THE CHILDREN'S PLACE, INC. This Quarterly Report on Form 10-Q contains or may contain 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 theSecurities and Exchange Commission , including in the "Risk Factors" section of its annual report on Form 10-K for the fiscal year endedFebruary 1, 2020 . 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 risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general (including decreased customer traffic, closures of schools and other activities causing decreased demand for our products and negative impacts on our customers' spending patterns due to decreased income or actual or perceived wealth and the impact of the CARES Act and other legislation related to the COVID-19 pandemic, and any changes to the CARES Act or such other legislation), 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 COVID-19 or other disease outbreaks, 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 endedFebruary 1, 2020 . Terms that are commonly used in our management's discussion and analysis of financial condition and results of operations are defined as follows: •First Quarter 2020 - The thirteen weeks endedMay 2, 2020 •First Quarter 2019 - The thirteen weeks endedMay 4, 2019 •Gross Margin - Gross profit expressed as a percentage of net sales •SG&A - Selling, general, and administrative expenses •FASB -Financial Accounting Standards Board •SEC -U.S. Securities and Exchange Commission •U.S. GAAP - Generally Accepted Accounting Principles inthe United States •FASB ASC - FASB Accounting Standards Codification, which serves as the source for authoritativeU.S. GAAP, except that rules and interpretive releases by theSEC are also sources of authoritativeU.S. GAAP forSEC registrants Our Business We are the largest pure-play children's specialty apparel retailer inNorth America . We design, contract to manufacture, sell at retail and wholesale, and license to sell, trend right, high quality merchandise predominately at value prices, primarily under our proprietary "The Children's Place ", "Place", "Baby Place ", and "Gymboree" brand names. As ofMay 2, 2020 , we had 920 stores acrossNorth America , our e-commerce businesses at www.childrensplace.com and www.gymboree.com, and had 266 international points of distribution with our eight franchise partners in 19 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 22 -------------------------------------------------------------------------------- Table of Contents www.childrensplace.com and www.gymboree.com. Included inThe Children's Place U.S. segment are ourU.S. andPuerto Rico -based stores and revenue from ourU.S. -based wholesale business. Included inThe 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 PlaceU.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated toThe 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 ofMay 2, 2020 , The Children's PlaceU.S. had 800 stores andThe Children's Place International had 120 stores. As ofMay 4, 2019 , The Children's PlaceU.S. had 849 stores andThe Children's Place International had 122 stores. Recent Developments The COVID-19 pandemic has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities, leading to significant adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in retail traffic and consumer spending on discretionary items. As a result of the impact of the COVID-19 pandemic, we have experienced significant business disruption, and onMarch 18, 2020 , we temporarily closed all of our stores across theU.S. andCanada . Our distribution centers remain open and operating to support our e-commerce business, which has accelerated since the temporary store closures.
In response to the COVID-19 pandemic, we have taken the following actions designed to preserve our financial flexibility:
•Executing a substantial reduction and/or deferral of all non-essential expenses and capital expenditures; •Collaborating with vendor partners to extend payment terms and balance forward inventory receipts to reflect reduced demand; •Suspended rent payments on all of ourU.S. and Canadian retail stores; •Evaluating our options on store lease events occurring through the end of fiscal 2021, which impact approximately 70% of our current store fleet, targeting 300 additional retail store closures through fiscal 2021; •EffectiveApril 1, 2020 ,Jane Elfers , President and Chief Executive Officer, agreed to forgo 100% of her salary until further notice. In addition, the senior leadership team took a temporary 25% reduction in salary until further notice and the independent Directors of the Board unanimously approved to forgo their cash compensation until further notice; •EffectiveApril 5, 2020 , allU.S. and Canadian field management and store associates were temporarily furloughed. We continue to furlough a portion of ourU.S. and Canadian field management and store associates not supporting ship from store activities; •EffectiveApril 5, 2020 , we instituted a combination of temporary furloughs and pay reductions for the substantial majority of our corporate staff; •Finalized an amendment to our revolving credit facility, which increased borrowing capacity from$325 million to$360 million for a period of one year; and •Temporarily suspended the Company's capital return program, inclusive of share repurchases and dividends. OnMay 19, 2020 , the Company reopened stores in 10 states:Alabama ,Arkansas ,Idaho ,Mississippi ,Montana ,Nebraska ,North Dakota ,Oklahoma ,South Dakota , andUtah . The Company intends to reopen stores on a phased timeline, as state and local guidelines and conditions permit, taking an informed, measured approach based on a number of factors. Operating Highlights Net sales decreased by$157.2 million , or 38.1%, to$255.2 million during the First Quarter 2020 from$412.4 million during the First Quarter 2019. The net sales decrease of$157.2 million primarily resulted from temporary store closures onMarch 18, 2020 due to the COVID-19 pandemic. Gross profit (loss) decreased by$171.7 million to$(19.7) million during the First Quarter 2020 from$152.0 million during the First Quarter 2019. The comparability of our gross profit (loss) was impacted by: an inventory provision of 23 -------------------------------------------------------------------------------- Table of Contents approximately$63.2 million , related to the adverse business disruption resulting from the COVID-19 pandemic, including the store closures; occupancy expense of approximately$23.1 million for our stores temporarily closed due to COVID-19; and incremental expenses, primarily personal protective equipment and incentive pay for our associates, of approximately$1.7 million . Excluding the impact of these charges, gross margin de-leveraged 990 basis points. The decrease resulted primarily from increased penetration of our e-commerce business and its higher fulfillment costs, along with the deleverage of fixed expenses resulting from the decline in sales as a result of store closures related to the COVID-19 pandemic. Selling, general, and administrative expenses decreased$29.5 million to$98.5 million during the First Quarter 2020 from$128.0 million during the First Quarter 2019. The comparability of our SG&A was impacted by: payroll and benefit costs for certain employees during the period our stores were closed due to the COVID-19 pandemic, net of a payroll tax credit benefit resulting from the CARES Act, of approximately$4.2 million ; restructuring costs, primarily related to severance costs for corporate associates, of approximately$3.4 million ; the write-off of certain account receivables of approximately$1.0 million ; and incremental operating expenses, primarily personal protective equipment for our associates, of approximately$0.7 million . Excluding the impact of these charges, SG&A de-leveraged 380 basis points due to the de-leverage of fixed expenses resulting from the decline in sales as a result of temporary store closures, partially offset by a reduction in operating expenses associated with actions taken in response to the COVID-19 pandemic. Asset impairment charges were$37.1 million during the First Quarter 2020, including the ROU assets recorded in connection with Topic 842, primarily for 412 stores. These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net revenues and cash flow projections resulting from the COVID-19 disruption. Asset impairment charges during the First Quarter 2019 were$0.3 million , which related to the full impairment of primarily five stores. Benefit for income taxes was$60.2 million during the First Quarter 2020 compared to a benefit of$1.2 million during the First Quarter 2019. Our effective tax rate was a benefit of 34.4% and 35.0% in the First Quarter 2020 and the First Quarter 2019, respectively. The First Quarter 2020 benefit was primarily driven by a favorable benefit due to the enactment of the CARES Act. The First Quarter 2019 benefit was primarily driven by an excess tax benefit related to the vesting of equity shares, which caused a benefit for income taxes in the quarter. Net income (loss) was$(114.8) million during the First Quarter 2020 compared to income of$4.5 million during the First Quarter 2019, due to the COVID-19 pandemic and the other factors discussed above. Earnings (loss) per diluted share was a loss of$(7.86) in the First Quarter 2020 compared to earnings of$0.28 per diluted share in the First Quarter 2019. This decrease in earnings per share is due to the factors noted above, partially offset by a lower weighted average common shares outstanding of approximately 1.5 million, which is the result of our share repurchase program. Although we are facing a period of uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our key strategic growth initiatives--superior product, business transformation through technology, and fleet optimization. Focus on product remains our top priority and strong product acceptance is anticipated to deliver gross margin and inventory productivity benefits. We reintroduced the iconic Gymboree brand inFebruary 2020 on an enhanced Gymboree website and in co-branded locations in over 200 Company stores in theU.S. andCanada by designing, sourcing, and merchandising Spring 2020 collections. The transformation of our digital capabilities continues to expand with the development of a completely redesigned responsive site and mobile application, providing a rich online shopping experience geared towards the needs of our "on-the-go" mobile customers, expanded customer personalization, which delivers unique, relevant content to drive sales, loyalty and retention, and the ability to have our entire store fleet equipped with ship-from-store capabilities. We continue to evaluate our store fleet as part of our fleet optimization initiative. We have closed 275 stores, including the four stores closed in the First Quarter 2020, since the announcement of this initiative. Our fleet optimization strategy has resulted in an average lease life of approximately two years with approximately 70% of our stores having a lease event by the end of fiscal 2021. As accelerated demand for online purchasing has increased our digital business, partly as a result of COVID-19, we have increased our planned store closures and are targeting to close approximately 300 additional store locations by the end of fiscal 2021, with approximately 200 closing in fiscal 2020. During the First Quarter 2020, we repurchased approximately 0.3 million shares for approximately$14.6 million , inclusive of shares surrendered to cover tax withholdings associated with the vesting of equity awards. As ofMay 2, 2020 , there was approximately$93.8 million in aggregate remaining pursuant to the 2018 Share Repurchase Program. InMarch 2020 , we announced a temporary suspension of our capital return program, inclusive of share repurchases and dividends. We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates intoU.S. dollars. The table below summarizes those average translation rates that most impact our operating results: 24
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Thirteen Weeks Ended
May 2, May 4,
2020 2019
Average Translation Rates (1)
Canadian Dollar 0.7275 0.7505
Hong Kong Dollar 0.1288 0.1274
China Yuan Renminbi 0.1422 0.1490
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(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
CRITICAL ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity withU.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, such as those resulting from disease pandemics and other catastrophic events. Our historical estimates have not differed materially from actual results. The Company's estimated realizable value of its inventory as ofMay 2, 2020 reflects material adverse impacts associated with the COVID-19 pandemic business disruptions, which include the temporary closure of the Company's and its franchisees' stores, as well as significant declines in retail traffic. 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$0.6 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 2017 (the "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 applicable performance period, which is generally three years, adjusted operating margin expansion achieved for the performance period, and adjusted return on invested capital ("adjusted ROIC") achieved at the end of the performance period. The 2017 Performance Awards cliff vest, if earned, after completion of the applicable performance period. The fair value of the 25 -------------------------------------------------------------------------------- Table of Contents 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 and fiscal 2019 (the "2018 and 2019 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 applicable performance period, which is generally three years, adjusted operating margin expansion achieved for the performance period, adjusted ROIC achieved as of the end of the performance period, and our adjusted ROIC relative to that of companies in our peer group as of the end of the performance period. The 2018 and 2019 Performance Awards cliff vest, if earned, after completion of the performance period. The fair value of the 2018 and 2019 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 2020 net income by approximately$0.9 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 reached comparable sales status, or sooner if circumstances should dictate, on at least an annual basis. We believe 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 impairment, we project future cash flows over the remaining life of the lease, adjusted for lease payments, and compare the total undiscounted cash flows to the net book value of the related long-lived assets, including ROU 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 use discounted future cash flows directly associated with those assets to determine fair market value of long-lived assets and ROU 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 and competition and their effect on sales trends, as well as macroeconomic factors, such as global pandemics. 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. Asset impairment charges during the First Quarter 2020 were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net revenues and cash flow projections resulting from the COVID-19 disruption. 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. 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 Measurement 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: 26 -------------------------------------------------------------------------------- Table of Contents •Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities •Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly •Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities Our cash and cash equivalents, 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 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 fair value hierarchy. Our assets measured at fair value on a nonrecurring basis include long-lived assets, such as intangible assets, fixed assets, and ROU 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. 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 ofMay 2, 2020 would have impacted net income by approximately$0.5 million . Recently Issued Accounting Standards Adopted in Fiscal 2020 InAugust 2018 , the FASB issued guidance related to the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. We adopted this guidance in the First Quarter 2020. This adoption did not have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued guidance related to disclosure requirements for fair value measurement. The amendments modify current fair value measurement disclosure requirements by removing, adding, or modifying certain fair value measurement disclosures. We adopted this guidance in the First Quarter 2020. This adoption did not have a material impact on our consolidated financial statements. InJune 2016 , the FASB issued guidance related to the accounting for financial instrument credit losses. The guidance provides more decision useful information about the expected credit losses on financial instruments by replacing the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted this guidance in the First Quarter 2020. This adoption did not have a material impact on our consolidated financial statements. To Be Adopted After Fiscal 2020 InDecember 2019 , the FASB issued guidance related to the accounting for income taxes. The guidance aims to simplify the accounting for income taxes by removing certain exceptions to the general principles within the current guidance and by clarifying and amending the current guidance. The guidance is effective for annual reporting periods, and interim periods within those years, beginning afterDecember 15, 2020 . We do not expect the guidance to have a material impact on our consolidated financial statements.
RESULTS OF OPERATIONS
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Table of Contents
The following table sets forth, for the periods indicated, selected statements
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, SG&A increased approximately 760 basis points to 38.6% of net sales
during the First Quarter 2020 from 31.0% during the First Quarter 2019.
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.
Thirteen Weeks Ended
May 2, May 4,
2020 2019
Net sales 100.0 % 100.0 %
Cost of sales (exclusive of depreciation and amortization) 107.7 63.1
Gross profit (loss) (7.7) 36.9
Selling, general, and administrative expenses 38.6 31.0
Depreciation and amortization 7.0 4.5
Asset impairment charges 14.5 0.1
Operating income (loss) (67.8) 1.2
Income (loss) before benefit for income taxes (68.6) 0.8
Benefit for income taxes (23.6) (0.3)
Net income (loss) (45.0) % 1.1 %
Number of Company-operated stores, end of period 920 971
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Table may not add due to rounding.
The following table sets forth net sales by segment, for the periods indicated.
Thirteen Weeks Ended
May 2, May 4,
2020 2019
Net sales: (In thousands)
The Children's Place U.S. $ 234,948 $ 374,657 $ 255,207 $ 412,382
First Quarter 2020 Compared to the First Quarter 2019
Net sales decreased by$157.2 million , or 38.1%, to$255.2 million during the First Quarter 2020 from$412.4 million during the First Quarter 2019. The net sales decrease of$157.2 million primarily resulted from temporary store closures onMarch 18, 2020 due to the COVID-19 pandemic. 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 net sales. The Children's PlaceU.S. net sales decreased$139.8 million , or 37.3%, to$234.9 million in the First Quarter 2020 compared to$374.7 million in the First Quarter 2019. This decrease primarily resulted from temporary store closures due to the COVID-19 pandemic.The Children's Place International net sales decreased$17.4 million , or 46.2%, to$20.3 million in the First Quarter 2020 compared to$37.7 million in the First Quarter 2019. The decrease resulted primarily from temporary store closures and a decrease in revenue from international franchisees due to the COVID-19 pandemic. Total e-commerce sales, which include postage and handling, increased to 53.0% of net sales during the First Quarter 2020 from 29.2% during the First Quarter 2019 due to accelerating e-commerce demand. 28 -------------------------------------------------------------------------------- Table of Contents Gross profit (loss) decreased by$171.7 million to$(19.7) million during the First Quarter 2020 from$152.0 million during the First Quarter 2019. The comparability of our gross profit (loss) was impacted by an inventory provision of approximately$63.2 , related to the adverse business disruption resulting from the COVID-19 pandemic, including the store closures; occupancy expense of approximately$23.1 million for our stores temporarily closed due to COVID-19; and incremental expenses, primarily personal protective equipment and incentive pay for our associates, of approximately$1.7 million . Excluding the impact of these charges, gross margin de-leveraged 990 basis points. The decrease resulted primarily from increased penetration of our e-commerce business and its higher fulfillment costs, along with the deleverage of fixed expenses resulting from the decline in sales as a result of store closures related to the COVID-19 pandemic. 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 sales to fluctuate from period to period. Selling, general, and administrative expenses decreased$29.5 million to$98.5 million during the First Quarter 2020 from$128.0 million during the First Quarter 2019. The comparability of our SG&A was impacted by: payroll and benefit costs for certain employees during the period our stores were closed due to the COVID-19 pandemic, net of a payroll tax credit benefit resulting from the CARES Act, of approximately$4.2 million ; restructuring costs, primarily related to severance costs for corporate associates, of approximately$3.4 million ; the write-off of certain account receivables of approximately$1.0 million ; and incremental operating expenses, primarily personal protective equipment for our associates, of approximately$0.7 million . Excluding the impact of these charges, SG&A de-leveraged 380 basis points due to the de-leverage of fixed expenses resulting from the decline in sales as a result of temporary store closures, partially offset by a reduction in operating expenses associated with actions taken in response to the COVID-19 pandemic. Asset impairment charges were$37.1 million during the First Quarter 2020, including the ROU assets recorded in connection with Topic 842, primarily for 412 stores. These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net revenues and cash flow projections resulting from the COVID-19 disruption. Asset impairment charges during the First Quarter 2019 were$0.3 million , which related to the full impairment of primarily five stores. Depreciation and amortization was$17.9 million during the First Quarter 2020 compared to$18.6 million during the First Quarter 2019. Benefit for income taxes was$60.2 million during the First Quarter 2020 compared to a benefit of$1.2 million during the First Quarter 2019. Our effective tax rate was a benefit of 34.4% and 35.0% in the First Quarter 2020 and the First Quarter 2019, respectively. The First Quarter 2020 benefit was primarily driven by a favorable benefit due to the enactment of the CARES Act. The First Quarter 2019 benefit was primarily driven by an excess tax benefit related to the vesting of equity shares, which caused a benefit for income taxes in the quarter. Net income (loss) was$(114.8) million during the First Quarter 2020 compared to income of$4.5 million during the First Quarter 2019, due to the COVID-19 pandemic and the other factors discussed above. Earnings (loss) per diluted share was a loss of$(7.86) in the First Quarter 2020 compared to earnings of$0.28 per diluted share in the First Quarter 2019. This decrease in earnings per share is due to the factors noted above, partially offset by a lower weighted average common shares outstanding of approximately 1.5 million, which is the result of our share repurchase program. LIQUIDITY AND CAPITAL RESOURCES Liquidity In response to the COVID-19 pandemic, the Company has taken the following actions to preserve financial flexibility: •Executing a substantial reduction and/or deferral of all non-essential expenses and capital expenditures; •Collaborating with vendor partners to extend payment terms and balance forward inventory receipts to reflect reduced demand; •Suspended rent payments on all of ourU.S. and Canadian retail stores; •Evaluating our options on store lease events occurring through the end of fiscal 2021, which impact approximately 70% of our current store fleet, targeting 300 additional retail store closures through fiscal 2021; •EffectiveApril 1, 2020 ,Jane Elfers , President and Chief Executive Officer, agreed to forgo 100% of her salary until further notice. In addition, the senior leadership team took a temporary 25% reduction in salary until further notice and the independent Directors of the Board unanimously approved to forgo their cash compensation until further notice; 29 -------------------------------------------------------------------------------- Table of Contents •EffectiveApril 5, 2020 , allU.S. and Canadian field management and store associates were temporarily furloughed. We continue to furlough a portion of ourU.S. and Canadian field management and store associates not supporting ship from store activities; •EffectiveApril 5, 2020 , we instituted a combination of temporary furloughs and pay reductions for the substantial majority of our corporate staff; •Finalized an amendment to our revolving credit facility, which increased borrowing capacity from$325 million to$360 million for a period of one year; and •Temporarily suspended the Company's capital return program, inclusive of share repurchases and dividends. Our working capital needs typically 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, prior to the suspension of our capital return program, the repurchases of our common stock and payment of dividends. Our working capital deficit increased$164.6 million to$290.8 million atMay 2, 2020 compared to$126.2 million atMay 4, 2019 , primarily due to seasonal cash usage and the impact of the COVID-19 pandemic, partially offset by cash management. During the First Quarter 2020, we repurchased approximately 0.3 million shares for approximately$14.6 million . During the First Quarter 2019, the Company repurchased approximately 0.3 million shares for approximately$33.3 million , inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards. Our credit facility provides for borrowings up to the lesser of$360.0 million , untilApril 2021 , when it reduces to$325 million , or our borrowing base, as defined by the credit facility agreement (see "Credit Facility" below). AtMay 2, 2020 , we had$234.6 million of outstanding borrowings and$88.4 million available for borrowing. In addition, atMay 2, 2020 , we had$6.2 million of outstanding letters of credit with an additional$43.8 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 subsidiaries maintain a credit agreement withWells Fargo Bank, National Association ("Wells Fargo"),Bank of America, N.A .,HSBC Business Credit (USA) Inc. , andJPMorgan Chase Bank, N.A . as lenders (collectively, the "Lenders") and Wells Fargo, as Administrative Agent, Collateral Agent, and SwingLine Lender (the "Credit Agreement"). The Credit Agreement, which expires inMay 2024 , consists of a$360 million asset based revolving credit facility, that was recently increased from$325 million as a result of finalizing an amendment with lenders onApril 24, 2020 to secure the Company an additional$35 million available under the accordion feature for a period of one year, and including a$25 million Canadian sublimit, with a$50 million sublimit for standby and documentary letters of credit. Revolving credit loans outstanding under the Credit Agreement bear interest, at the Company's option, at: (i)the prime rate plus a margin of 1.75% to 1.88% based on the amount of our average excess availability under the facility; or (ii)the London InterBank Offered Rate, or "LIBOR", for an interest period of one, two, three, or six months, as selected by us, plus a margin of 2.50% to 2.75% based on the amount of our average excess availability under the facility. We are charged an unused line fee of 0.25% on the unused portion of the commitments. Letter of credit fees range from 1.25% to 1.38% for commercial letters of credit and range from 2.00% to 2.25% for standby letters of credit. Letter of credit fees are determined based on the amount of our average excess availability under the facility. The amount available for loans and letters of credit under the Credit Agreement is determined by a borrowing base consisting of certain credit card receivables, certain 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 the Company'sU.S. and Canadian assets excluding intellectual property, software, equipment, and fixtures. 30
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Table of Contents We have capitalized an aggregate of approximately$5.3 million in deferred financing costs related to the Credit Agreement. The unamortized balance of deferred financing costs atMay 2, 2020 was approximately$1.1 million . Unamortized deferred financing costs are amortized over the remaining term of the Credit Agreement. Cash Flows/Capital Expenditures During the First Quarter 2020, cash flows used in operating activities were$40.5 million compared to cash flows provided by operating activities of$21.2 million during the First Quarter 2019. The decrease was primarily as a result of a net loss in the quarter due to temporary store closures due to the COVID-19 pandemic, partially offset by strategic working capital management and the extension of vendor payment terms. During the First Quarter 2020, cash flows used in investing activities were$5.6 million compared to$86.5 million during the First Quarter 2019. This change was primarily due to the Gymboree intellectual property and related assets acquisition during the First Quarter 2019 and a reduction in capital expenditures. During the First Quarter 2020, cash flows provided by financing activities were$49.2 million compared to$62.0 million during the First Quarter 2019. The decrease primarily resulted from a decrease in borrowings under our revolving credit facility, partially offset by a decrease in purchases of our common stock and the suspension of the payment of dividends. InMarch 2020 , we temporarily suspended our capital return program, inclusive of share repurchases and dividends. Our ability to continue to meet our capital requirements in fiscal 2020 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 the First Quarter 2020, we were able to fund our capital expenditures with cash on hand 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 inU.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 ofMay 2, 2020 , we had foreign exchange forward contracts with an aggregate notional amount of$2.7 million , and the fair value of the derivative instruments was an asset of$1.4 million .
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