following table summarizes the Company’s stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
August 4,
2018
|
|
July 29,
2017
|
|
August 4,
2018
|
|
July 29,
2017
|
|
(In thousands)
|
Deferred Awards
|
$
|
3,533
|
|
|
$
|
2,661
|
|
|
$
|
7,346
|
|
|
$
|
5,926
|
|
Performance Awards
|
3,887
|
|
|
4,160
|
|
|
8,871
|
|
|
8,554
|
|
Total stock-based compensation expense
(1)
|
$
|
7,420
|
|
|
$
|
6,821
|
|
|
$
|
16,217
|
|
|
$
|
14,480
|
|
____________________________________________
|
|
(1)
|
During the
Second Quarter 2018
and the
Second Quarter 2017
, approximately
$1.0 million
and
$1.0 million
, respectively, were included within cost of sales. During
Year-To-Date 2018
and the
Year-To-Date 2017
, approximately
$1.9 million
and
$2.0 million
, respectively, were included within cost of sales (exclusive of depreciation and amortization). All other stock-based compensation is included in selling, general, and administrative expenses.
|
The Company recognized a tax benefit related to stock-based compensation expense of approximately
$4.3 million
and
$5.6 million
during
Year-To-Date 2018
and
Year-To-Date 2017
, respectively.
Awards Granted During
Year-To-Date 2018
The Company granted Deferred Awards and Performance Awards to various executives and Deferred Awards to members of our Board of Directors during
Year-To-Date 2018
. Awards were also granted in connection with new hires. Generally, the Deferred Awards have a three year vesting period with one third of the award vesting annually. Generally, the Deferred Awards granted to members of the Board of Directors vest after one year. Performance Awards granted during
Year-To-Date 2018
have a three-year performance period, and, if earned, vest upon completion of the three-year performance period. Depending on the cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period, adjusted return on invested capital achieved as of the end of fiscal 2020, and the ranking of our adjusted ROIC relative to that of companies in our peer group as of the end of the performance period, the percentage of Target Shares earned could range from 0% to 250%.
Changes in the Company’s Unvested Stock Awards during
Year-To-Date 2018
Deferred Awards
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
(In thousands)
|
|
|
Unvested Deferred Awards, beginning of period
|
420
|
|
|
$
|
82.30
|
|
Granted
|
131
|
|
|
123.89
|
|
Vested
|
(115
|
)
|
|
64.27
|
|
Forfeited
|
(16
|
)
|
|
97.26
|
|
Unvested Deferred Awards, end of period
|
420
|
|
|
$
|
99.65
|
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards approximated
$26.1 million
as of
August 4, 2018
, which will be recognized over a weighted average period of approximately
2.1
years.
Performance Awards
|
|
|
|
|
|
|
|
|
Number of
Shares
(1)
|
|
Weighted
Average
Grant Date
Fair Value
|
|
(In thousands)
|
|
|
Unvested Performance Awards, beginning of period
|
544
|
|
|
$
|
84.11
|
|
Granted
|
86
|
|
|
123.00
|
|
Shares earned in excess of target
|
347
|
|
|
70.09
|
|
Vested shares, including shares earned in excess of target
|
(513
|
)
|
|
70.09
|
|
Forfeited
|
(82
|
)
|
|
119.17
|
|
Unvested Performance Awards, end of period
|
382
|
|
|
$
|
91.46
|
|
____________________________________________
|
|
(1)
|
For those awards in which the performance period is complete, the number of unvested shares is based on actual shares that will vest upon completion of the service period.
|
For those awards in which the performance period is not yet complete, the number of unvested shares in the table above is based on the participants earning their Target Shares at
100%
. However, the cumulative expense recognized reflects changes in estimated adjusted earnings per share, adjusted operating margin expansion, and adjusted return on invested capital as they occur. Total unrecognized stock-based compensation expense related to unvested Performance Awards approximated
$18.8 million
as of
August 4, 2018
, which will be recognized over a weighted average period of approximately
1.5
years.
|
|
5.
|
EARNINGS PER COMMON SHARE
|
The following table reconciles net income and share amounts utilized to calculate basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
August 4, 2018
|
|
July 29, 2017
|
|
August 4, 2018
|
|
July 29, 2017
|
|
(In thousands)
|
Net income
|
$
|
7,486
|
|
|
$
|
14,290
|
|
|
$
|
39,023
|
|
|
$
|
50,519
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
16,636
|
|
|
17,704
|
|
|
16,819
|
|
|
17,659
|
|
Dilutive effect of stock awards
|
79
|
|
|
473
|
|
|
406
|
|
|
630
|
|
Diluted weighted average common shares
|
16,715
|
|
|
18,177
|
|
|
17,225
|
|
|
18,289
|
|
Antidilutive stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Antidilutive stock awards (Deferred Awards and Performance Awards) represent those awards that are excluded from the earnings per share calculation as a result of their antidilutive effect in the application of the treasury stock method in accordance with FASB ASC 260--
Earnings per Share
.
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2018
|
|
February 3, 2018
|
|
July 29, 2017
|
|
|
(In thousands)
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
3,403
|
|
|
$
|
3,403
|
|
|
$
|
3,403
|
|
Building and improvements
|
|
35,548
|
|
|
35,548
|
|
|
35,548
|
|
Material handling equipment
|
|
50,230
|
|
|
50,102
|
|
|
48,345
|
|
Leasehold improvements
|
|
310,669
|
|
|
308,465
|
|
|
316,823
|
|
Store fixtures and equipment
|
|
274,661
|
|
|
262,363
|
|
|
247,888
|
|
Capitalized software
|
|
240,471
|
|
|
237,786
|
|
|
213,902
|
|
Construction in progress
|
|
11,135
|
|
|
9,498
|
|
|
27,775
|
|
|
|
926,117
|
|
|
907,165
|
|
|
893,684
|
|
Accumulated depreciation and amortization
|
|
(669,062
|
)
|
|
(648,628
|
)
|
|
(630,373
|
)
|
Property and equipment, net
|
|
$
|
257,055
|
|
|
$
|
258,537
|
|
|
$
|
263,311
|
|
At
August 4, 2018
, the Company performed impairment testing on
992
stores with a total net book value of approximately
$84.5 million
. During the
Second Quarter 2018
, the Company recorded asset impairment charges of $0.6 million primarily for
two
stores, both of which were fully impaired. Additionally, during the
Second Quarter 2018
, the Company recorded asset impairment charges of $3.4 million related to the write-down of information technology systems. During
Year-To-Date 2018
, the Company recorded asset impairment charges of $0.8 million primarily for four stores. Additionally, during
Year-To-Date 2018
, the Company recorded asset impairment charges of $4.4 million related to the write-down of information technology systems.
At
July 29, 2017
, the Company performed impairment testing on
1,026
stores with a total net book value of approximately
$84.9 million
. During the Second Quarter 2017, the Company recorded asset impairment charges of $1.0 million for three stores, all of which were fully impaired. During Year-To-Date 2017, the Company recorded asset impairment charges of $1.5 million for primarily nine stores, all of which were fully impaired.
7. CREDIT FACILITY
The Company and certain of its domestic subsidiaries maintain a credit agreement (the “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 (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender.
The Credit Agreement, which expires in September 2020, consists of a
$250 million
asset based revolving credit facility, with a
$50 million
sublimit for standby and documentary letters of credit and an uncommitted accordion feature that could provide up to
$50 million
of additional availability. 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 the Company’s 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 the Company, plus a margin of
1.25%
to
1.50%
based on the amount of the Company’s average excess availability under the facility.
|
The Company is charged a fee of
0.25%
on the unused portion of the commitments. Letter of credit fees range from
0.625%
to
0.75%
for commercial letters of credit and from
0.75%
to
1.00%
for standby letters of credit. Letter of credit fees are determined based on the amount of the Company's 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 trade and franchise 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. The Company is not subject to any early termination fees.
The Credit Agreement contains covenants which include conditions 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 the Company’s U.S. assets excluding intellectual property, software, equipment, and fixtures.
The Company has capitalized an aggregate of approximately
$4.3 million
in deferred financing costs related to the Credit Agreement. The unamortized balance of deferred financing costs at
August 4, 2018
was approximately
$0.6 million
. Unamortized deferred financing costs are amortized over the remaining term of the Credit Agreement.
The table below presents the components of the Company’s credit facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2018
|
|
February 3,
2018
|
|
July 29,
2017
|
|
(In millions)
|
Credit facility maximum
|
$
|
250.0
|
|
|
$
|
250.0
|
|
|
$
|
250.0
|
|
Borrowing base
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
|
|
|
|
|
|
Outstanding borrowings
|
89.3
|
|
|
21.5
|
|
|
54.5
|
|
Letters of credit outstanding—standby
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
Utilization of credit facility at end of period
|
96.3
|
|
|
28.5
|
|
|
61.5
|
|
|
|
|
|
|
|
Availability
(1)
|
$
|
153.7
|
|
|
$
|
221.5
|
|
|
$
|
188.5
|
|
|
|
|
|
|
|
Interest rate at end of period
|
3.5
|
%
|
|
5.0
|
%
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date 2018
|
|
Fiscal
2017
|
|
Year-To-Date 2017
|
Average end of day loan balance during the period
|
$
|
64.6
|
|
|
$
|
45.8
|
|
|
$
|
62.9
|
|
Highest end of day loan balance during the period
|
151.6
|
|
|
98.2
|
|
|
98.2
|
|
Average interest rate
|
4.0
|
%
|
|
2.9
|
%
|
|
2.7
|
%
|
____________________________________________
|
|
(1)
|
The sublimit availability for the letters of credit was
$43.0 million
at each of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, respectively.
|
|
|
8.
|
LEGAL AND REGULATORY MATTERS
|
The Company is a defendant in
Rael v. The Children’s Place, Inc.
, a purported class action, pending in the U.S. District Court, Southern District of California. In the initial complaint filed in February 2016, the plaintiff alleged that the Company falsely advertised discount prices in violation of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. The plaintiff filed an amended complaint in April 2016, adding allegations of violations of other state consumer protection laws. In August 2016, the plaintiff filed a second amended complaint, adding an additional plaintiff and removing the other state law claims. The plaintiffs’ second amended complaint seeks to represent a class of California purchasers and seeks, among other items, injunctive relief, damages, and attorneys’ fees and costs.
The Company engaged in mediation proceedings with the plaintiffs in December 2016 and April 2017. The parties reached an agreement in principle in April 2017, and signed a definitive settlement agreement in November 2017, to settle the matter on a class basis with all individuals in the U.S. who made a qualifying purchase at The Children’s Place from February 11, 2012 through the date of preliminary approval by the court of the settlement. The settlement is subject to court approval and provides for merchandise vouchers for class members who submit valid claims, as well as payment of legal fees and expenses and claims administration expenses. The court has stayed the matter, pending an appellate court ruling in another lawsuit to which the Company is not a party. The settlement, if ultimately approved by the court, will result in the dismissal of all claims through the date of the court’s preliminary approval of the settlement. However, if the settlement is rejected by the court, the parties will likely return to litigation, and in such event, no assurance can be given as to the ultimate outcome of this
matter. In connection with the proposed settlement, the Company recorded a reserve for
$5.0 million
in its consolidated financial statements in the first quarter of 2017.
The Company is also involved in various legal proceedings arising in the normal course of business. In the opinion of management, any ultimate liability arising out of these proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company's deferred tax assets and liabilities are comprised largely of differences relating to depreciation, rent expense, inventory, stock-based compensation and various accruals and reserves.
The Company’s effective tax rate for the Second Quarter 2018 was an expense of 17.5% compared to a benefit of 388.0% during the Second Quarter 2017. The effective tax rate was higher during the Second Quarter 2018 primarily as a result of excess tax benefits of approximately $0.5 million during the Second Quarter 2018 compared to approximately $12.3 million in the Second Quarter 2017 due to the timing of excess tax benefits associated with share-based compensation vestings, partially offset by the benefit of the lower U.S. tax rate due to the Tax Cuts and Jobs Act (the "Tax Act").
The Company’s effective tax rate for Year-To-Date 2018 was a benefit of 22.6%, compared to a benefit of 11.8% for Year-To-Date 2017. The effective tax rate was lower for the Year-To-Date 2018 primarily due to a higher excess tax benefit on a percentage basis during Year-To-Date 2018 when applied to pre-tax income year over year, a lower U.S. Federal tax rate in fiscal 2018 due to the reduction in rate under the Tax Act, partially offset by a reserve release of $4 million in the Second Quarter 2017.
Due to the complexities of the Tax Act, the SEC staff issued SAB 118 that allows the Company to record a provisional amount for any income tax effects of the Tax Act in accordance with ASC 740--Income Taxes, to the extent that a reasonable estimate can be made. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have recorded provisional amounts for any items that could be reasonably estimated at this time. This includes the one-time transition tax that we have estimated to be $37.6 million, which is based on our total accumulated post-1986 prescribed foreign earnings and profits ("E&P") estimated to be $388 million, which was previously considered to be indefinitely reinvested. The transition tax is payable over eight years. The first payment was made during the first quarter of fiscal 2018. In addition, pursuant to IRS guidance, the overpayment from the fiscal year 2017 tax return will be applied first toward the transition tax. Within our consolidated balance sheets, the remaining unpaid transition tax of $19.1 million is included in long-term liabilities.
Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of accumulated post-1986 prescribed foreign E&P and finalize the amounts held in cash or other specified assets. While the Company is no longer permanently reinvested to the extent earnings were subject to the transition tax under the Tax Act, no additional income taxes have been provided on any earnings subsequent to the transition or for any additional outside basis differences inherent in these entities, as these amounts continue to be permanently reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities (i.e., basis differences in excess of that subject to the one-time transition tax) is not practicable.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in provision for income taxes. The total amount of unrecognized tax benefits as of
August 4, 2018
, February 3, 2018, and
July 29, 2017
were
$3.9 million
,
$4.0 million
and
$3.2 million
, respectively, and is included within non-current liabilities. The Company recognized less than
$0.1 million
in each of the
Second Quarter 2018
and the
Second Quarter 2017
, respectively, of additional interest expense related to its unrecognized tax benefits. During each of
Year-To-Date 2018
and
Year-To-Date 2017
, the Company recognized less than $0.1 million of additional interest expense. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in provision for income taxes.
The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company, joined by its domestic subsidiaries, files a consolidated income tax return for federal income tax purposes. The Company, with certain exceptions, is no longer subject to income tax examinations by U.S. federal, state and local, or foreign tax authorities for tax years 2012 and prior.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's
tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
|
|
10.
|
DERIVATIVE INSTRUMENTS
|
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates attributable to inventory purchases denominated in a foreign currency. Specifically, our Canadian subsidiary’s functional currency is the Canadian dollar, but purchases inventory from suppliers in U.S. dollars. In order to mitigate the variability of cash flows associated with certain of these forecasted inventory purchases, we enter into foreign exchange forward contracts. These contracts typically mature within 12 months. We do not use forward contracts to engage in currency speculation and we do not enter into derivative financial instruments for trading purposes.
The Company accounts for all of its derivatives and hedging activity under FASB ASC 815--
Derivatives and Hedging
.
Under the Company’s risk management policy and in accordance with guidance under the topic, in order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The Company would discontinue hedge accounting under a foreign exchange forward contract prospectively (i) if management determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is terminated, (iii) if the forecasted transaction being hedged by the derivative is no longer probable of occurring, or (iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate.
All derivative instruments are presented at gross fair value on the consolidated balance sheets within either prepaid expenses and other current assets or accrued expenses and other current liabilities. As of
August 4, 2018
, the Company had foreign exchange forward contracts with an aggregate notional amount of
$23.9 million
and the fair value of the derivative instruments was an asset of
$2.6 million
. As these foreign exchange forward contracts are measured at fair value using observable market inputs such as forward rates, the Company's credit risk and our counterparties’ credit risks, they are classified within Level 2 of the valuation hierarchy. Cash settlements related to these forward contracts are recorded within cash flows from operating activities within the consolidated statements of cash flows.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings within cost of sales (exclusive of depreciation and amortization) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in earnings within selling, general, and administrative expenses, consistent with where the Company records realized and unrealized foreign currency gains and losses on transactions in foreign denominated currencies. There were no losses related to hedge ineffectiveness during
Year-To-Date 2018
. Assuming
August 4, 2018
exchange rates remain constant,
$0.8 million
of gains, net of tax, related to hedges of these transactions are expected to be reclassified from OCI into earnings over the next 12 months. Changes in fair value associated with derivatives that are not designated and qualified as cash flow hedges are recognized as earnings within selling, general, and administrative expenses.
The Company enters into foreign exchange forward contracts with major banks and has risk exposure in the event of nonperformance by either party. However, based on our assessment, the Company believes that obligations under the contracts will be fully satisfied. Accordingly, there was no requirement to post collateral or other security to support the contracts as of
August 4, 2018
.
In accordance with FASB ASC 280---
Segment Reporting
, the Company reports 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 the Company’s U.S. and Puerto Rico-based stores and revenue from the Company's U.S.-based wholesale business. Included in The Children's Place International segment are the Company's Canadian-based stores, revenue from the Company's Canadian wholesale business and revenue from international franchisees. The Company measures its 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. The Company periodically reviews these allocations and adjusts them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales and the Company has no major customers that account for more than
10%
of its net sales. As of
August 4, 2018
, The Children’s Place U.S. owned and operated
866
stores and The Children’s Place International owned and operated
126
stores. As of
July 29, 2017
, The Children’s Place U.S. owned and operated
897
stores and The Children’s Place International owned and operated
129
stores.
The following tables provide segment level financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
August 4,
2018
|
|
July 29,
2017
|
|
August 4,
2018
|
|
July 29,
2017
|
|
(In thousands)
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
399,299
|
|
|
$
|
327,375
|
|
|
$
|
795,077
|
|
|
$
|
722,138
|
|
The Children’s Place International
(1)
|
49,419
|
|
|
46,226
|
|
|
89,954
|
|
|
88,139
|
|
Total net sales
|
$
|
448,718
|
|
|
$
|
373,601
|
|
|
$
|
885,031
|
|
|
$
|
810,277
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
6,286
|
|
|
$
|
(924
|
)
|
|
$
|
26,675
|
|
|
$
|
37,816
|
|
The Children’s Place International
|
3,736
|
|
|
4,143
|
|
|
6,405
|
|
|
7,687
|
|
Total operating income
|
$
|
10,022
|
|
|
$
|
3,219
|
|
|
$
|
33,080
|
|
|
$
|
45,503
|
|
Operating income as a percent of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
1.6
|
%
|
|
(0.3
|
)%
|
|
3.4
|
%
|
|
5.2
|
%
|
The Children’s Place International
|
7.6
|
%
|
|
9.0
|
%
|
|
7.1
|
%
|
|
8.7
|
%
|
Total operating income as a percent of net sales
|
2.2
|
%
|
|
0.9
|
%
|
|
3.7
|
%
|
|
5.6
|
%
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
14,863
|
|
|
$
|
14,271
|
|
|
$
|
30,404
|
|
|
$
|
28,234
|
|
The Children’s Place International
|
1,732
|
|
|
1,708
|
|
|
3,597
|
|
|
3,437
|
|
Total depreciation and amortization
|
$
|
16,595
|
|
|
$
|
15,979
|
|
|
$
|
34,001
|
|
|
$
|
31,671
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
16,376
|
|
|
$
|
9,776
|
|
|
$
|
27,222
|
|
|
$
|
22,876
|
|
The Children’s Place International
|
405
|
|
|
88
|
|
|
624
|
|
|
280
|
|
Total capital expenditures
|
$
|
16,781
|
|
|
$
|
9,864
|
|
|
$
|
27,846
|
|
|
$
|
23,156
|
|
____________________________________________
|
|
(1)
|
Net sales from The Children's Place International are primarily derived from revenues from Canadian operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2018
|
|
February 3, 2018
|
|
July 29, 2017
|
Total assets:
|
(In thousands)
|
The Children’s Place U.S.
|
$
|
781,336
|
|
|
$
|
750,670
|
|
|
$
|
786,038
|
|
The Children’s Place International
|
73,008
|
|
|
189,558
|
|
|
184,637
|
|
Total assets
|
$
|
854,344
|
|
|
$
|
940,228
|
|
|
$
|
970,675
|
|
Subsequent to August 4, 2018 and through August 24, 2018, the Company repurchased approximately 40 thousand shares for approximately $5.7 million.
The Company announced that its Board of Directors has declared a quarterly cash dividend of
$0.50
per share to be paid on September 17, 2018 to shareholders of record at the close of business on September 5, 2018.