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MarketScreener Homepage  >  Equities  >  Nasdaq  >  The Children's Place, Inc.    PLCE

THE CHILDREN'S PLACE, INC.

(PLCE)
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Children Place : CHILDRENS PLACE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

09/03/2020 | 04:07pm EST
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 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 1, 2020 and supplemented by the "Risk Factors"
section of its quarterly report on Form 10-Q for the fiscal quarter ended May 2,
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, schools adopting a remote learning model,
closures of businesses 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
ended February 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:
•Second Quarter 2020 - The thirteen weeks ended August 1, 2020
•Second Quarter 2019 - The thirteen weeks ended August 3, 2019
•Year-To-Date 2020 - The twenty-six weeks ended August 1, 2020
•Year-To-Date 2019 - The twenty-six weeks ended August 3, 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 in the United States
•FASB ASC - FASB Accounting Standards Codification, which serves as the source
for authoritative U.S. GAAP, except that rules and interpretive releases by the
SEC are also sources of authoritative U.S. GAAP for SEC registrants
Our Business
We are the largest pure-play children's specialty apparel retailer in North
America. We design, contract to manufacture, 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 of August 1, 2020, we had 824 stores
across North America, our e-commerce businesses at www.childrensplace.com and
www.gymboree.com, and had 276 international points of distribution with our
eight franchise partners in 19 countries.


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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 and www.gymboree.com.  Included in The Children's PlaceU.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 August 1,
2020, The Children's Place U.S. had 711 stores and The Children's Place
International had 113 stores. As of August 3, 2019, The Children's Place U.S.
had 840 stores and The Children's Place International had 121 stores.
Recent Developments
The COVID-19 pandemic has significantly impacted regions all around the world,
resulting in restrictions and shutdowns implemented by national, state, and
local authorities and private entities, leading to significant adverse economic
conditions and business disruptions, as well as significant volatility in global
financial and retail markets. Federal, state, and local governments worldwide
have imposed and continue to impose varying degrees of preventative and
protective actions, such as travel bans, restrictions on public gatherings,
forced closures of businesses and other activities, the adoption of remote or
hybrid learning models for schools, and stay-at-home orders, all in an effort to
reduce the spread of the virus. In addition, certain mall owners have restricted
hours of operation and the number of people permitted in stores. 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 on March 18, 2020, we temporarily closed
all of our stores across the U.S. and Canada. We re-opened the majority of our
stores during the last two weeks of June and, as of August 1, 2020, we had 771
stores open, representing 94 percent of our total fleet. Our distribution
centers remain open and operating to support our e-commerce business, which has
increased 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;
•Temporarily suspended rent payments on all of our U.S. and Canadian retail
stores during the first quarter of fiscal 2020 and resumed rent payments on a
modified basis as stores began to re-open during the Second Quarter 2020. We are
negotiating with our landlords regarding the suspended rent payments and the
modified rent payments;
•Evaluating our options on store lease events occurring through the end of
fiscal 2021, which impact approximately 65% of our current store fleet. We are
targeting 300 retail store closures through fiscal 2021 with a target of 200
store closures in fiscal 2020, inclusive of the 102 stores permanently closed in
the first half of fiscal 2020, and 100 store closures in fiscal 2021;
•Effective April 1, 2020, Jane Elfers, President and Chief Executive Officer,
agreed to forgo 100% of her salary. In addition, the senior leadership team took
a 25% reduction in salary and the independent Directors of the Board unanimously
approved to forgo their cash compensation. Effective June 28, 2020, the base
salaries of the executives noted above and the cash compensation of the
independent Directors of the Board were reinstated to 100% of pre-reduction
levels;
•Effective April 5, 2020, all U.S. and Canadian field management and store
associates were temporarily furloughed, with the Company continuing to provide
health benefits, until needed to support ship-from-store activities or stores
were re-opened;
•Effective April 5, 2020, we instituted a combination of temporary furloughs and
pay reductions for the substantial majority of our corporate staff. During the
Second Quarter 2020 a majority of our furloughed employees returned to work and
effective June 28, 2020, salaries were reinstated to 100% of pre-reduction
levels;
•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
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•Temporarily suspended the Company's capital return program, inclusive of share
repurchases and dividends.
Operating Highlights
Net sales decreased by $51.6 million, or 12.3%, to $368.9 million during the
Second Quarter 2020 from $420.5 million during the Second Quarter 2019.  The net
sales decrease of $51.6 million primarily resulted from the impact of temporary
store closures, along with a decrease in back to school sales beginning in
mid-July, partially offset by increased e-commerce sales.
  Gross profit decreased by $71.7 million to $67.1 million during the Second
Quarter 2020 from $138.8 million during the Second Quarter 2019.  The
comparability of our gross profit was impacted by occupancy expense of
approximately $23.9 million for our stores temporarily closed due to COVID-19
and incremental expenses, including personal protective equipment and incentive
pay for our associates, of approximately $2.7 million. Excluding the impact of
these charges, gross margin de-leveraged 760 basis points. The decrease resulted
primarily from higher fulfillment costs related to meaningfully higher levels of
ship-from-store activity related to strong digital demand.
Selling, general, and administrative expenses decreased $2.1 million to $114.3
million during the Second Quarter 2020 from $116.4 million during the Second
Quarter 2019. The comparability of our SG&A was impacted by incremental
operating expenses, including personal protective equipment for our associates,
of approximately $7.1 million and restructuring costs of approximately $3.0
million. Excluding the impact of these charges, SG&A de-leveraged 60 basis
points due to the de-leverage of fixed expenses resulting from the decline in
sales, partially offset by a reduction in operating expenses associated with
actions taken in response to the COVID-19 pandemic.
Provision (benefit) for income taxes was a benefit of $(20.5) million during the
Second Quarter 2020 compared to an expense of $35 thousand during the Second
Quarter 2019.  Our effective tax rate was a benefit of 30.5% compared to expense
of 2.2% in the Second Quarter 2020 and the Second Quarter 2019, respectively.
The Second Quarter 2020 benefit was primarily driven by a favorable benefit due
to the enactment of the CARES Act. The effective tax rate during the Second
Quarter 2019 was primarily driven by an excess tax benefit related to the
vesting of equity shares during the Second Quarter 2019, which lowered the
overall effective tax rate.
Net income (loss) was a loss of $(46.6) million during the Second Quarter 2020
compared to income of $1.5 million during the Second Quarter 2019, due to the
COVID-19 pandemic and other factors discussed above.  Earnings (loss) per
diluted share was a loss of $(3.19) in the Second Quarter 2020 compared to
earnings of $0.10 per diluted share in the Second 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 1.2 million,
which is the result of our share repurchase program, prior to its suspension.
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. We reintroduced the iconic Gymboree
brand in February 2020 on an enhanced Gymboree website and in co-branded
locations in over 200 Company stores in the U.S. and Canada 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 an online shopping experience geared towards the needs of our
"on-the-go" mobile customers, expanded customer personalization, which delivers
unique, relevant content designed to drive sales, loyalty and retention, and the
ability to have our entire store fleet equipped with ship-from-store
capabilities. Also, in response to increased digital demand, including as a
result of the COVID-19 pandemic, the Company has increased and will continue to
increase the utilization of its third-party logistics provider to further
support both our U.S. and Canadian e-commerce operations.
We continue to evaluate our store fleet as part of our fleet optimization
initiative. We have closed 373 stores, including the 102 stores closed during
Year-To-Date 2020, since the announcement of this initiative. Our fleet
optimization strategy has resulted in an average lease life of approximately two
years with approximately 65% 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 accelerated our
planned store closures and are targeting 300 retail store closures through
fiscal 2021 with a target of 200 store closures in fiscal 2020, inclusive of the
102 stores permanently closed in the first half of fiscal 2020, and 100 store
closures in fiscal 2021.
During Year-To-Date 2020, we repurchased approximately 0.3 million shares for
approximately $15.4 million, inclusive of shares surrendered to cover tax
withholdings associated with the vesting of equity awards. As of August 1, 2020,
there was approximately $93.0 million in aggregate remaining pursuant to the
2018 Share Repurchase Program. In March 2020, we announced a temporary
suspension of our capital return program, inclusive of share repurchases and
dividends.
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We have subsidiaries whose operating results are based in foreign currencies and
are thus subject to the fluctuations of the corresponding translation rates into
U.S. dollars. The table below summarizes those average translation rates that
most impact our operating results:
                                                     Thirteen Weeks Ended                                                 Twenty-six Weeks Ended
                                             August 1,                   August 3,             August 1,              August 3,
                                                2020                        2019                  2020                   2019
Average Translation Rates (1)
Canadian Dollar                                0.7313                      0.7537                0.7294                 0.7521
Hong Kong Dollar                               0.1290                      0.1277                0.1289                 0.1276
China Yuan Renminbi                            0.1416                      0.1453                0.1419                 0.1471

__________________________________________________

(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.



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, such as
those resulting from disease pandemics and other catastrophic events.  Our
historical estimates have not differed materially from actual results.
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. Performance Awards are granted
in the form of restricted stock units which have performance criteria that must
be achieved for the awards to vest (the "Target Shares") in addition to a
service period
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requirement. For Performance Awards, an employee may earn from 0% to 250% of
their Target Shares based on the Company's achievement of certain performance
goals established at the beginning of the applicable performance period. The
Performance Awards cliff vest, if earned, after completion of the applicable
performance period, which is generally three years. The fair value of these
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 Year-To-Date 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:
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•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 of August 1, 2020 would have impacted net income by
approximately $0.5 million.

Recently Issued Accounting Standards
Adopted in Fiscal 2020
In August 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 of fiscal 2020.
This adoption did not have a material impact on our consolidated financial
statements.
In August 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 of fiscal
2020. This adoption did not have a material impact on our consolidated financial
statements.
In June 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 U.S. 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 of fiscal 2020. This adoption did
not have a material impact on our consolidated financial statements.
To Be Adopted After Fiscal 2020
In December 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
after December 15, 2020. We do not expect the guidance to have a material impact
on our consolidated financial statements.
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RESULTS OF OPERATIONS
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 330 basis points to 31.0% of net sales
during the Second Quarter 2020 from 27.7% during the Second 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                                               Twenty-six Weeks Ended
                                                        August 1,                August 3,                 August 1,                 August 3,
                                                          2020                     2019                      2020                       2019
Net sales                                                    100.0  %                  100.0  %                  100.0  %                   100.0  %
Cost of sales (exclusive of depreciation and
amortization)                                                 81.8                      67.0                      92.4                       65.1
Gross profit                                                  18.2                      33.0                       7.6                       34.9
Selling, general, and administrative expenses                 31.0                      27.7                      34.1                       29.3
Depreciation and amortization                                  4.5                       4.4                       5.5                        4.4
Asset impairment charges                                       0.1                         -                       6.0                        0.1

Operating income (loss)                                      (17.5)                      0.9                     (38.1)                       1.1

Income (loss) before benefit for income taxes                (18.2)                      0.4                     (38.8)                       0.6
Provision (benefit) for income taxes                          (5.6)                        -                     (12.9)                      (0.1)
Net income (loss)                                            (12.6) %                    0.4  %                  (25.9) %                     0.7  %
Number of Company-operated stores, end of period               824                       961                       824                        961


____________________________________________

Table may not add due to rounding.



The following table sets forth net sales by segment, for the periods indicated.
                                                                                                              Twenty-six Weeks
                                                       Thirteen Weeks Ended                                        Ended
                                                   August 1,           August 3,          August 1,           August 3,
                                                      2020                2019               2020                2019
Net sales:                                                                    (In thousands)
The Children's Place U.S.                        $   333,034$ 374,725$ 567,982$   749,381
The Children's Place International                    35,889             45,745             56,148               83,470
Total net sales                                  $   368,923$ 420,470$ 624,130$   832,851

Second Quarter 2020 Compared to the Second Quarter 2019


Net sales decreased by $51.6 million, or 12.3%, to $368.9 million during the
Second Quarter 2020 from $420.5 million during the Second Quarter 2019.  The net
sales decrease of $51.6 million primarily resulted from the impact of temporary
store closures, along with a decrease in back to school sales beginning in
mid-July, partially offset by increased e-commerce sales.
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 Place U.S. net sales decreased $41.7 million, or 11.1%, to $333.0
million in the Second Quarter 2020 compared to $374.7 million in the Second
Quarter 2019.  This decrease primarily resulted from the impact of temporary
store closures, along with a decrease in back to school sales beginning in
mid-July, partially offset by increased e-commerce sales.
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The Children's Place International net sales decreased $9.8 million, or 21.4%,
to $35.9 million in the Second Quarter 2020 compared to $45.7 million in the
Second Quarter 2019.  This decrease primarily resulted 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 71.0%
of net sales during the Second Quarter 2020 from 28.6% during the Second Quarter
2019.
Gross profit decreased by $71.7 million to $67.1 million during the Second
Quarter 2020 from $138.8 million during the Second Quarter 2019.  The
comparability of our gross profit was impacted by occupancy expense of
approximately $23.9 million for our stores temporarily closed due to COVID-19
and incremental expenses, including personal protective equipment and incentive
pay for our associates, of approximately $2.7 million. Excluding the impact of
these charges, gross margin de-leveraged 760 basis points. The decrease resulted
primarily from higher fulfillment costs related to meaningfully higher levels of
ship-from-store activity related to strong digital demand.
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 $2.1 million to $114.3
million during the Second Quarter 2020 from $116.4 million during the Second
Quarter 2019. The comparability of our SG&A was impacted by incremental
operating expenses, including personal protective equipment for our associates,
of approximately $7.1 million and restructuring costs of approximately $3.0
million. Excluding the impact of these charges, SG&A de-leveraged 60 basis
points due to the de-leverage of fixed expenses resulting from the decline in
sales, partially offset by a reduction in operating expenses associated with
actions taken in response to the COVID-19 pandemic.
Asset impairment charges were $0.5 million during the Second Quarter 2020,
primarily related to six stores. Asset impairment charges during the Second
Quarter 2019 were $0.1 million, primarily related to the full impairment of two
stores.
Depreciation and amortization was $16.7 million during the Second Quarter 2020
compared to $18.5 million during the Second Quarter 2019 primarily reflecting
decreased depreciation associated with the write-off of store fixed assets as a
result of the impairment charge incurred in the first quarter of 2020.
Provision (benefit) for income taxes was a benefit of $(20.5) million during the
Second Quarter 2020 compared to an expense of $35 thousand during the Second
Quarter 2019.  Our effective tax rate was a benefit of 30.5% and expense of 2.2%
in the Second Quarter 2020 and the Second Quarter 2019, respectively. The Second
Quarter 2020 benefit was primarily driven by a favorable benefit due to the
enactment of the CARES Act. The effective tax rate during the Second Quarter
2019 was primarily driven by an excess tax benefit related to the vesting of
equity shares during the Second Quarter 2019, which lowered the overall
effective tax rate.
Net income (loss) was a loss of $(46.6) million during the Second Quarter 2020
compared to income of $1.5 million during the Second Quarter 2019, due to the
factors discussed above.  Earnings per diluted share was a loss of $(3.19) in
the Second Quarter 2020 compared to earnings of $0.10 per diluted share in the
Second 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 1.2 million, which is the result of our share
repurchase program.

Year-To-Date 2020 Compared to the Year-To-Date 2019
Net sales decreased by $208.8 million, or 25.1%, to $624.1 million during
Year-To-Date 2020 from $832.9 million during Year-To-Date 2019.  The net sales
decrease of $208.8 million primarily resulted from temporary store closures due
to the COVID-19 pandemic, partially offset by increased e-commerce sales.
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 Place U.S. net sales decreased $181.4 million, or 24.2%, to
$568.0 million during Year-To-Date 2020 compared to $749.4 million during
Year-To-Date 2019.  This decrease primarily resulted from temporary store
closures due to the COVID-19 pandemic, partially offset by increased e-commerce
sales.
The Children's Place International net sales decreased $27.4 million, or 32.8%,
to $56.1 million during Year-To-Date 2020 compared to $83.5 million during
Year-To-Date 2019.  This decrease primarily resulted from temporary store
closures and a decrease in revenue from international franchisees due to the
COVID-19 pandemic.
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Total e-commerce sales, which include postage and handling, increased to 63.6%
of net sales during Year-To-Date 2020 from 28.9% during Year-To-Date 2019.
Gross profit decreased by $243.4 million to $47.4 million during Year-To-Date
2020 from $290.8 million during Year-To-Date 2019.  The comparability of our
gross profit was impacted by an inventory provision of approximately $63.2
million, related to the adverse business disruption resulting from the COVID-19
pandemic, including the store closures; occupancy expense of approximately $47.1
million for our stores temporarily closed due to COVID-19; and incremental
expenses, including personal protective equipment and incentive pay for our
associates, of approximately $4.4 million. Excluding the impact of these
charges, gross margin de-leveraged 890 basis points. The decrease resulted
primarily from higher fulfillment costs related to meaningfully higher levels of
ship-from-store activity related to strong digital demand.
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 $31.6 million to $212.8
million during Year-To-Date 2020 from $244.4 million during Year-To-Date 2019.
The comparability of our SG&A was impacted by incremental expenses, including
personal protective equipment and incentive pay for our associates, of
approximately $7.8 million, restructuring costs, primarily related to severance
costs for corporate and store associates, of approximately $6.4 million, 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, and the write-off of certain
account receivables of approximately $1.1 million. Excluding the impact of these
charges, SG&A de-leveraged 160 basis points due to the de-leverage of fixed
expenses resulting from the decline in sales, partially offset by a reduction in
operating expenses associated with actions taken in response to the COVID-19
pandemic.
Asset impairment charges were $37.6 million during Year-To-Date 2020, including
the ROU assets recorded in connection with Topic 842, primarily for 418 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 were $0.5 million during Year-To-Date 2019, primarily related to the
full impairment of seven stores.
Depreciation and amortization was $34.6 million during Year-To-Date 2020
compared to $37.1 million during Year-To-Date 2019 primarily reflecting
decreased depreciation associated with the write-off of store fixed assets as a
result of the impairment charge incurred in the first quarter of fiscal 2020.
Benefit for income taxes was a benefit of $80.7 million during Year-To-Date 2020
compared to a benefit of $1.1 million during Year-To-Date 2019.  Our effective
tax rate was a benefit of 33.3% and 23.1% during Year-To-Date 2020 and
Year-To-Date 2019, respectively. The Year-To-Date 2020 benefit was primarily
driven by a favorable benefit due to the enactment of the CARES Act. The
Year-To-Date 2019 benefit was primarily driven by an excess tax benefit related
to the vesting of equity shares, which caused a benefit for income taxes for the
year.
Net income (loss) was a loss of $(161.4) million during Year-To-Date 2020
compared to income of $6.0 million during Year-To-Date 2019, due to the factors
discussed above.  Earnings per diluted share was a loss of $(11.04) during
Year-To-Date 2020 compared to earnings of $0.38 per diluted share during
Year-To-Date 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 1.4 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;
•Temporarily suspended rent payments on all of our U.S. and Canadian retail
stores during the first quarter of fiscal 2020 and resumed rent payments on a
modified basis as stores began to re-open during the Second Quarter 2020. We are
negotiating with our landlords regarding the suspended rent payments and the
modified rent payments;
•Evaluating our options on store lease events occurring through the end of
fiscal 2021, which impact approximately 65% of our current store fleet. We are
targeting 300 retail store closures through fiscal 2021 with a target of 200
store
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closures in fiscal 2020, inclusive of the 102 stores permanently closed in the
first half of fiscal 2020, and 100 store closures in fiscal 2021;
•Effective April 1, 2020, Jane Elfers, President and Chief Executive Officer,
agreed to forgo 100% of her salary. In addition, the senior leadership team took
a 25% reduction in salary and the independent Directors of the Board unanimously
approved to forgo their cash compensation. Effective June 28, 2020, the base
salaries of the executives noted above and the cash compensation of the
independent Directors of the Board were reinstated to 100% of pre-reduction
levels;
•Effective April 5, 2020, all U.S. and Canadian field management and store
associates were temporarily furloughed, with the Company continuing to provide
health benefits, until needed to support ship-from-store activities or stores
were re-opened;
•Effective April 5, 2020, we instituted a combination of temporary furloughs and
pay reductions for the substantial majority of our corporate staff. During the
Second Quarter 2020 a majority of our furloughed employees returned to work and
effective June 28, 2020, salaries were reinstated to 100% of pre-reduction
levels;
•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 $186.9 million to a deficit of $339.7
million at August 1, 2020 compared to a working capital deficit of $152.8
million at August 3, 2019, primarily due to seasonal cash usage and the impact
of the COVID-19 pandemic, partially offset by cash management. During
Year-To-Date 2020, prior to the suspension of our capital return program, we
repurchased approximately 0.3 million shares for approximately $15.4 million.
During Year-To-Date 2019, we repurchased approximately 0.6 million shares for
approximately $60.4 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 million,
until April 2021, when it reduces to $325 million, or our borrowing base, as
defined by the credit facility agreement (see "Credit Facility" below).  At
August 1, 2020, we had $250.8 million of outstanding borrowings and $69.7
million available for borrowing. In addition, at August 1, 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 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, which expires in May 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 on April 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.
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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's U.S. and Canadian assets
excluding intellectual property, software, equipment, and fixtures.
We have capitalized an aggregate of approximately $5.4 million in deferred
financing costs related to the Credit Agreement. The unamortized balance of
deferred financing costs at August 1, 2020 was approximately $1.0 million.
Unamortized deferred financing costs are amortized over the remaining term of
the Credit Agreement.
Cash Flows/Capital Expenditures
During Year-To-Date 2020, cash flows used in operating activities were $83.2
million compared to cash flows provided by operating activities of $23.3 million
during Year-To-Date 2019. The decrease was primarily as a result of a net loss
in the year 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 Year-To-Date 2020, cash flows used in investing activities were $14.1
million compared to $97.5 million during Year-To-Date 2019. This change was
primarily due to the Gymboree intellectual property and related assets
acquisition during Year-To-Date 2019 and a reduction in capital expenditures
during Year-To-Date 2020 compared to Year-To-Date 2019.
During Year-To-Date 2020, cash flows provided by financing activities were $64.6
million compared to $69.3 million during Year-To-Date 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. In March 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
Year-To-Date 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 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 August 1, 2020, we had
foreign exchange forward contracts with an aggregate notional amount of $9.5
million, and the fair value of the derivative instruments was an asset of $1.3
million.

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