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Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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, including but not limited to statements relating to the Company’s strategic initiatives. 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 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 3, 2018
. 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 changes in economic conditions, the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions and disruptions in the Company’s global supply chain, including resulting from foreign sources of supply in less developed countries or more politically unstable countries, 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, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. 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 3, 2018
.
Terms that are commonly used in our management’s discussion and analysis of financial condition and results of operations are defined as follows:
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•
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Third Quarter 2018
— The thirteen weeks ended
November 3, 2018
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•
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Third Quarter 2017
— The thirteen weeks ended
October 28, 2017
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•
|
Year-To-Date 2018
— The thirty-nine weeks ended
November 3, 2018
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•
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Year-To-Date 2017
— The thirty-nine weeks ended
October 28, 2017
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•
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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 store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is re-opened for a full fiscal month.
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•
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AUR — Average unit retail
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•
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Gross Margin — Gross profit expressed as a percentage of net sales
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•
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SG&A — Selling, general, and administrative expenses
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•
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FASB — Financial Accounting Standards Board
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•
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SEC — U.S. Securities and Exchange Commission
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•
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U.S. GAAP — Generally Accepted Accounting Principles in the United States
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•
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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. The Company provides apparel, accessories, footwear, and other items for children. We design, contract to manufacture, sell at retail and wholesale, and license to sell trend right, high-quality merchandise at value prices, the substantial majority of which is under our proprietary “The Children's Place”, “Place” and "Baby Place" brand names. As of
November 3, 2018
, we operated
988
stores across North
America, our e-commerce business at
www.childrensplace.com
, and had 211 international points of distribution open and operated by our eight franchise partners in 20 countries.
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 and revenue from our U.S.-based wholesale business. Included in The Children's Place International segment are our Canadian- based stores, revenue from the Company's Canadian wholesale business, 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 3, 2018
, The Children’s Place U.S. owned and operated
862
stores and The Children’s Place International owned and operated
126
stores. As of
October 28, 2017
, The Children’s Place U.S. owned and operated
898
stores and The Children’s Place International owned and operated
129
stores.
Operating Highlights
Our Comparable Retail Sales increased 9.5% and 6.7% during the
Third Quarter 2018
and
Year-To-Date 2018
, respectively. Net sales
increased by
$32.5 million
, or
6.6%
, to
$522.5 million
during the
Third Quarter 2018
.
Gross margin de-leveraged 220 basis points to 39.1% during the
Third Quarter 2018
from 41.3% during the
Third Quarter 2017
. The decrease resulted primarily from lower merchandise margins resulting primarily from the continued increased penetration of our e-commerce business, partially offset by leverage of fixed expenses due to the positive Comparable Retail Sales and reclassification of certain items due to the adoption of Topic 606.
Selling, general, and administrative expenses increased $4.9 million to
$123.2 million
during the
Third Quarter 2018
from $118.3 million during the
Third Quarter 2017
. As a percentage of net sales, SG&A leveraged 50 basis points to 23.6% during the
Third Quarter 2018
from 24.1% during the
Third Quarter 2017
. The leverage was primarily due to strong Comparable Retail Sales and lower incentive compensation expense, partially offset by expenses related to the continued investment in our transformation initiatives and the reclassification of certain items due to the adoption of Topic 606.
Provision for income taxes was
$13.9 million
during the
Third Quarter 2018
compared to
$20.0 million
during the
Third Quarter 2017
. Our effective tax rate was
21.7%
and
31.2%
in the
Third Quarter 2018
and the
Third Quarter 2017
, respectively. The effective tax rate was lower primarily as a result of a lower U.S. Federal tax rate in fiscal 2018 due to the Tax Act and a favorable mix of income generated in foreign jurisdictions subject to lower tax rates.
Net income was
$49.9 million
during the
Third Quarter 2018
compared to
$44.1 million
during the
Third Quarter 2017
, due to the factors discussed above. Earnings per diluted share was
$3.03
in the
Third Quarter 2018
compared to
$2.44
per diluted share in the
Third Quarter 2017
. This increase in earnings per share is due to the factors noted above and a lower weighted average common shares outstanding of approximately 1.6 million, which is the result of our share repurchase program.
We continue to make significant progress on our key strategic growth initiatives--superior product, business transformation through technology, alternate channels of distribution, and fleet optimization.
Our business transformation through technology initiative has two key components: inventory management and digital transformation. With respect to digital transformation, our goal is to deliver one to one personalization focusing on improving customer acquisition and increasing customer engagement with our brand and to continue to gain market share.
The transformation of our digital capabilities has continued during
Year-To-Date 2018
with the implementation of a new on-site search tool, the enhancement of our email trigger capabilities, and the introduction of dynamic display re-targeting.
During the remainder of fiscal 2018, we plan to continue to develop several new capabilities, including: a new pricing and promotional system that will enable us to deliver personalized offers to our customers, improvements to our e-commerce platform, a new loyalty system that will deliver real-time personalized communication and promotions, and buy-online-ship-to-store.
With respect to alternate channels of distribution, we continued our international expansion program and added 20 net additional international points of distribution (stores, shop in shops, e-commerce site) during
Year-To-Date 2018
bringing our total count to 211, operating in 20 countries. During the
Third Quarter 2018
, Semir, our Chinese partner, opened its first stores in Shanghai.
We continue to evaluate our store fleet as part of our fleet optimization initiative to improve store productivity and plan to close approximately 300 stores through fiscal 2020, which includes the 195 stores closed since the announcement of this initiative.
During
Year-To-Date 2018
, we repurchased approximately 1.7 million shares for approximately $213.1 million, inclusive of shares repurchased under our accelerated share repurchase program and shares surrendered to cover tax withholdings associated with the vesting of equity awards. As of November 3, 2018, there was approximately $281 million in aggregate remaining pursuant to the 2017 and 2018 Share Repurchase Programs. We also paid cash dividends of $24.9 million during
Year-To-Date 2018
and announced that our Board of Directors has declared a quarterly cash dividend of
$0.50
per share to be paid on December 28, 2018 to shareholders of record on the close of business on December 17, 2018.
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:
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Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Average Translation Rates
(1)
|
|
|
|
|
|
|
|
Canadian Dollar
|
0.7673
|
|
0.8001
|
|
0.7728
|
|
0.7700
|
Hong Kong Dollar
|
0.1275
|
|
0.1280
|
|
0.1275
|
|
0.1283
|
China Yuan Renminbi
|
0.1454
|
|
0.1509
|
|
0.1518
|
|
0.1476
|
__________________________________________________
|
|
(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.
|
Recent Developments
In November 2018, we announced that our Chief Financial Officer, Anurup Pruthi, left the Company to pursue other opportunities, with Michael Scarpa permanently reassuming Mr. Pruthi’s duties and the Chief Financial Officer and Principal Financial Officer titles, in addition to Mr. Scarpa’s current duties as the Company's Chief Operating Officer. Subsequent to this announcement, the Company announced that it appointed Robert Helm, the Company's Vice President, Finance and Accounting, as its Principal Accounting Officer. Also, in November 2018, we announced that Pamela Wallack, President of Global Product, left the Company, with Jane Elfers, our Chief Executive Officer and President, permanently reassuming Ms. Wallack’s duties.
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 net realizable value, with cost determined using an average cost method. The estimated market value of inventory is determined based on an analysis of historical sales trends of our individual product categories, the impact of market trends and economic conditions and a forecast of future demand, as well as plans to sell through inventory. Estimates may differ from actual results due to the quantity, quality, and mix of products in
inventory, consumer and retailer preferences and market conditions. Our historical estimates have not differed materially from actual results and a 10% difference in our reserve as of
November 3, 2018
would have impacted net income by approximately $0.1 million. Our reserve balance at
November 3, 2018
was approximately $1.8 million compared to $2.3 million at
October 28, 2017
.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. A 0.5% difference in our shrinkage rate as a percentage of cost of goods sold could impact each quarter's net income by approximately $0.7 million.
Stock-Based Compensation
- We account for stock-based compensation according to the provisions of FASB ASC 718--
Compensation-Stock Compensation
.
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 in addition to a service period requirement ("Performance Awards") and each Performance Award has a defined number of shares that an employee can earn (the "Target Shares"). With the approval of the Board's Compensation Committee, the Company may settle vested Deferred Awards and Performance Awards to the employee in shares, in a cash amount equal to the market value of such shares at the time all requirements for delivery of the award have been met, or in part shares and cash. For Performance Awards issued during fiscal 2016 and fiscal 2017 (the “2016 and 2017 Performance Awards”), an employee may earn from 0% to 200% of their Target Shares based 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, and adjusted return on invested capital ("adjusted ROIC") achieved at the end of the performance period. The 2016 and 2017 Performance Awards cliff vest, if earned, after completion of the applicable 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 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 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. 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 2018 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.
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 sales and payroll, and in certain cases, our ability to renegotiate lease costs. 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 3, 2018
, the average net book value per store was approximately $0.1 million.
Income Taxes
-We utilize the liability method of accounting for income taxes as set forth in FASB ASC 740--Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, as well as for net operating losses and tax credit carryforwards. Deferred tax
assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which the basis differences and tax assets are expected to be realized. In accordance with SAB 118, we report provisional amounts if we are able to determine a reasonable estimate but do not have the necessary information available, prepared, and analyzed in reasonable detail to complete the accounting for the Tax Act. We may revise our estimates as we finalize our accounting during a measurement period of up to one year from the enactment of the Tax Act. 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, the availability of tax planning strategies, taxable income in prior carryback years, and future reversals of existing taxable temporary differences. 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-
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:
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•
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Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
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•
|
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
|
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|
•
|
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, assets of the Company’s Deferred Compensation Plan, 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 included in the Deferred Compensation Plan is not subject to fair value measurement.
Our assets measured at fair value on a nonrecurring basis include long-lived assets. We review 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.
Our derivative assets and liabilities include foreign exchange forward contracts that are measured at fair value using observable market inputs such as forward rates, our credit risk and our counterparties’ credit risks. Based on these inputs, our derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
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, cyber-security coverage, 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 3, 2018
would have impacted net income by approximately $0.4 million.
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 does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
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.
The Company will adopt this guidance beginning in its fiscal year 2019 using a modified retrospective approach with the cumulative effect of adopting the standard recognized as an adjustment to opening retained earnings. The Company anticipates it will apply an optional package of practical expedients intended to ease transition to the standard by allowing the Company to carryforward its original lease classification conclusions without reassessment. The Company is also evaluating which, if any, of certain other expedients it will elect upon adoption. 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of operations 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, gross profit decreased approximately 220 basis points to 39.1% of net sales during the
Third Quarter 2018
from
41.3%
during the
Third Quarter 2017
. 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.
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Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Net sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales (exclusive of depreciation and amortization)
|
60.9
|
|
|
58.7
|
|
|
63.1
|
|
|
61.4
|
|
Gross profit
|
39.1
|
|
|
41.3
|
|
|
36.9
|
|
|
38.6
|
|
Selling, general, and administrative expenses
|
23.6
|
|
|
24.1
|
|
|
26.0
|
|
|
26.0
|
|
Depreciation and amortization
|
3.3
|
|
|
3.4
|
|
|
3.7
|
|
|
3.7
|
|
Asset impairment charge
|
0.1
|
|
|
0.7
|
|
|
0.4
|
|
|
0.4
|
|
Other income
|
(0.2
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Operating income
|
12.4
|
|
|
13.1
|
|
|
6.9
|
|
|
8.4
|
|
Income before income taxes
|
12.2
|
|
|
13.1
|
|
|
6.8
|
|
|
8.4
|
|
Provision for income taxes
|
2.7
|
|
|
4.1
|
|
|
0.5
|
|
|
1.1
|
|
Net income
|
9.6
|
%
|
|
9.0
|
%
|
|
6.3
|
%
|
|
7.3
|
%
|
Number of Company-operated stores, end of period
|
988
|
|
|
1,027
|
|
|
988
|
|
|
1,027
|
|
____________________________________________
Table may not add due to rounding.
The following tables set forth net sales by segment, for the periods indicated.
|
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|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Net sales:
|
(In thousands)
|
The Children’s Place U.S.
|
$
|
461,286
|
|
|
$
|
427,603
|
|
|
$
|
1,256,363
|
|
|
$
|
1,149,741
|
|
The Children’s Place International
|
61,209
|
|
|
62,423
|
|
|
151,163
|
|
|
150,562
|
|
Total net sales
|
$
|
522,495
|
|
|
$
|
490,026
|
|
|
$
|
1,407,526
|
|
|
$
|
1,300,303
|
|
Third Quarter 2018
Compared to the
Third Quarter 2017
Net sales
increased by
$32.5 million
, or
6.6%
, to
$522.5 million
during the
Third Quarter 2018
from
$490.0 million
during the
Third Quarter 2017
. The net sales increase of
$32.5 million
was primarily driven by a Comparable Retail Sales increase of 9.5% and the adoption of Topic 606, partially offset by a negative impact resulting from the calendar shift related to the 53rd week in fiscal 2017. Total e-commerce sales, which include postage and handling, increased to approximately 29% of net sales during the
Third Quarter 2018
from approximately 22% during the
Third Quarter 2017
.
We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including Comparative Retail Sales and revenues.
The Children’s Place U.S. net sales increased
$33.7 million
, or
7.9%
, to
$461.3 million
in the
Third Quarter 2018
compared to
$427.6 million
in the
Third Quarter 2017
. This increase primarily resulted from a U.S. Comparable Retail Sales increase of 10.6% and the adoption of Topic 606, partially offset by a negative impact resulting from the calendar shift related to the 53rd week in fiscal 2017.
The Children’s Place International net sales decreased
$1.2 million
, or
1.9%
, to
$61.2 million
in the
Third Quarter 2018
compared to
$62.4 million
in the
Third Quarter 2017
. The decrease resulted primarily from unfavorable changes in the Canadian exchange rate compared to the U.S. dollar, partially offset by a Canadian Comparable Retail Sales increase of 1.6%.
Gross profit
increased by $1.9 million to $204.4 million during the
Third Quarter 2018
from $202.4 million during the
Third Quarter 2017
. Gross margin de-leveraged 220 basis points to 39.1% during the
Third Quarter 2018
from
41.3%
during the
Third Quarter 2017
. The decrease resulted primarily from lower merchandise margins resulting primarily from the continued increased penetration of our e-commerce business, partially offset by leverage of fixed expenses due to the positive Comparable Retail Sales and reclassification of certain items due to the adoption of Topic 606.
Gross profit as a percentage of net revenues is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit as a percentage of net revenues to fluctuate from period to period.
Selling, general, and administrative expenses
increased $4.9 million to
$123.2 million
during the
Third Quarter 2018
from $118.3 million during the
Third Quarter 2017
. As a percentage of net sales, SG&A leveraged 50 basis points to 23.6% during the
Third Quarter 2018
from 24.1% during the
Third Quarter 2017
. The leverage was primarily due to strong Comparable Retail Sales and lower incentive compensation expense, partially offset by expenses related to the continued investment in our transformation initiatives and the reclassification of certain items due to the adoption of Topic 606.
Asset impairment charges
were
$0.4 million
during the
Third Quarter 2018
, which related to the full impairment of primarily five stores. Asset impairment charges during the
Third Quarter 2017
were
$3.2 million
, of which $0.8 million related to the full impairment of primarily
eight
stores and $2.4 million related to the write-down of information technology systems.
Depreciation and amortization
was
$17.4 million
during the
Third Quarter 2018
compared to
$16.8 million
during the
Third Quarter 2017
reflecting increased depreciation associated with our ongoing investment in business transformation initiatives.
Other costs (income)
was $1.2 million during the
Third Quarter 2018
related to the settlement of a distribution center lease.
Provision for income taxes
was
$13.9 million
during the
Third Quarter 2018
compared to
$20.0 million
during the
Third Quarter 2017
. Our effective tax rate was
21.7%
and
31.2%
in the
Third Quarter 2018
and the
Third Quarter 2017
, respectively. The effective tax rate was lower primarily as a result of a lower U.S. Federal tax rate in fiscal 2018 due to the Tax Act and a favorable mix of income generated in foreign jurisdictions subject to lower tax rates.
Net income
was
$49.9 million
during the
Third Quarter 2018
compared to
$44.1 million
during the
Third Quarter 2017
, due to the factors discussed above. Earnings per diluted share was
$3.03
in the
Third Quarter 2018
compared to
$2.44
per diluted share in the
Third Quarter 2017
. This increase in earnings per share is due to the factors noted above and a lower weighted average common shares outstanding of approximately 1.6 million, which is the result of our share repurchase program.
Year-To-Date 2018
Compared to the
Year-To-Date 2017
Net sales
increased by
$107.2 million
, or
8.2%
, to
$1.408 billion
during
Year-To-Date 2018
from
$1.300 billion
during
Year-To-Date 2017
. The net sales increase was primarily driven by a Comparable Retail Sales increase of 6.7%, the adoption of Topic 606, and a positive impact resulting from the calendar shift related to the 53rd week in fiscal 2017. Total e-commerce sales, which include postage and handling, increased to approximately 27% of net sales during
Year-To-Date 2018
from approximately 23% during
Year-To-Date 2017
.
We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including Comparative Retail Sales and revenues.
The Children’s Place U.S. net sales increased
$106.6 million
, or
9.3%
, to
$1.256 billion
during
Year-To-Date 2018
compared to
$1.150 billion
during
Year-To-Date 2017
. This increase primarily resulted from a U.S. Comparable Retail Sales increase of 7.5% and the adoption of Topic 606.
The Children’s Place International net sales increased
$0.6 million
, or
0.4%
, to
$151.2 million
during
Year-To-Date 2018
compared to
$150.6 million
during
Year-To-Date 2017
. The increase resulted primarily from the adoption of Topic 606, partially offset by a Canadian Comparable Retail Sales decrease of 0.2%.
Gross profit
increased by $18.0 million to $519.4 million during
Year-To-Date 2018
from $501.4 million during
Year-To-Date 2017
. Gross margin de-leveraged 170 basis points to
36.9%
during
Year-To-Date 2018
from
38.6%
during
Year-To-Date 2017
. The decrease resulted primarily from lower merchandise margins resulting primarily from the continued increased penetration of our e-commerce business, partially offset by leverage of fixed expenses due to the positive Comparable Retail Sales and reclassification of certain items due to the adoption of Topic 606.
Gross profit as a percentage of net revenues is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit as a percentage of net revenues to fluctuate from period to period.
Selling, general, and administrative expenses
increased $27.3 million to
$365.9 million
during
Year-To-Date 2018
from
$338.6 million
during
Year-To-Date 2017
. As a percentage of net sales, SG&A was flat at
26.0%
during
Year-To-Date 2018
and
Year-To-Date 2017
, respectively. The comparability of our SG&A was affected by expenses related to the restructuring of certain store and corporate operations, consulting costs for organizational design efforts, system transition costs, and costs incurred in connection with the review of our warehouse and distribution network of $2.7 million during
Year-To-Date 2018
and by costs related to the a provision for a legal settlement, restructuring of certain store operations, a state sales and use tax audit settlement, and a provision for foreign exchange control penalties of $6.9 million during
Year-To-Date 2017
. Excluding this impact, our SG&A increased $31.4 million and de-leveraged 30 basis points. The de-leverage was primarily due to the continued investment in our transformation initiatives and the reclassification of certain items due to the adoption of Topic 606, partially offset by lower incentive compensation expense.
Asset impairment charges
were
$5.6 million
during
Year-To-Date 2018
, of which $1.2 million related to the full impairment of primarily nine stores and $4.4 million related to the write-down of information technology systems. Asset impairment charges during
Year-To-Date 2017
were $4.7 million, of which $2.3 million related to the full impairment of primarily
17
stores, and $2.4 million related to the write-down of information technology systems.
Depreciation and amortization
was
$51.4 million
during
Year-To-Date 2018
compared to
$48.5 million
during
Year-To-Date 2017
reflecting increased depreciation associated with our ongoing investment in business transformation initiatives.
Other costs (income)
was $1.3 million during
Year-To-Date 2018
related to the settlement of a distribution center lease.
Provision for income taxes
was
$6.7 million
during
Year-To-Date 2018
compared to
$14.6 million
during
Year-To-Date 2017
. Our effective tax rate was 7.0% and 13.4% during
Year-To-Date 2018
and
Year-To-Date 2017
, respectively. The effective tax rate was lower for the
Year-To-Date 2018
primarily due to a lower U.S. Federal tax rate in fiscal 2018 due to the Tax Act and a favorable mix of income generated in foreign jurisdictions subject to lower tax rates, partially offset by a reserve release of $4 million in the first quarter of fiscal 2017.
Net income
was
$88.9 million
during
Year-To-Date 2018
compared to
$94.6 million
during
Year-To-Date 2017
, due to the factors discussed above. Earnings per diluted share was
$5.24
during
Year-To-Date 2018
compared to
$5.19
per diluted share during
Year-To-Date 2017
. This increase in earnings per share is due to the factors noted above and a lower weighted average common shares outstanding of approximately 1.2 million, which is the result of our share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our working capital needs follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Our primary uses of cash are for working capital requirements, which are principally inventory purchases, and the financing of capital projects, including investments in new systems, and the repurchases of our common stock and payment of dividends.
Our working capital decreased $126.9 million to $135.6 million at
November 3, 2018
compared to $262.5 million at
October 28, 2017
, primarily due to the purchase of common stock related to our share repurchase programs. During
Year-To-Date 2018
, we repurchased approximately 1.7 million shares for approximately $213.1 million. During
Year-To-Date 2017
, we repurchased approximately 0.8 million shares for approximately $85.4 million, inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards. We also paid cash dividends of $24.9 million and $21.1 million during
Year-To-Date 2018
and
Year-To-Date 2017
, respectively. Subsequent to
November 3, 2018
and through December 4, 2018, we repurchased approximately 60 thousand shares for approximately $8.4 million and declared a quarterly cash dividend of
$0.50
per share to be paid on December 28, 2018 to shareholders of record at the close of business on December 17, 2018.
Our credit facility provides for borrowings up to the lesser of
$250 million
or our borrowing base, as defined by the credit facility agreement (see “Credit Facility” below). At
November 3, 2018
, we had
$65.0 million
of outstanding borrowings and
$178.0 million
available for borrowing. In addition, at
November 3, 2018
, we had
$7.0 million
of outstanding letters of credit with an additional
$43.0 million
available for issuing letters of credit.
We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future 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 (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender (the “Credit Agreement”). The Credit Agreement was amended on September 15, 2015 and the provisions below reflect the amended and extended Credit Agreement.
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 our average excess availability under the facility; or
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(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
1.25%
to
1.50%
based on the amount of our average excess availability under the facility.
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We are charged an unused line fee of
0.25%
on the unused portion of the commitments. Letter of credit fees range from
0.625%
to
0.750%
for commercial letters of credit and range from
0.75%
to
1.00%
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 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. We are not subject to any early termination fees.
The Credit Agreement contains covenants, which include conditions on stock repurchases 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.
We have 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
November 3, 2018
was approximately
$0.5 million
. Unamortized deferred financing costs are amortized over the remaining term of the Credit Agreement.
Cash Flows/Capital Expenditures
During
Year-To-Date 2018
, cash flows provided by operating activities were
$83.5 million
compared to
$129.9 million
during
Year-To-Date 2017
. The decrease was primarily due to the timing of inventory purchases and working capital needs.
During
Year-To-Date 2018
, cash flows used in investing activities were
$41.1 million
compared to
$4.2 million
during
Year-To-Date 2017
. This change was primarily due to a net redemption of short-term investments into cash and cash equivalents during
Year-To-Date 2018
compared to a net purchase of short-term investments during
Year-To-Date 2017
and increased capital expenditures, primarily related to our business transformation initiatives.
During
Year-To-Date 2018
, cash flows used in financing activities were
$194.5 million
compared to
$65.5 million
during
Year-To-Date 2017
. The increase primarily resulted from an increase in purchases of our common stock, primarily related to our accelerated share repurchase program and shares repurchased to cover tax withholdings associated with the vesting of equity awards.
We anticipate that total capital expenditures will be approximately $70-75 million in fiscal 2018, primarily related to our business transformation initiatives, compared to $59 million in fiscal 2017. Our ability to continue to meet our capital requirements in fiscal 2018 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 2018
, we were able to fund our capital expenditures with cash on hand and 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 for the foreseeable future.
Derivative Instruments
We are 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.
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
November 3, 2018
, we had foreign exchange forward contracts with an aggregate notional amount of
$24.4 million
and the fair value of the derivative instruments was an asset of
$2.3 million
.