NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BASIS OF PRESENTATION
Description of Business
The Children’s Place, Inc. and subsidiaries (collectively, the “Company”) is the largest pure-play children’s specialty apparel retailer in North America. The Company provides apparel, footwear, accessories, and other items for children and ‘tweens.’ The Company designs, contracts to manufacture, sells at retail and wholesale, and licenses to sell trend right, high-quality merchandise predominately at value prices, primarily under the Company’s proprietary “The Children’s Place”, “Place”, “Baby Place”, “Gymboree” and “Sugar & Jade” brand names.
The Company classifies its business into two segments: The Children’s Place U.S. and The Children’s Place International. Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from its U.S.-based wholesale business. Included in The Children’s Place International segment are its Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, as well as revenue from international franchisees. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com.
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of October 30, 2021 and October 31, 2020, the results of its consolidated operations for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, consolidated comprehensive income (loss) for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020, consolidated cash flows for the thirty-nine weeks ended October 30, 2021 and October 31, 2020, and consolidated changes in stockholders’ equity for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020. The consolidated balance sheet as of January 30, 2021 was derived from audited financial statements. Due to the seasonal nature of the Company’s business, the results of operations for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 are not necessarily indicative of operating results for a full fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) that began in Wuhan, China and has since spread to the other regions of the world. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and the President of the United States declared a national emergency. Federal, state, and local governments and health officials mandated and continue to mandate various restrictions, including closures of businesses and other activities, travel restrictions, restrictions on public gatherings, stay at home orders and advisories, quarantining of people who may have been exposed to the virus, and the adoption of remote or hybrid learning models for schools. The COVID-19 pandemic has significantly negatively affected the global economy, significantly disrupted global supply chains, and created significant disruption of the financial and retail markets, including a significant disruption in consumer demand for children’s clothing and accessories. As such, the comparability of the Company’s operating results has been affected by significant adverse impacts related to the COVID-19 pandemic.
Terms that are commonly used in the notes to the Company’s consolidated financial statements are defined as follows:
•Third Quarter 2021 — The thirteen weeks ended October 30, 2021
•Third Quarter 2020 — The thirteen weeks ended October 31, 2020
•Year-To-Date 2021 — The thirty-nine weeks ended October 30, 2021
•Year-To-Date 2020 — The thirty-nine weeks ended October 31, 2020
•FASB — Financial Accounting Standards Board
•SEC — U.S. Securities and Exchange Commission
•U.S. GAAP — Generally Accepted Accounting Principles in the United States
•FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated. As of October 30, 2021, January 30, 2021 and October 31, 2020, the Company did not have any investments in unconsolidated affiliates. FASB ASC 810—Consolidation is considered when determining whether an entity is subject to consolidation.
Fiscal Year
The Company’s fiscal year is a 52-week or 53-week period ending on the Saturday on or nearest to January 31.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and amounts of revenues and expenses reported during the period. Actual results could differ from the assumptions used and estimates made by management, which could have a material impact on the Company’s financial position or results of operations. Significant estimates inherent in the preparation of the consolidated financial statements include: reserves for the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived assets; fair value measurements; accounting for income taxes and related uncertain tax positions; insurance reserves; intangible assets; valuation of stock-based compensation awards and related estimated forfeiture rates, among others.
Reclassifications
Certain reclassifications have been made to prior periods' financial statements to conform to the current period's presentation.
Inventories
Inventories, which consist primarily of finished goods, are stated at the lower of cost or net realizable value, with cost determined on an average cost basis. The Company capitalizes certain buying, design, and supply chain costs in inventory, and these costs are reflected within cost of sales as the inventories are sold. Inventory shrinkage is estimated in interim periods based upon the historical results of physical inventory counts in the context of current year facts and circumstances.
Stock-based Compensation
The Company generally grants time-vesting stock awards (“Deferred Awards”) and performance-based stock awards (“Performance Awards”) to employees at management levels. The Company also grants Deferred Awards to its non-employee directors. Deferred Awards are granted in the form of restricted stock units that require each recipient to complete a service period. Deferred Awards generally vest ratably over three years, except for those granted to non-employee directors, which generally vest after one year. Performance Awards are granted in the form of restricted stock units which have performance criteria that must be achieved for the awards to vest (the “Target Shares”) in addition to a service period requirement. For Performance Awards, an employee may earn from 0% to 300% of their Target Shares based on the terms of the award and 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 Deferred Awards and Performance Awards granted is based on the closing price of the Company’s common stock on the grant date.
Stock-based compensation expense is recognized ratably over the related service period, reduced for estimated forfeitures of those awards not expected to vest due to employee turnover. Stock-based compensation expense, as it relates to Performance Awards, is also adjusted based on the probability that the performance criteria will be achieved.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets when events indicate that their carrying value may not be recoverable. Such events include historical trends or projected trends of cash flow losses or a future expectation that the Company will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for
impairment, the Company groups its long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
The Company reviews all stores that have reached comparable sales status, or sooner if circumstances should dictate, on at least an annual basis. The Company believes waiting this period of time allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed. For each store that shows indications of impairment, the Company performs a recoverability test comparing estimated undiscounted future cash flows to the carrying value of the related long-lived assets. If the undiscounted cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. The Company primarily uses discounted future cash flows directly associated with those assets to determine fair market value of long-lived assets and right-of-use (“ROU”) assets. In evaluating future cash flows, the Company considers external and internal factors. External factors comprise the local environment in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as the global COVID-19 pandemic. Internal factors include the Company’s ability to gauge the fashion taste of its customers, control variable costs such as cost of sales and payroll, and in certain cases, its ability to renegotiate lease costs.
Deferred Compensation Plan
The Company has a deferred compensation plan (the “Deferred Compensation Plan”), which is a nonqualified plan, for eligible senior level employees. Under the Deferred Compensation Plan, a participant may elect to defer up to 80% of his or her base salary and/or up to 100% of his or her bonus to be earned for the year following the year in which the deferral election is made. The Deferred Compensation Plan also permits members of the Board of Directors to elect to defer payment of all or a portion of their retainer and other fees to be earned for the year following the year in which a deferral election is made. In addition, eligible employees and directors of the Company may also elect to defer payment of any shares of Company stock that are earned with respect to stock-based awards. Directors may elect to have all or a certain portion of their fees earned for their service on the Board invested in shares of the Company’s common stock. Such elections are irrevocable. The Company is not required to contribute to the Deferred Compensation Plan, but at its sole discretion, can make additional contributions on behalf of the participants. Deferred amounts are not subject to forfeiture and are deemed invested among investment funds offered under the Deferred Compensation Plan, as directed by each participant. Payments of deferred amounts (as adjusted for earnings and losses) are payable following separation from service or at a date or dates elected by the participant at the time the deferral is elected. Payments of deferred amounts are generally made in either a lump sum or in annual installments over a period not exceeding 15 years. All deferred amounts are payable in the form in which they were made, except for Board of Directors fees invested in shares of the Company’s common stock, which are settled in shares of Company common stock. Earlier distributions are not permitted except in the case of an unforeseen hardship.
The Company has established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The assets of the rabbi trust are general assets of the Company and, as such, would be subject to the claims of creditors in the event of bankruptcy or insolvency. Investments of the rabbi trust consist of mutual funds and Company common stock. The Deferred Compensation Plan liability, excluding Company common stock, is included within other long-term liabilities, and changes in the balance, except those relating to payments, are recognized as compensation expense within selling, general, and administrative expenses. The value of the mutual funds is included in other assets and related earnings and losses are recognized as investment income or loss, which is included within selling, general, and administrative expenses. Company stock deferrals are included within the equity section of the Company’s consolidated balance sheet as treasury stock and as a deferred compensation liability. Deferred stock is recorded at fair market value at the time of deferral, and any subsequent changes in fair market value are not recognized.
Fair Value Measurement and Financial Instruments
FASB ASC 820—Fair Value 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
The Company’s 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.
The Company’s derivative assets and liabilities include foreign exchange forward contracts that are measured at fair value using observable market inputs such as forward rates, the Company’s credit risk, and counterparties’ credit risks. Based on these inputs, the Company’s derivative assets and liabilities are classified within Level 2 of the fair value hierarchy.
The Company’s assets measured at fair value on a nonrecurring basis include long-lived assets, such as intangible assets, fixed assets, and ROU assets. The Company reviews the carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to fall within Level 3 of the fair value hierarchy.
Recently Issued Accounting Standards
Adopted in Fiscal 2021
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 previous guidance and by clarifying and amending the previous guidance. The guidance was effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. The Company adopted this guidance in the first quarter of 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
2. REVENUES
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents the Company’s revenues disaggregated by geography:
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Thirteen Weeks Ended
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Thirty-nine Weeks Ended
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October 30,
2021
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October 31,
2020
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October 30,
2021
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October 31,
2020
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Net sales:
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(in thousands)
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South
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$
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194,081
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$
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151,374
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$
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524,449
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|
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$
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395,655
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Northeast
|
129,308
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|
97,668
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|
309,284
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|
|
232,435
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West
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80,103
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50,896
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202,180
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143,472
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Midwest
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71,482
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61,740
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180,375
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139,243
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International and other
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83,251
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63,893
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191,273
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138,896
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Total net sales
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$
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558,225
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$
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425,571
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$
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1,407,561
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$
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1,049,701
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The Company recognizes revenue, including shipping and handling fees billed to customers, upon purchase at the Company’s retail stores or when received by the customer if the product was purchased via e-commerce, net of coupon redemptions and anticipated sales returns. The Company deferred sales of $8.8 million and $7.4 million within Accrued expenses and other current liabilities as of October 30, 2021 and October 31, 2020, respectively, based upon estimated time of delivery, at which point control passes to the customer. Sales tax collected from customers is excluded from revenue.
For the sale of goods with a right of return, the Company recognizes revenue for the consideration it expects to be entitled to and calculates an allowance for estimated sales returns based upon the Company’s sales return experience. Adjustments to the allowance for estimated sales returns in subsequent periods are generally not material based on historical data, thereby reducing the uncertainty inherent in such estimates. The allowance for estimated sales returns, which is recorded in accrued expenses and other current liabilities, was $2.9 million and $1.7 million as of October 30, 2021 and October 31, 2020, respectively.
The Company’s private label credit card is issued to customers for use exclusively at The Children’s Place stores and online at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com, and credit is extended to such customers by a third-party financial institution on a non-recourse basis to the Company. The private label credit card includes multiple performance obligations for the Company, including marketing and promoting the program on behalf of the bank and the
operation of the loyalty rewards program. Included in the agreement with the third-party financial institution was an upfront bonus paid to the Company. The upfront bonus is recognized as revenue and allocated between brand and reward obligations. As the license of the Company’s brand is the predominant item in the performance obligation, the amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur.
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration, such as additional bonuses, including profit-sharing, over the life of the program. Similar to the upfront bonus, the usage-based royalties and bonuses are recognized as revenue and allocated between the brand and reward obligations. The amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In addition, the annual profit-sharing amount is estimated and recognized quarterly within an annual period when earned. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets.
The Company has a points-based customer loyalty program in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within accrued expenses and other current liabilities. The total contract liabilities related to this program were $6.0 million and $2.5 million as of October 30, 2021 and October 31, 2020, respectively.
The Company’s policy with respect to gift cards is to record revenue as and when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property, which is recorded within net sales. Prior to their redemption, gift cards are recorded as a liability within Accrued expenses and other current liabilities. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:
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Contract Liability
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(in thousands)
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Balance at January 30, 2021
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$
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13,634
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Gift cards sold
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17,733
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Gift cards redeemed
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(16,716)
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Gift card breakage
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(2,256)
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Balance at October 30, 2021
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$
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12,395
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The Company has an international program of territorial agreements with franchisees. The Company generates revenues from the franchisees from the sale of product and, in certain cases, sales royalties. The Company records net sales and cost of goods sold on the sale of product to franchisees when the franchisee takes ownership of the product. The Company records net sales for royalties when the applicable franchisee sells the product to their customers. Under certain agreements, the Company receives a fee from each franchisee for exclusive territorial rights and based on the opening of new stores. The Company records these territorial fees as deferred revenue and amortizes the fee into net sales over the life of the territorial agreement.
3. LEASES
The Company has operating leases for retail stores, corporate offices, distribution facilities, and certain equipment. The Company’s leases have remaining lease terms ranging from less than one year up to nine years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the lease early.
The lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For operating leases, the ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives. For finance leases, the ROU asset is initially measured at cost and subsequently amortized using the straight-line method generally from the lease commencement date to the earlier of the end of its useful life or the end of the lease term.
The discount rate is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the Company is required to use its incremental borrowing rate. The discount rate for a lease is determined based on the information available at lease commencement. In general, the Company accounts for the underlying leased asset and applies a discount rate at the lease level. However, there are certain non-real estate leases for which the Company utilizes the portfolio method by aggregating similar leased assets based on the underlying lease term.
The Company has made an accounting policy election by class of underlying asset to not apply the recognition requirements of FASB ASC 842—Leases (“Topic 842”) to leases with an initial term of 12 months or less. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected a policy to account for lease and non-lease components as a single component for all asset classes.
In certain leases, the Company has the right to exercise lease renewal options. Renewal option periods are included in the measurement of lease ROU assets and lease liabilities where the exercise is reasonably certain to occur.
As of the periods presented, the Company’s finance leases were not material to the consolidated balance sheets, consolidated statements of operations, or consolidated statements of cash flows.
The Company has certain lease agreements structured with both a fixed base rent and a contingent rent based on a percentage of sales over contractual levels, others with only contingent rent based on a percentage of sales, and some with a fixed base rent adjusted periodically for inflation or changes in fair market value of the underlying real estate. Contingent rent is recognized as sales occur. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company records all occupancy costs in cost of sales, except costs for administrative office buildings, which are recorded in selling, general, and administrative expenses.
In April 2020, the FASB staff released guidance regarding rent concessions related to the effects of the COVID-19 pandemic to allow for a temporary practical expedient (the “COVID-19 expedient”) to account for rent concessions as though enforceable rights and obligations for those concessions existed in the lease agreements. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
Upon the temporary closure of the Company’s store fleet in March 2020, the Company began negotiating for concessions of certain rent payments for the time the stores were impacted. While more than 99% of the Company’s stores have reopened, these discussions and negotiations had remained ongoing and were substantially completed at the end of the second quarter of 2021. For the lease concessions that have been agreed upon and executed, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts that shared similar characteristics. Rather, the Company accounts for COVID-19 lease concessions as reductions to variable lease cost.
The following components of lease expense are included in the Company’s consolidated statements of operations.
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Thirteen Weeks Ended
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Thirty-nine Weeks Ended
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|
October 30, 2021
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|
October 31, 2020
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|
October 30, 2021
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October 31, 2020
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(in thousands)
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Operating lease cost
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$
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28,378
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|
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$
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29,218
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|
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$
|
78,408
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|
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$
|
108,412
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Variable lease cost (1)
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15,459
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|
|
16,871
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|
|
29,680
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|
|
36,696
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Total lease cost
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$
|
43,837
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|
$
|
46,089
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|
|
$
|
108,088
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$
|
145,108
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____________________________________________
(1)Includes short term leases with lease periods of less than 12 months as well as lease abatements accounted for as reductions to variable lease costs under the COVID-19 expedient of $0.7 million and $11.0 million during the Third Quarter 2021 and Year-To-Date 2021, respectively.
As of October 30, 2021, the weighted-average remaining operating lease term was 4.3 years, and the weighted-average discount rate for operating leases was 5.3%.
Cash paid for amounts included in the measurement of operating lease liabilities during Year-To-Date 2021 was $142.6 million.
ROU assets obtained in exchange for new operating lease liabilities were approximately $6.1 million during Year-To-Date 2021.
As of October 30, 2021, the maturities of lease liabilities were as follows:
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October 30, 2021
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(in thousands)
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Remainder of 2021
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$
|
36,503
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2022
|
89,827
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2023
|
50,651
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2024
|
30,406
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2025
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18,456
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Thereafter
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50,082
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Total lease payments
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275,925
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Less: imputed interest
|
(27,478)
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Present value of lease liabilities
|
$
|
248,447
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4. INTANGIBLE ASSETS
On April 4, 2019, the Company acquired certain intellectual property and related assets (the “Gymboree Assets”) of Gymboree Group, Inc. and related entities, which included the worldwide rights to the names “Gymboree” and “Crazy 8” and other intellectual property, including trademarks, domain names, copyrights, and customer databases. These intangible assets, inclusive of acquisition costs, are recorded in the long-term assets section of the consolidated balance sheets.
The Company’s intangible assets include both indefinite-lived and finite-lived assets. Intangible assets with indefinite lives consist primarily of trademarks and acquired trade names, which are tested for impairment annually or whenever circumstances indicate that a decline in value may have occurred. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. The Company’s finite-lived intangible assets consist primarily of customer lists and other acquisition-related assets. Finite-lived intangible assets are amortized over their estimated useful economic lives and are reviewed for impairment when factors indicate that an impairment may have occurred. The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than its carrying value.
The Company’s intangible assets were as follows:
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October 30, 2021
|
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Useful life
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Gross amount
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Accumulated amortization
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Net amount
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(in thousands)
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Gymboree tradename(1)
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Indefinite
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$
|
69,953
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$
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—
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$
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69,953
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Crazy 8 tradename(1)
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5 years
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4,000
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(2,061)
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|
1,939
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Customer databases(2)
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3 years
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|
3,000
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|
|
(2,578)
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|
|
422
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Total intangibles, net
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|
$
|
76,953
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|
|
$
|
(4,639)
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|
|
$
|
72,314
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2021
|
|
|
|
Useful life
|
|
Gross amount
|
|
Accumulated amortization
|
|
Net amount
|
|
|
|
|
|
(in thousands)
|
|
Gymboree tradename(1)
|
|
Indefinite
|
|
$
|
69,953
|
|
|
$
|
—
|
|
|
$
|
69,953
|
|
|
Crazy 8 tradename(1)
|
|
5 years
|
|
4,000
|
|
|
(1,461)
|
|
|
2,539
|
|
|
Customer databases(2)
|
|
3 years
|
|
3,000
|
|
|
(1,827)
|
|
|
1,173
|
|
|
Total intangibles, net
|
|
|
|
$
|
76,953
|
|
|
$
|
(3,288)
|
|
|
$
|
73,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
|
|
Useful life
|
|
Gross amount
|
|
Accumulated amortization
|
|
Net amount
|
|
|
|
|
|
(in thousands)
|
|
Gymboree tradename(1)
|
|
Indefinite
|
|
$
|
69,953
|
|
|
$
|
—
|
|
|
$
|
69,953
|
|
|
Crazy 8 tradename(1)
|
|
5 years
|
|
4,000
|
|
|
(1,261)
|
|
|
2,739
|
|
|
Customer databases(2)
|
|
3 years
|
|
3,000
|
|
|
(1,577)
|
|
|
1,423
|
|
|
Total intangibles, net
|
|
|
|
$
|
76,953
|
|
|
$
|
(2,838)
|
|
|
$
|
74,115
|
|
____________________________________________
(1)Included within Tradenames, net in the consolidated balance sheets.
(2)Included within Other assets in the consolidated balance sheets.
5. STOCKHOLDERS’ EQUITY
Share Repurchase Program
In March 2018, the Board of Directors authorized a $250 million share repurchase program (the “2018 Share Repurchase Program”). As of October 30, 2021, there was approximately $47.7 million remaining on the 2018 Share Repurchase Program. In November 2021, the Board of Directors approved another $250.0 million share repurchase program, which adds to the remaining availability under the 2018 Share Repurchase Program. Under these programs, the Company may repurchase shares on the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under a program will depend on a variety of factors, including price, corporate and regulatory requirements, and other market and business conditions. The Company may suspend or discontinue the programs at any time and may thereafter reinstitute purchases, all without prior announcement. From March 2020 through July 2021, the Company suspended share repurchases, other than to satisfy withholding tax requirements of equity award recipients, due to the COVID-19 pandemic.
Pursuant to the Company’s practice, including due to restrictions imposed by the Company’s insider trading policy during black-out periods, the Company withholds and repurchases shares of vesting stock awards and makes payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. The Company’s payment of the withholding taxes in exchange for the surrendered shares constitutes a repurchase of its common stock. The Company also acquires shares of its common stock in conjunction with liabilities owed under the Company’s Deferred Compensation Plan, which are held in treasury.
The following table summarizes the Company’s share repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 30, 2021
|
|
October 31, 2020
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
|
|
(in thousands)
|
|
Share repurchases related to:
|
|
|
|
|
|
|
|
|
|
2018 Share Repurchase Program
|
|
518
|
|
|
$
|
45,187
|
|
|
292
|
|
|
$
|
15,452
|
|
|
Shares acquired and held in treasury under Deferred Compensation Plan
|
|
3
|
|
|
$
|
208
|
|
|
4
|
|
|
$
|
139
|
|
In accordance with the FASB ASC 505—Equity, the par value of the shares retired is charged against common stock and the remaining purchase price is allocated between additional paid-in capital and retained earnings. The portion charged against additional paid-in capital is determined using a pro-rata allocation based on total shares outstanding. During Year-To-Date 2021 and Year-To-Date 2020, $35.6 million and $10.6 million, respectively, was charged to retained earnings related to all shares retired during those periods.
Dividends
In March 2020, the Company announced it had temporarily suspended its dividend payments due to the COVID-19 pandemic.
Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Company’s Board of Directors based on a number of factors, including business and market conditions, the Company’s financial performance, and other investment priorities.
6. STOCK-BASED COMPENSATION
The following table summarizes the Company’s stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
October 30,
2021
|
|
October 31,
2020
|
|
October 30,
2021
|
|
October 31,
2020
|
|
|
(In thousands)
|
|
Deferred Awards
|
$
|
2,956
|
|
|
$
|
2,775
|
|
|
$
|
9,722
|
|
|
$
|
10,282
|
|
|
Performance Awards
|
3,638
|
|
|
500
|
|
|
15,314
|
|
|
(2,894)
|
|
|
Total stock-based compensation expense (1)
|
$
|
6,594
|
|
|
$
|
3,275
|
|
|
$
|
25,036
|
|
|
$
|
7,388
|
|
____________________________________________
(1)Stock-based compensation expense recorded within Cost of sales (exclusive of depreciation and amortization) amounted to $0.8 million and $0.9 million in the Third Quarter 2021 and Third Quarter 2020, respectively, and $2.5 million and $2.6 million in the Year-To-Date 2021 and Year-To-Date 2020, respectively. All other stock-based compensation is included in Selling, general, and administrative expenses.
The Company recognized a tax benefit related to stock-based compensation expense of $6.9 million and $2.0 million during Year-To-Date 2021 and Year-To-Date 2020, respectively.
Changes in the Company’s Unvested Stock Awards During Year-To-Date 2021
Deferred Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
(in thousands)
|
|
|
|
Unvested Deferred Awards, beginning of period
|
550
|
|
|
$
|
55.43
|
|
|
Granted
|
155
|
|
|
76.50
|
|
|
Vested
|
(227)
|
|
|
86.47
|
|
|
Forfeited
|
(4)
|
|
|
97.91
|
|
|
Unvested Deferred Awards, end of period
|
474
|
|
|
47.03
|
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was $17.9 million as of October 30, 2021, which will be recognized over a weighted average period of approximately 1.8 years.
Performance Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares (1)
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
(in thousands)
|
|
|
|
Unvested Performance Awards, beginning of period
|
350
|
|
|
$
|
74.37
|
|
|
Granted
|
160
|
|
|
74.92
|
|
|
Shares earned in excess of (below) target
|
(22)
|
|
|
65.34
|
|
|
Vested shares, including shares earned
|
(118)
|
|
|
95.61
|
|
|
Forfeited
|
(1)
|
|
|
104.45
|
|
|
Unvested Performance Awards, at end of period
|
369
|
|
|
68.22
|
|
____________________________________________
(1)For awards for which the performance period is complete, the number of unvested shares is based on actual shares that will vest upon completion of the service period. For awards for which the performance period is not yet complete, the number of unvested shares is based on participants earning their Target Shares at 100%.
The cumulative expense recognized for performance shares reflects changes in the probability that the performance criteria will be achieved as they occur. Based on the current number of Performance Awards expected to be earned, total unrecognized stock-based compensation expense related to unvested Performance Awards was $16.0 million as of October 30, 2021, which will be recognized over a weighted average period of approximately 2.0 years.
7. EARNINGS PER COMMON SHARE
The following table reconciles net income (loss) and share amounts utilized to calculate basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
October 30, 2021
|
|
October 31, 2020
|
|
October 30, 2021
|
|
October 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net income (loss)
|
$
|
78,868
|
|
|
$
|
13,320
|
|
|
$
|
148,168
|
|
|
$
|
(148,129)
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
14,668
|
|
|
14,639
|
|
|
14,706
|
|
|
14,628
|
|
|
Dilutive effect of stock awards
|
205
|
|
|
4
|
|
|
273
|
|
|
—
|
|
|
Diluted weighted average common shares
|
14,873
|
|
|
14,643
|
|
|
14,979
|
|
|
14,628
|
|
|
|
|
|
|
|
|
|
|
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2021
|
|
January 30, 2021
|
|
October 31, 2020
|
|
|
|
|
(in thousands)
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
$
|
3,403
|
|
|
$
|
3,403
|
|
|
$
|
3,403
|
|
|
Building and improvements
|
|
|
36,045
|
|
|
36,133
|
|
|
35,927
|
|
|
Material handling equipment
|
|
|
61,717
|
|
|
58,034
|
|
|
56,926
|
|
|
Leasehold improvements
|
|
|
211,420
|
|
|
216,989
|
|
|
226,881
|
|
|
Store fixtures and equipment
|
|
|
221,104
|
|
|
226,404
|
|
|
234,423
|
|
|
Capitalized software
|
|
|
316,440
|
|
|
296,967
|
|
|
295,277
|
|
|
Construction in progress
|
|
|
8,822
|
|
|
15,211
|
|
|
12,701
|
|
|
|
|
|
858,951
|
|
|
853,141
|
|
|
865,538
|
|
|
Less accumulated depreciation and amortization
|
|
|
(699,708)
|
|
|
(671,340)
|
|
|
(673,994)
|
|
|
Property and equipment, net
|
|
|
$
|
159,243
|
|
|
$
|
181,801
|
|
|
$
|
191,544
|
|
At October 30, 2021, the Company reviewed its store related long-lived assets for indicators of impairment, and performed a recoverability test if indicators were identified. Based on the results of the analysis performed, the Company recorded asset impairment charges of $1.3 million, inclusive of ROU assets, in the Third Quarter 2021 and Year-To-Date 2021.
At October 31, 2020, the Company reviewed its store related long-lived assets for 809 stores with a total net book value of approximately $44.0 million for indicators of impairment, and performed a recoverability test if indicators were identified. Based on the results of the analysis performed, the Company recorded asset impairment charges of $0.3 million, inclusive of ROU assets, primarily for one store, in the Third Quarter 2020. The Company recorded asset impairment charges of $37.9 million, inclusive of ROU assets, for 419 stores, during Year-To-Date 2020.
9. DEBT
Revolving Credit Facility
The Company and certain of its 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. The ABL Credit Facility includes a $25 million Canadian sublimit and a $50 million sublimit for standby and documentary letters of credit. On October 5, 2020, the Company 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. On April 23, 2021, the Company and its Lenders extended the $35 million of additional availability for an additional year until April 23, 2022.
Borrowings outstanding under the ABL Credit Facility 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 the Company’s average excess availability under the facility; or
(ii)the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, two, three, or six months, as selected by the Company, plus a margin of: a) 2.50% to 2.75% and b) 1.00%, based on the amount of the Company’s average excess availability under the facility.
The Company is charged a fee of 0.25% on the unused portion of the commitments. Letter of credit fees range from 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. The Company is 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 the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of its business.
Credit extended under the ABL Credit Facility 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. 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 the Company’s intellectual property, certain furniture, fixtures and equipment, and pledges of subsidiary capital stock.
As of October 30, 2021 the Company has capitalized an aggregate of approximately $6.3 million in deferred financing costs related to the ABL Credit Facility. The unamortized balance of deferred financing costs as of October 30, 2021 was approximately $1.0 million. Unamortized deferred financing costs are amortized over the remaining term of the ABL Credit Facility.
The table below presents the components of the Company’s ABL Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
2021
|
|
January 30,
2021
|
|
October 31,
2020
|
|
|
(in millions)
|
|
Credit facility maximum
|
$
|
360.0
|
|
|
$
|
360.0
|
|
|
$
|
360.0
|
|
|
Borrowing base (1)
|
360.0
|
|
|
282.2
|
|
|
360.0
|
|
|
|
|
|
|
|
|
|
Outstanding borrowings
|
174.4
|
|
|
169.8
|
|
|
179.4
|
|
|
|
|
|
|
|
|
|
Letters of credit outstanding—standby
|
7.4
|
|
|
8.2
|
|
|
7.8
|
|
|
Utilization of credit facility at end of period
|
181.8
|
|
|
178.0
|
|
|
187.2
|
|
|
|
|
|
|
|
|
|
Availability (2)
|
$
|
178.2
|
|
|
$
|
104.2
|
|
|
$
|
172.8
|
|
|
|
|
|
|
|
|
|
Interest rate at end of period
|
3.8
|
%
|
|
4.2
|
%
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date 2021
|
|
Fiscal 2020
|
|
Year-To-Date 2020
|
|
Average end of day loan balance during the period
|
$
|
195.0
|
|
|
$
|
216.2
|
|
|
$
|
233.2
|
|
|
Highest end of day loan balance during the period
|
$
|
269.7
|
|
|
$
|
275.6
|
|
|
$
|
275.6
|
|
|
Average interest rate
|
3.8
|
%
|
|
3.8
|
%
|
|
3.7
|
%
|
____________________________________________
(1)Lower of the credit facility maximum or the total borrowing base collateral.
(2)The sub-limit availability for letters of credit was $42.6 million as of October 30, 2021, $41.8 million as of January 30, 2021, and $42.2 million as of October 31, 2020.
Long-Term Debt
Long-term debt was solely comprised of the Term Loan transaction completed during the third quarter of 2020, as discussed below.
On October 5, 2020, the Company and certain of its subsidiaries entered into a loan agreement (the “Loan Agreement”) dated October 5, 2020 with SLR Credit Solutions (formerly known as 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 the Company’s 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. For the Third Quarter 2021 and Year-To-Date 2021, the Company recognized $1.9 million and $5.5 million, respectively, within interest expense related to the Term Loan.
The Term Loan is secured by a first priority security interest in the Company’s 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 the Company’s subsidiaries that guarantees 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 the ability of the Company and its subsidiaries 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.
The following table summarizes the current and long-term portion of the long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
2021
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan principal
|
$
|
79,000
|
|
|
|
|
|
|
Less: Unamortized discount, net
|
(877)
|
|
|
|
|
|
|
Less: Unamortized debt issuance costs, net
|
(961)
|
|
|
|
|
|
|
Term Loan, net
|
77,162
|
|
|
|
|
|
|
Less: Current portion, net (1)
|
(28,270)
|
|
|
|
|
|
|
Long-term debt, net
|
$
|
48,892
|
|
|
|
|
|
____________________________________________
(1)Includes principal of $29.0 million that was repaid in connection with the refinancing of the Term Loan in November 2021 (see Note 14 - Subsequent Events for further information).
Future principal payments of long-term debt due subsequent to October 30, 2021 are as follows:
|
|
|
|
|
|
|
|
Period
|
Future Principal Payments (1)
|
|
|
(in thousands)
|
|
Remainder of 2021
|
$
|
1,000
|
|
|
2022
|
5,500
|
|
|
2023
|
7,500
|
|
|
2024
|
65,000
|
|
|
|
|
|
Total future principal payments
|
$
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________________________________
(1)Future principal payments do not give effect to the refinancing of the Term Loan in November 2021 (see Note 14 - Subsequent Events for further information).
On November 16, 2021, the Company completed the refinancing of the ABL Credit Facility and Term Loan with a new lending group led by an affiliate of Wells Fargo by entering into a fourth amendment to its Credit Agreement, dated as of May 9, 2019, with the lenders party thereto. At the same time, the Company repaid outstanding principal of $79.0 million under the Term Loan. The new debt consists of a revolving credit facility with $350.0 million of maximum availability and a $50.0 million term loan (see Note 14 - Subsequent Events for further information).
10. LEGAL AND REGULATORY MATTERS
The Company is a defendant in Rael v. The Children’s Place, Inc., a purported class action, pending in the U.S. District Court, Southern District of California. In the initial complaint filed in February 2016, the plaintiff alleged that the Company falsely advertised discount prices in violation of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. The plaintiff filed an amended complaint in April 2016, adding allegations of violations of other state consumer protection laws. In August 2016, the plaintiff filed a second amended complaint, adding an additional plaintiff and removing the other state law claims. The plaintiffs’ second amended complaint sought to represent a class of California purchasers and sought, among other items, injunctive relief, damages, and attorneys’ fees and costs.
The Company engaged in mediation proceedings with the plaintiffs in December 2016 and April 2017. The parties reached an agreement in principle in April 2017, and signed a definitive settlement agreement in November 2017, to settle the matter on a class basis with all individuals in the U.S. who made a qualifying purchase at The Children’s Place from February 11, 2012 through January 28, 2020, the date of preliminary approval by the court of the settlement. The Company submitted its memorandum in support of final approval of the class settlement on March 2, 2021. On March 29, 2021, the court granted final approval of the class settlement and denied plaintiff’s motion for attorney’s fees, with the attorney’s fees to be decided after the class recovery amount has been determined. The settlement provides merchandise vouchers for qualified class members who submit valid claims, as well as payment of legal fees and expenses and claims administration expenses. In connection with the settlement, the Company recorded a reserve for $5.0 million in its consolidated financial statements in the first quarter of 2017.
The Company is also involved in various legal proceedings arising in the normal course of business. In the opinion of management, any ultimate liability arising out of these proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
11. INCOME TAXES
The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company’s deferred tax assets and liabilities are comprised largely of differences relating to depreciation and amortization, rent expense, inventory, stock-based compensation, net operating loss carryforwards, tax credits, and various accruals and reserves.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. Included in the CARES Act is a provision that allows net operating losses (“NOLs”) incurred in taxable years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to offset 100% of taxable income and generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and expects the NOL carryback provision of the CARES Act to result in a material cash benefit to the Company.
The Company’s effective tax rate for the Third Quarter 2021 was 28.2% as compared to 33.6% during the Third Quarter 2020. The Company’s provision for income taxes for the Third Quarter 2021 was $31.0 million compared to $6.7 million in the Third Quarter 2020. The decrease in the effective tax rate for the Third Quarter 2021 compared to the Third Quarter 2020 was primarily driven by tax benefits from the CARES Act in the prior year.
The Company’s effective tax rate for Year-To-Date 2021 was a tax provision of 27.5% as compared to a tax benefit of 33.3% for Year-To-Date 2020. The Company’s provision for income taxes for the Year-To-Date 2021 was $56.3 million compared to an income tax benefit of $73.9 million in Year-To-Date 2020. The decrease in the effective tax rate for Year-To-Date 2021 compared to Year-To-Date 2020 was primarily driven by tax benefits from the CARES Act in the prior year.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The total amount of unrecognized tax benefits as of October 30, 2021, January 30, 2021, and October 31, 2020 was $8.0 million, $7.9 million, and $6.8 million, respectively, and is included within non-current liabilities. Additional interest expense recognized in the Third Quarter 2021, Third Quarter 2020, Year-To-Date 2021 and Year-To-Date 2020 related to unrecognized tax benefits was not significant.
The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company, including its domestic subsidiaries, files a consolidated income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, state and local, or foreign tax authorities for fiscal tax years 2014 and prior, with the exception of Hong Kong, which is open through fiscal tax year 2013 due to an ongoing tax examination.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues arise as a result of a tax audit, and are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
12. SEGMENT INFORMATION
In accordance with FASB ASC 280—Segment Reporting, the Company reports segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com. Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from the Company’s U.S.-based wholesale business. Included in The Children’s Place International segment are the Company’s Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, and revenue from international franchisees. The Company measures its segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions, such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. The Company periodically reviews these allocations and adjusts them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and the Company has no major customers that individually account for more than 10% of its net sales. As of October 30, 2021, The Children’s Place U.S. had 611 stores
and The Children’s Place International had 92 stores. As of October 31, 2020, The Children’s Place U.S. had 702 stores and The Children’s Place International had 107 stores.
The following tables provide segment level financial information:
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
October 30,
2021
|
|
October 31,
2020
|
|
October 30,
2021
|
|
October 31,
2020
|
|
|
(in thousands)
|
|
Net sales(1):
|
|
|
|
|
]
|
|
|
|
The Children’s Place U.S.
|
$
|
498,836
|
|
|
$
|
373,625
|
|
|
$
|
1,269,196
|
|
|
$
|
941,607
|
|
|
The Children’s Place International (2)
|
59,389
|
|
|
51,946
|
|
|
138,365
|
|
|
108,094
|
|
|
Total net sales
|
$
|
558,225
|
|
|
$
|
425,571
|
|
|
$
|
1,407,561
|
|
|
$
|
1,049,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1):
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
100,456
|
|
|
$
|
17,491
|
|
|
$
|
196,262
|
|
|
$
|
(204,468)
|
|
|
The Children’s Place International
|
13,354
|
|
|
5,832
|
|
|
21,304
|
|
|
(9,836)
|
|
|
Total operating income (loss)
|
$
|
113,810
|
|
|
$
|
23,323
|
|
|
$
|
217,566
|
|
|
$
|
(214,304)
|
|
|
Operating income (loss) as a percent of net sales(1):
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
20.1
|
%
|
|
4.7
|
%
|
|
15.5
|
%
|
|
(21.7)
|
%
|
|
The Children’s Place International
|
22.5
|
%
|
|
11.2
|
%
|
|
15.4
|
%
|
|
(9.1)
|
%
|
|
Total operating income (loss) as a percent of net sales
|
20.4
|
%
|
|
5.5
|
%
|
|
15.5
|
%
|
|
(20.4)
|
%
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
13,153
|
|
|
$
|
14,542
|
|
|
$
|
40,767
|
|
|
$
|
46,322
|
|
|
The Children’s Place International
|
1,051
|
|
|
1,267
|
|
|
3,390
|
|
|
4,083
|
|
|
Total depreciation and amortization
|
$
|
14,204
|
|
|
$
|
15,809
|
|
|
$
|
44,157
|
|
|
$
|
50,405
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
The Children’s Place U.S.
|
$
|
8,432
|
|
|
$
|
9,413
|
|
|
$
|
21,304
|
|
|
$
|
23,046
|
|
|
The Children’s Place International
|
72
|
|
|
82
|
|
|
696
|
|
|
717
|
|
|
Total capital expenditures
|
$
|
8,504
|
|
|
$
|
9,495
|
|
|
$
|
22,000
|
|
|
$
|
23,763
|
|
____________________________________________
(1)Net sales and operating income (loss) were significantly impacted by the COVID-19 pandemic in the Third Quarter 2020 and Year-To-Date 2020.
(2)Net sales from The Children’s Place International are primarily derived from Canadian operations. The Company’s foreign subsidiaries, primarily in Canada, have operating results based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2021
|
|
January 30, 2021
|
|
October 31, 2020
|
|
Total assets:
|
(in thousands)
|
|
The Children’s Place U.S.
|
$
|
995,835
|
|
|
$
|
1,054,339
|
|
|
$
|
1,113,309
|
|
|
The Children’s Place International
|
92,531
|
|
|
85,788
|
|
|
93,634
|
|
|
Total assets
|
$
|
1,088,366
|
|
|
$
|
1,140,127
|
|
|
$
|
1,206,943
|
|
13. DERIVATIVE INSTRUMENTS
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates attributable to inventory purchases denominated in a foreign currency. Specifically, the functional currency of the Company’s Canadian subsidiary is the Canadian dollar, but it 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, the Company enters, from time to time, into foreign exchange forward contracts. These contracts typically mature within 12 months. The Company does not use forward contracts to engage in currency speculation, and it does not enter into derivative financial instruments for trading purposes.
The Company accounts for all of its derivatives and hedging activity under FASB ASC 815—Derivatives and Hedging.
Under the Company’s risk management policy and in accordance with guidance under the topic, in order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed
prospectively and retrospectively. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The Company discontinues hedge accounting under a foreign exchange forward contract prospectively: (i) if management determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is terminated, (iii) if the forecasted transaction being hedged by the derivative is no longer probable of occurring, or (iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate.
All derivative instruments are presented at gross fair value on the consolidated balance sheets within either Prepaid expenses and other current assets or Accrued expenses and other current liabilities. As of October 30, 2021 and October 31, 2020, the Company did not have any open foreign exchange forward contracts.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings within Cost of sales (exclusive of depreciation and amortization) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in earnings within Selling, general, and administrative expenses, consistent with where the Company records realized and unrealized foreign currency gains and losses on transactions in foreign denominated currencies. There were no losses related to hedge ineffectiveness during Year-To-Date 2021 or Year-To-Date 2020. Changes in fair value associated with derivatives that were not designated and qualified as cash flow hedges were recognized in earnings within Selling, general, and administrative expenses. During Year-To-Date 2021, there were no derivatives that qualified as cash flow hedges.
14. SUBSEQUENT EVENTS
Refinancing of ABL Credit Facility and Term Loan
On November 16, 2021, the Company completed the refinancing of its ABL Credit Facility and Term Loan with a new lending group led by an affiliate of Wells Fargo by entering into a fourth amendment to its Credit Agreement, dated as of May 9, 2019, with the lenders party thereto. The new debt consists of a revolving credit facility with $350.0 million of maximum availability and a $50.0 million term loan, both with five year maturities, lower interest rates, reduced reporting requirements, and increased flexibility under the covenants.
The new revolving credit facility is secured by a first-priority lien on substantially all of the Company’s U.S. and Canadian assets, and a second-priority lien on the Company’s intellectual property, and certain furniture, fixtures and equipment. Interest on borrowings is payable monthly at LIBOR plus 1.125% or 1.375%, based on the amount of the Company’s average excess availability under the facility. The new revolving credit facility has an unused line fee of 0.20%.
The new term loan is secured by a first-priority lien on the Company’s intellectual property, and certain furniture, fixtures and equipment, and a second-priority lien on the assets securing the new revolving credit facility. Interest is payable monthly at LIBOR plus 2.50%. The new term loan does not require amortization if certain conditions are met and is pre-payable at any time without penalty.
Concurrently, the Company repaid remaining principal of $79.0 million on its $80.0 million Term Loan with SLR Credit Solutions (formerly known as Crystal Financial LLC).
Share Repurchase Program
In November 2021, the Board of Directors approved another $250.0 million share repurchase program, which adds to the remaining availability under the 2018 Share Repurchase Program.
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