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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)

11/24/2020 | 04:40pm 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"
sections of its quarterly reports on Form 10-Q for the fiscal quarter ended May
2, 2020 and the fiscal quarter ended August 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, schools adopting remote and hybrid learning models, 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 the COVID-19 pandemic or other
disease outbreaks, or 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:
•Third Quarter 2020 - The thirteen weeks ended October 31, 2020
•Third Quarter 2019 - The thirteen weeks ended November 2, 2019
•Year-To-Date 2020 - The thirty-nine weeks ended October 31, 2020
•Year-To-Date 2019 - The thirty-nine weeks ended November 2, 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 October 31, 2020, we had 809 stores
across North America, our e-commerce businesses at www.childrensplace.com and
www.gymboree.com, and had 252 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 280, 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-based
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 October 31,
2020, The Children's Place U.S. had 702 stores and The Children's Place
International had 107 stores. As of November 2, 2019, The Children's Place U.S.
had 834 stores and The Children's Place International had 121 stores.
COVID-19 Pandemic
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 and health
officials 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 October 31, 2020, 99% of our
stores were open to the public. Our distribution centers remain open and
operating to support our e-commerce business, which has significantly 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 118 stores permanently closed in
the first nine months of fiscal 2020, and 100 store closures in fiscal 2021;
•Effective April 1, 2020, Jane Elfers, President and Chief Executive Officer,
forfeited 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;
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•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;
•Temporarily suspended the Company's capital return program, inclusive of share
repurchases and dividends;
•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
•Secured an $80 million term loan on October 5, 2020. We used all of the net
proceeds from the term loan to pay down revolving credit facility borrowings.
Recent Developments
In November 2020, as a result of recent nationwide increases in COVID-19 cases,
state and local regulations required the Company to temporarily close additional
retail stores in the U.S and Canada. The Company cannot predict whether or when
store closures will continue to occur or when the stores that were required to
close will reopen.
In response to increased digital demand resulting from the COVID-19 pandemic,
the Company expects a continued increase in the use of its third-party logistics
provider to further support both our U.S. and Canadian e-commerce operations. In
addition, we expect to incur freight surcharges and to experience capacity
constraints across the domestic transportation network resulting from the
unprecedented level of expected online demand.
Operating Highlights
Net sales decreased by $99.2 million, or 18.9%, to $425.6 million during the
Third Quarter 2020 from $524.8 million during the Third Quarter 2019, primarily
as a result of a decrease in back-to-school sales due to schools adopting remote
and hybrid learning models, along with the impact of the permanent and temporary
store closures.
Gross profit decreased by $52.0 million to $146.1 million during the Third
Quarter 2020 from $198.1 million during the Third Quarter 2019.  The
comparability of our gross profit was impacted by incremental expenses related
to the COVID-19 pandemic, including personal protective equipment and incentive
pay for our associates, of approximately $3.8 million and occupancy expense of
approximately $1.9 million for our stores temporarily closed due to the COVID-19
pandemic. Excluding the impact of these charges, gross margin de-leveraged 210
basis points to 35.7% of net sales. The decrease was primarily the result of
increased penetration of our ecommerce business and its higher fulfillment
costs, along with the deleverage of fixed expenses resulting from the decline in
net sales, partially offset by higher merchandise margins in both our stores and
e-commerce channels.
Selling, general, and administrative expenses decreased $13.9 million to $106.6
million during the Third Quarter 2020 from $120.5 million during the Third
Quarter 2019. The comparability of our SG&A was impacted by incremental
operating expenses, including personal protective equipment for our associates,
of approximately $1.6 million and restructuring costs of approximately $0.9
million. Excluding the impact of these and other smaller incremental charges,
SG&A de-leveraged 210 basis points to 24.3% of net sales, primarily as a result
of the deleverage of fixed expenses resulting from the decline in net sales and
higher incentive compensation accruals, partially offset by a reduction in store
expenses resulting from our permanent store closures, as well as a reduction in
operating expenses associated with actions taken in response to the COVID-19
pandemic.
Provision for income taxes was an expense of $6.7 million during the Third
Quarter 2020 compared to an expense of $12.7 million during the Third Quarter
2019.  Our effective tax rate was 33.6% in Third Quarter 2020 compared to 22.8%
in Third Quarter 2019. The increase in the effective tax rate for the Third
Quarter 2020 compared to the Third Quarter 2019 was primarily driven by the
impact of the CARES Act on the current quarter rate and the jurisdictional mix
of income in the periods.
Net income decreased by $29.7 million to $13.3 million during the Third Quarter
2020 compared to net income of $43.0 million during the Third Quarter 2019, due
to the COVID-19 pandemic and other factors discussed above.  Earnings per
diluted share was $0.91 in the Third Quarter 2020 compared to $2.77 per diluted
share in the Third Quarter 2019.  This decrease in diluted earnings per share is
due to the factors noted above, partially offset by a lower weighted average
common shares outstanding of approximately 0.9 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.

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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 and were encouraged
by the initial customer response to the relaunch prior to the COVID-19 pandemic.
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 389 stores, including the 118 stores closed during
Year-To-Date 2020, since the announcement of this initiative in 2013. 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 the COVID-19 pandemic, 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 118 stores permanently closed in the first nine months of
fiscal 2020, and 100 store closures in fiscal 2021.
During Year-To-Date 2020, we repurchased approximately 0.3 million shares for
approximately $15.5 million, consisting of shares surrendered to cover tax
withholdings associated with the vesting of equity awards. As of October 31,
2020, there was approximately $92.9 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.
We have subsidiaries whose operating results are based in foreign currencies and
are thus subject to the fluctuations of the corresponding translation rates into
U.S. dollars. The table below summarizes those average translation rates that
most impact our operating results:
                                                         Thirteen Weeks Ended                                   Thirty-nine Weeks Ended
                                               October 31,                   November 2,             October 31,                     November 2,
                                                   2020                          2019                    2020                            2019
Average Translation Rates (1)
Canadian Dollar                                   0.7565                        0.7560                  0.7384                          0.7534
Hong Kong Dollar                                  0.1290                        0.1276                  0.1290                          0.1276
China Yuan Renminbi                               0.1466                        0.1410                  0.1435                          0.1451

__________________________________________________

(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 the 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.

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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 $0.5 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 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 $1.0 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 pandemic.
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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:
•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 October 31, 2020 would have impacted net income
by approximately $0.6 million.
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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 210 basis points to 25.1% of net sales
during the Third Quarter 2020 from 23.0% during the Third 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., "deleveraging"), we
have less efficiently utilized the investments we have made in our business.
                                                                Thirteen Weeks Ended                                Thirty-nine Weeks Ended
                                                       October 31,               November 2,                October 31,                 November 2,
                                                          2020                      2019                        2020                       2019
Net sales                                                    100.0  %                    100.0  %                  100.0  %                     100.0  %
Cost of sales (exclusive of depreciation and
amortization)                                                 65.7                        62.2                      81.6                         64.0
Gross profit                                                  34.3                        37.8                      18.4                         36.0
Selling, general, and administrative expenses                 25.1                        23.0                      30.4                         26.9
Depreciation and amortization                                  3.7                         3.6                       4.8                          4.1
Asset impairment charges                                       0.1                         0.2                       3.6                          0.1

Operating income (loss)                                        5.5                        11.0                     (20.4)                         4.9

Income (loss) before benefit for income taxes                  4.7                        10.6                     (21.2)                         4.5
Provision (benefit) for income taxes                           1.6                         2.4                      (7.0)                         0.9
Net income (loss)                                              3.1  %                      8.2  %                  (14.1  %)                      3.6  %
Number of Company-operated stores, end of period               809                         955                       809                          955


____________________________________________

Table may not add due to rounding.


The following table sets forth net sales by segment, for the periods indicated.
                                                         Thirteen Weeks Ended                     Thirty-nine Weeks Ended
                                                  October 31,           November 2,           October 31,          November 2,
                                                      2020                 2019                  2020                  2019
Net sales:                                                                       (in thousands)
The Children's Place U.S.                        $   373,625          $    

467,834 $ 941,607$ 1,217,215The Children's Place International

                    51,946                56,962               108,094              140,432
Total net sales                                  $   425,571$    524,796$  1,049,701$ 1,357,647



Third Quarter 2020 Compared to the Third Quarter 2019
Net sales decreased by $99.2 million, or 18.9%, to $425.6 million during the
Third Quarter 2020 from $524.8 million during the Third Quarter 2019.  The net
sales decrease of $99.2 million primarily resulted from a decrease in
back-to-school sales due to schools adopting remote and hybrid learning models,
along with the impact of the permanent and temporary store closures.
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 $94.2 million, or 20.1%, to $373.6
million in the Third Quarter 2020 compared to $467.8 million in the Third
Quarter 2019.  This decrease primarily resulted from a decrease in
back-to-school sales due to schools adopting remote and hybrid learning models,
along with the impact of the permanent and temporary store closures.

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The Children's Place International net sales decreased $5.1 million, or 8.8%, to
$51.9 million in the Third Quarter 2020 compared to $57.0 million in the Third
Quarter 2019.  This decrease primarily resulted from a decrease in
back-to-school sales due to schools adopting remote and hybrid learning models,
along with a decrease in revenue from international franchisees due to the
COVID-19 pandemic.
Total e-commerce sales, which include postage and handling, increased to 43.9%
of net sales during the Third Quarter 2020 from 35.4% during the Third Quarter
2019.
Gross profit decreased by $52.0 million to $146.1 million during the Third
Quarter 2020 from $198.1 million during the Third Quarter 2019.  The
comparability of our gross profit was impacted by incremental expenses related
to the COVID-19 pandemic, including personal protective equipment and incentive
pay for our associates, of approximately $3.8 million and occupancy expense of
approximately $1.9 million for our stores temporarily closed due to the COVID-19
pandemic. Excluding the impact of these charges, gross margin deleveraged 210
basis points to 35.7% of net sales. The decrease was primarily the result of
increased penetration of our e-commerce business and its higher fulfillment
costs, along with the deleverage of fixed expenses resulting from the decline in
net sales, partially offset by higher merchandise margins in both our stores and
e-commerce channels.
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
(e-commerce sales have typically higher fulfillment costs than store sales),
changes in the mix of products sold, the timing and level of promotional
activities, foreign currency exchange rates, and fluctuations in materials and
freight 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 $13.9 million to $106.6
million during the Third Quarter 2020 from $120.5 million during the Third
Quarter 2019. The comparability of our SG&A was impacted by incremental
operating expenses, including personal protective equipment for our associates,
of approximately $1.6 million and restructuring costs of approximately $0.9
million. Excluding the impact of these and other smaller incremental charges,
SG&A deleveraged 210 basis points to 24.3% of net sales, primarily as a result
of the deleverage of fixed expenses resulting from the decline in net sales and
higher incentive compensation accruals, partially offset by a reduction in store
expenses resulting from our permanent store closures, as well as a reduction in
operating expenses associated with actions taken in response to the COVID-19
pandemic.
Asset impairment charges were $0.3 million during the Third Quarter 2020,
primarily for one store. Asset impairment charges during the Third Quarter 2019
were $0.8 million, primarily related to eight stores.
Depreciation and amortization was $15.8 million during the Third Quarter 2020
compared to $18.8 million during the Third 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 for income taxes was an expense of $6.7 million during the Third
Quarter 2020 compared to an expense of $12.7 million during the Third Quarter
2019.  Our effective tax rate was 33.6% in Third Quarter 2020 compared to 22.8%
in Third Quarter 2019. The increase in the effective tax rate for the Third
Quarter 2020 compared to the Third Quarter 2019 was primarily driven by the
impact of the CARES Act on the current quarter rate and the jurisdictional mix
of income in the periods.
Net income decreased by $29.7 million to $13.3 million during the Third Quarter
2020 compared to net income of $43.0 million during the Third Quarter 2019, due
to the COVID-19 pandemic and other factors discussed above.  Earnings per
diluted share was $0.91 in the Third Quarter 2020 compared to $2.77 per diluted
share in the Third Quarter 2019.  This decrease in diluted earnings per share is
due to the factors noted above, partially offset by a lower weighted average
common shares outstanding of approximately 0.9 million, which is the result of
our share repurchase program, prior to its suspension.
Year-To-Date 2020 Compared to the Year-To-Date 2019
Net sales decreased by $307.9 million, or 22.7%, to $1,049.7 million during
Year-To-Date 2020 from $1,357.6 million during Year-To-Date 2019.  The net sales
decrease of $307.9 million was primarily a result of the permanent and temporary
store closures, along with a decrease in back-to-school sales beginning in
mid-July due to schools adopting remote and hybrid learning models, partially
offset by increased e-commerce sales.
The Children's Place U.S. net sales decreased $275.6 million, or 22.6%, to
$941.6 million during Year-To-Date 2020 compared to $1,217.2 million during
Year-To-Date 2019.  This decrease primarily resulted from the permanent and
temporary store closures, along with a decrease in back-to-school sales
beginning in mid-July due to schools adopting remote and hybrid learning models,
partially offset by increased e-commerce sales.
The Children's Place International net sales decreased $32.3 million, or 23.0%,
to $108.1 million during Year-To-Date 2020 compared to $140.4 million during
Year-To-Date 2019.  This decrease primarily resulted from the permanent and
temporary store closures, along with a decrease in back-to-school sales
beginning in mid-July due to schools adopting remote and hybrid learning models,
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 55.6%
of net sales during Year-To-Date 2020 from 31.4% during Year-To-Date 2019.
Gross profit decreased by $295.4 million to $193.5 million during Year-To-Date
2020 from $488.9 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 temporary store closures; occupancy expense of
approximately $49.0 million for our stores temporarily closed due to the
COVID-19 pandemic; and incremental expenses, including personal protective
equipment and incentive pay for our associates, of approximately $8.2 million.
Excluding the impact of these charges, gross margin deleveraged 610 basis points
to 29.9% of net sales. The decrease resulted primarily from the increased
penetration of our ecommerce business and its higher fulfillment costs, along
with the deleverage of fixed expenses resulting from the decline in net sales.
Selling, general, and administrative expenses decreased $45.5 million to $319.4
million during Year-To-Date 2020 from $364.9 million during Year-To-Date 2019.
The comparability of our SG&A was impacted by incremental operating expenses,
including personal protective equipment and incentive pay for our associates, of
approximately $9.4 million, restructuring costs, primarily related to severance
costs for corporate and store associates, of approximately $7.3 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. Excluding the impact of these and
other smaller incremental charges, SG&A deleveraged 160 basis points to 28.1% of
net sales primarily as a result of the deleverage 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 $37.9 million during Year-To-Date 2020, including
the ROU assets recorded in connection with Topic 842, primarily for 419 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 $1.3 million during Year-To-Date 2019, primarily related to the
impairment of 15 stores.
Depreciation and amortization was $50.4 million during Year-To-Date 2020
compared to $55.9 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 (provision) for income taxes was a benefit of $73.9 million during
Year-To-Date 2020 compared to an expense of $11.6 million during Year-To-Date
2019.  Our effective tax rate was a benefit of 33.3% and an expense of 19.1%
during Year-To-Date 2020 and Year-To-Date 2019, respectively. The Year-To-Date
2020 benefit was primarily driven the net loss in the period as well as the
impact of the enactment of the CARES Act. The Year-To-Date 2019 income tax rate
was impacted by an excess tax benefit related to the vesting of equity shares.
Net income (loss) was a loss of ($148.1) million during Year-To-Date 2020
compared to income of $49.1 million during Year-To-Date 2019, due to the factors
discussed above.  Loss per diluted share was ($10.13) during Year-To-Date 2020
compared to earnings per diluted share of $3.10 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
1.2 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 closures in fiscal 2020, inclusive of the 118 stores permanently closed in
the first nine months of fiscal 2020, and 100 store closures in fiscal 2021;
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•Effective April 1, 2020, Jane Elfers, President and Chief Executive Officer,
forfeited 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;
•Temporarily suspended the Company's capital return program, inclusive of share
repurchases and dividends;
•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
•Secured an $80 million term loan on October 5, 2020. We used all of the net
proceeds from the term loan to pay down revolving credit facility borrowings.
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 $92.6 million to a deficit of $237.1
million at October 31, 2020 compared to a working capital deficit of $144.5
million at November 2, 2019, primarily due to seasonal cash usage and the impact
of the COVID-19 pandemic, partially offset by cash management. While our working
capital deficit has increased since last year, we returned to generating
positive operating cash flows of $32.5 million for the Third Quarter 2020 after
two previous quarters of operating cash outflows. During Year-To-Date 2020,
prior to the suspension of our capital return program, we repurchased
approximately 0.3 million shares for approximately $15.5 million.  During
Year-To-Date 2019, we repurchased approximately 1.0 million shares for
approximately $93.8 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
October 31, 2020, we had $179.4 million of outstanding borrowings and $172.8
million available for borrowing. In addition, at October 31, 2020, we had $7.8
million of outstanding letters of credit with an additional $42.2 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 an asset-based revolving credit
facility (the "ABL Credit Facility") 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 ABL Credit Facility, which expires in May 2024, consists of a $360 million
asset-based revolving credit facility that was increased from $325 million as a
result of finalizing an amendment with the 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. On October 5,
2020, we further amended the ABL Credit Facility to provide for certain changes
that permitted the issuance of an $80 million Term Loan (the "Term Loan") on
that date and align certain terms of the ABL Credit Facility to those of the
Term Loan. The Term Loan is discussed in more detail below.

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Borrowings outstanding under the ABL Credit Facility bear interest, at our
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 a) 2.50% to
2.75% and b) 1.00% based on the amount of our average excess availability under
the facility.
We are charged a 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
from 2.00% to 2.25% for standby letters of credit.  Letter of credit fees are
determined based on the amount of the Company's average excess availability
under the facility. The amount available for loans and letters of credit under
the ABL Credit Facility is determined by a borrowing base consisting of certain
credit card receivables and certain trade receivables, certain inventory, and
the fair market value of certain real estate, subject to certain reserves.
The outstanding obligations under the ABL Credit Facility 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 ABL Credit Facility contains covenants, which include conditions on stock
buybacks and the payment of cash dividends or similar payments.  These covenants
also limit our ability to incur certain liens, to incur certain indebtedness, to
make certain investments, acquisitions, or dispositions or to change the nature
of our business.
Credit extended under the ABL Credit Facility is secured by a first priority
security interest in substantially all of our U.S. and Canadian assets excluding
intellectual property, software, equipment, and fixtures. In connection with the
Term Loan, the Lenders under the ABL Credit Facility entered into an
intercreditor agreement with the Term Loan lender and were granted a second
priority security interest in the Term Loan collateral, which includes our
intellectual property, certain furniture, fixtures and equipment, and pledges of
subsidiary capital stock.
We have capitalized an aggregate of approximately $5.9 million in deferred
financing costs related to the Credit Agreement. The unamortized balance of
deferred financing costs at October 31, 2020 was approximately $1.4 million.
Unamortized deferred financing costs are amortized over the remaining term of
the ABL Credit Facility.
Term Loan
On October 5, 2020, we and certain of our subsidiaries entered into a loan
agreement (the "Loan Agreement") dated October 5, 2020 with Crystal Financial
LLC, as Lender, Administrative Agent, and Collateral Agent, providing for an $80
million Term Loan. The net proceeds from the Term Loan, after deducting related
fees and expenses, were used to repay borrowings under our ABL Credit Facility.
The Term Loan: (i) matures on the earlier of October 5, 2025 or the maturity
date under the ABL Credit Facility, currently in May 2024; (ii) bears interest,
payable monthly, at the greater of (a) the three month LIBOR Rate published in
the Wall Street Journal, and (b) 1.00%, plus 7.75% or 8.00% depending on the
average excess availability of credit under the ABL Credit Facility, adjusted
quarterly; and (iii) amortizes by (x) 5.00% per annum payable quarterly
beginning with the fiscal quarter ending on or around July 31, 2021 through the
fiscal quarter ending on or around April 30, 2022, (y) 7.50% per annum payable
quarterly beginning with the fiscal quarter ending on or around July 31, 2022
through the fiscal quarter ending on or around April 30, 2023, and (z) 10.00%
per annum payable quarterly thereafter.
The Term Loan is secured by a first priority security interest in our
intellectual property, certain furniture, fixtures and equipment, and pledges of
subsidiary capital stock, and a second priority security interest in the
collateral securing the ABL Credit Facility. The Term Loan is guaranteed,
subject to certain exceptions, by each of our subsidiaries that guarantee the
ABL Credit Facility.
The Term Loan is, in whole or in part, pre-payable any time and from time to
time, subject to certain prepayment premiums specified in the Loan Agreement,
plus accrued and unpaid interest.
Among other covenants, the Loan Agreement limits our ability to incur certain
liens, to incur certain indebtedness, including under the ABL Credit Facility,
to make certain investments, acquisitions, dispositions or restricted payments,
or to change the nature of its business. These covenants are substantially the
same covenants as provided in the ABL Credit Facility.
The Loan Agreement contains customary events of default, which include (subject
in certain cases to customary grace and cure periods), nonpayment of principal
or interest, breach of other covenants in the Loan Agreement, failure to pay
certain other indebtedness, including under the ABL Credit Facility, and certain
events of bankruptcy, insolvency or reorganization.
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  Table of Contents
Cash Flows/Capital Expenditures
During Year-To-Date 2020, cash flows used in operating activities were $50.7
million compared to cash flows provided by operating activities of $100.6
million during Year-To-Date 2019. The Year-To-Date 2020 cash flows used in
operating activities were primarily the result of a net loss in the year due to
the permanent and temporary store closures, partially offset by strategic
working capital management and the extension of vendor payment terms. The
Year-To-Date 2019 cash provided by operating activities was primarily the result
of the net income for the period and working capital management.
During Year-To-Date 2020, cash flows used in investing activities were $23.6
million compared to $119.1 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 $70.7
million compared to $15.1 million during Year-To-Date 2019.  The increase when
compared to the prior year primarily resulted from the proceeds received from an
$80 million Term Loan in the Third Quarter 2020, 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. The increase in cash flows provided by financing activities when
compared to the prior year period was partially offset by a decrease in
revolving credit facility borrowings.
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.

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