CHILDRENS PLACE RETAIL STORES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FIFTY-TWO WEEKS ENDED FEBRUARY 2, 2002

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-23071

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THE CHILDREN'S PLACE RETAIL STORES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 31-1241495
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)

915 SECAUCUS ROAD
SECAUCUS, NEW JERSEY 07094
(Address of Principal Executive Offices) (Zip Code)

(201) 558-2400
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

The aggregate market value of voting stock held by non-affiliates was
$396,242,596 at the close of business on March 15, 2002.

Indicate the number of outstanding shares of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, par
value $0.10 per share, outstanding at March 15, 2002: 26,407,107 shares.

Documents Incorporated by Reference: Portions of the Company's Proxy
Statement for its annual meeting of stockholders to be held on June 6, 2002 are
incorporated partially in Part III hereof.

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THE CHILDREN'S PLACE RETAIL STORES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FIFTY-TWO WEEKS ENDED FEBRUARY 2, 2002
TABLE OF CONTENTS

PART I

ITEM 1. -- BUSINESS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF FEDERAL SECURITIES LAWS WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. THOSE STATEMENTS INCLUDE, BUT
MAY NOT BE LIMITED TO, THE DISCUSSIONS OF THE COMPANY'S OPERATING AND GROWTH
STRATEGY. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER
THE CAPTION "RISK FACTORS." ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THE ASSUMPTIONS COULD PROVE TO BE INACCURATE, AND
THEREFORE, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K WILL PROVE TO BE ACCURATE. IN
LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED. THE COMPANY UNDERTAKES
NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT EVENTS AND CIRCUMSTANCES OCCURRING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT ON FORM 10-K.

OVERVIEW

The Children's Place Retail Stores, Inc. is a growing specialty
retailer of apparel and accessories for children from newborn to twelve years of
age. We design, source and market our products under our proprietary "The
Children's Place" brand name for sale exclusively in our stores and on our
website. Our merchandising objective is to provide our customers with
high-quality, fashion and basic products at prices that represent substantial
value to our customers. As of March 15, 2002, we operated 543 stores in 47
states, located primarily in regional shopping malls.

We provide high-quality products that appeal to customers from a broad
range of socioeconomic and demographic profiles. We believe that the combination
of our distinctive approach to merchandising; our high quality, fashionable
product at value prices; and the growing strength of our proprietary brand
generates this broad appeal. Our designers interpret style and color fashion
trends to develop a selection of fresh and youthful coordinated outfits that
distinguishes "The Children's Place" brand. We believe that our up to date
merchandise styling, our coordinated, high-quality products and our consistent
value pricing have created name recognition and customer loyalty for "The
Children's Place" brand.

Over the last several years, we have been aggressively opening new
stores to capitalize on our business strengths and our strong store
economics. During fiscal 1999, fiscal 2000 and fiscal 2001, we opened 84, 108
and 121 new stores, respectively. We closed one store in fiscal 2000 and one
store in fiscal 2001. We plan to continue our aggressive expansion program
during fiscal 2002. We expect to open approximately 130 stores, including our
entry into the international market with the planned opening of approximately
30 stores in Canada.

Our net sales have increased at a compound annual growth rate of
approximately 28% from $192.6 million in fiscal 1997 to $657.0 million in fiscal
2001. During fiscal 2001, we experienced a comparable store sales decline of 8%
in part due to the difficult economic climate. During the previous four fiscal
years, our comparable store sales increased by 4%, 15%, 14% and 2%. Our net
income has increased from $5.2 million in fiscal 1997 to $46.6 million in fiscal
2001 and our diluted earnings per share have increased from $0.22 per share in
fiscal 1997 to $1.73 per share in fiscal 2001.

Our broad merchandise appeal and value pricing strategy results in a
highly portable store concept which can operate profitably in a wide variety of
demographic and geographic regions. Over the past four years, our new stores
have generated an average cash-on-cash return on investment of approximately
81%. We believe that we have the opportunity to significantly increase our
domestic store base and anticipate operating more than 1,000 stores by the end
of 2005. Our goal is to make "The Children's Place" the number one children's
specialty apparel retailer in America.

We believe that the following strengths have contributed to our success
and provide us with a competitive advantage:

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MERCHANDISING STRATEGY. Our merchandising strategy is built on offering
a fashionable collection of interchangeable outfits and accessories to create a
coordinated look distinctive to The Children's Place. We offer an updated,
focused assortment of styles in a variety of colors and patterns, with the aim
of consistently creating a fresh, youthful feel that we believe distinguishes
"The Children's Place" brand. To continually generate freshness in our stores,
we typically introduce a new merchandise line each month. Each line is built
around a theme that includes a stylish assortment of coordinated fashion and
basic apparel with matching accessories designed to encourage multiple item
purchases and wardrobe building.

VALUE PRICING STRATEGY. We offer high-quality clothing and accessories
under "The Children's Place" brand name at prices generally 20% to 30% below
most of our direct mall-based competitors. We employ this value pricing strategy
across our entire merchandise offering, which we believe has enabled us to build
a broad and loyal base of customers. To generate increased customer traffic and
heightened excitement, we periodically run promotions on select seasonal
merchandise and distribute coupons for limited time periods.

STRONG BRAND IMAGE. We believe that we have built a strong loyalty and
brand image for "The Children's Place" by (1) offering high-quality products at
a value price, (2) providing a distinctive collection of coordinated and
interchangeable outfits and accessories, (3) maintaining a uniform store design
and merchandise presentation, (4) emphasizing our fashionable, youthful image in
our marketing visuals and (5) selling our merchandise exclusively in our 543
stores and on our website. In our continuing efforts to enhance the appeal and
recognition of our brand name, we continue to emphasize our logos: "Place,"
"Place Sport," "P," "Place Jeans" and other "Place" logos on our merchandise.

LOW-COST SOURCING. We control the design, sourcing and presentation of
our products, all of which are marketed under our proprietary brand name. We
believe that this control is essential in assuring the consistency and quality
of our merchandise and brand image, as well as in our ability to deliver value
to our customers. We have established close, long-standing and mutually
beneficial relationships with our trading company, buying agents and numerous
manufacturers. Through these relationships and our extensive knowledge of low
cost sourcing, we are able to offer our customers high-quality products at value
prices while maintaining strong gross margin levels. We further believe that our
integrated merchandise approach, from in-house design to in-store presentation,
enables us to quickly identify and respond to market trends, uphold rigorous
product quality standards, manage the cost of our merchandise and strengthen our
brand name. We believe our Asian offices add to our ability to capitalize on new
sourcing opportunities, increase our control over product quality and enable us
to respond to changing merchandise trends more effectively and efficiently.

EXPERIENCED MANAGEMENT TEAM. Our management team is led by Ezra Dabah,
who guides the management of The Children's Place using his broad apparel
merchandising and buying expertise, which includes approximately 19 years in the
children's segment of the market. In addition, the other members of our
management team have an average of 18 years of retail or apparel industry
experience and an average of 13 years with The Children's Place.

STRONG STORE ECONOMICS. Our store opening campaign capitalizes on our
competitive advantages and strong store economics. In fiscal 2001, our new
stores that were operating for their first full fiscal year generated a
cash-on-cash return on investment of approximately 63%. During fiscal 2002, we
intend to continue our aggressive store opening campaign and plan to open
approximately 130 stores, which will include approximately 30 stores in Canada.

MERCHANDISING

Our merchandising strategy is built on offering a collection of
interchangeable outfits and accessories to create a coordinated look distinctive
to The Children's Place. We offer a focused assortment of styles in a variety of
colors and patterns, with the aim of consistently creating a fresh, youthful
look that we believe distinguishes "The Children's Place" brand. We divide the
year into quarterly merchandising seasons: Spring, Summer, Back-to-School and
Holiday. Within each season, we also introduce a new merchandise line each
month.

To execute our merchandising strategy, we rely on the coordinated
efforts of our merchandising, trend, design, planning and sourcing teams. These
teams, in conjunction with senior management, review our prior season results
and fashion trends to determine the silhouettes, color and graphic design that
we will offer in upcoming seasons. Merchandising selects specific silhouettes
for production from the assortment of designs that are created by

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the design and trend teams. Then, based upon detail design specifications,
including production quantities determined by merchandising and planning, the
sourcing team arranges for the manufacture of the selected styles.

Our trend and design teams analyze and interpret current and emerging
fashion trends, translating them into a broad selection of youthful children's
clothing and accessories in an array of fashionable colors and patterns that are
appropriate for upcoming seasons. Work on each of our seasonal lines begins
approximately one year before the season, with the gathering of samples and
market intelligence on fashion trends. This process involves extensive European
and domestic market research, media, trade shows, fashion magazines, the
services of fashion and color forecast organizations and analysis of prior
season performance. After the trend team presents the fashion themes for a
coming season, the designers, with the direction of merchandising, translate
those themes into an assortment of fashion and basic designs that seek to
reflect the fresh and youthful image of "The Children's Place" brand. These
interpretations include variations in fabric and other materials, product color,
decoration and age-appropriate silhouette. Potential items are designed using
computer aided design technology, giving us the opportunity to consider a wide
range of style and fashion options. In addition, our Asian offices coordinate
the production of prototype samples which enable our merchandising teams to
ensure that our merchandise will properly reflect our design concepts.

The merchandise management team creates a detailed purchasing plan for
the season covering each department, category and key items, based on
historical, current and emerging category trends. The production process takes
approximately six months from order confirmation to receipt of merchandise at
our distribution facilities. The planning team monitors current and future
inventory levels on a weekly basis and analyzes sales patterns to predict future
demand for various categories. We regularly monitor sales of each style and
color and maintain some flexibility to adjust merchandise on order for future
seasons or to accelerate delivery of merchandise. The merchandise allocation
team is responsible for planning and allocating merchandise to each store based
on sales volume levels, merchandise turns and other factors.

SOURCING AND PROCUREMENT

We combine management's extensive sourcing experience with a cost-based
buying strategy in order to control and reduce costs. Management believes it has
a thorough understanding of the economics of apparel manufacturing, including
costs of materials and components. This knowledge enables us to determine the
most cost-effective country and manufacturer from which to source each item and
obtain low prices. Relying on our supplier relationships and management's
knowledge of manufacturing costs, we believe we have been able to arrange for
the manufacture of high-quality products at low cost.

Our sourcing team makes on-site visits to our independent agents and
various manufacturers to negotiate product costs, finalize technical
specifications of each product and confirm delivery of merchandise manufactured
to our specifications. Our apparel is produced to our specifications by more
than 150 independent manufacturers located primarily in Asia. To support our
growing inventory needs and to control merchandise costs, we continue to pursue
global sourcing opportunities and consider product cost and quality, reliability
of the manufacturer, service and product lead times, among other factors.

We have no exclusive or long-term contracts with our manufacturers and
typically transact business on an item-by-item basis under purchase orders at
freight on board cost in U.S. dollars. We are parties to agency agreements with
commissioned independent agents to oversee production, assist in sourcing and
pre-production approval, quality inspection and to ensure timely delivery of
merchandise. We purchase approximately 20% of our products from a commissioned
independent agent in Taiwan and approximately 10% of our products from a
commissioned independent agent in Turkey. We also purchase approximately 40% of
our merchandise through a Hong Kong-based trading company. This trading company
is responsible for procurements from manufacturers located throughout Asia.
Although they are not contractually obligated to do so, the Hong Kong-based
trading company, and our commissioned independent agents in Taiwan and Turkey
each have exclusive arrangements with The Children's Place. We have developed
long-term, continuous relationships with key individual manufacturers and
material suppliers which have yielded numerous benefits, including quality
control and low costs, and have afforded us flexible working arrangements and a
steady flow of merchandise supply. In addition, we believe our Asian offices
enable us to obtain more favorable material and manufacturing costs and more
quickly identify and act on new sourcing and supplier opportunities. Our Asian
offices also facilitates our prototype sample production and enables us to
foster stronger relationships with our suppliers, manufacturers, agents and
trading companies in the Far East. During fiscal 2001, we purchased
approximately 3% of our merchandise directly from various factories,

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without the assistance of an agent or trading company. During fiscal 2002, we
plan to increase the amount of merchandise purchased directly from various
factories to approximately 5% to 10% of our total merchandise procurement.

Together with our agents and key suppliers, we employ tracking systems
that enables us to anticipate potential delivery delays in our orders and take
action to mitigate the impact of any delays. By using these systems together
with our purchase order and advanced shipping notification systems, we and our
independent agents actively monitor the status of each purchase order from order
confirmation to merchandise receipt. We experience occasional shipment delays,
but no such delay has had a material adverse effect on our business.

To ensure quality and promote consumer confidence in our products, we
augment our manufacturers' testing requirements with our own, in-house quality
assurance laboratory to test and evaluate fabric, trimming materials and
pre-production samples against a comprehensive range of physical performance
standards before production begins. The quality control personnel of our Asian
offices, independent agents and trading company visit the various manufacturing
facilities to monitor and improve the quality control and production process.
Our Asian offices have enhanced our quality control by enabling us to monitor
component and manufacturing quality at close range and address related problems
at an early stage. With this focus on pre-production quality approval, we are
generally able to detect and correct quality-related problems before bulk
production begins. We do not accept our finished apparel products until each
purchase order receives formal certification of compliance from our agents' or
appointed third party inspectors.

COMPANY STORES

EXISTING STORES. As of March 15, 2002, we operated 543 stores in 47
states. Most of our stores are clustered in and around major metropolitan areas.
Our stores are concentrated in major regional malls, with the exception of 34
street, 37 outlet and 43 strip center stores. The following table sets forth the
number of stores in each state as of March 15, 2002:

4

STORE TYPE. Our typical store is approximately 4,300 square feet and
features a design that incorporates light wood floors, fixtures and trim. The
store is brightly lit, featuring floor-to-ceiling glass windows that allow our
colorful fashions to attract customers from the outside. A customized grid
system throughout the store's upper perimeter displays featured merchandise,
marketing photographs and promotions. Each line is merchandised as a collection
of coordinated fashion and basic items, with matching accessories. We
continually refine our merchandise presentation strategy to improve the shopping
experience of our customers. We believe that our merchandise presentation
effectively displays "The Children's Place" coordinated look and creates a
visually attractive selling environment that maximizes customer convenience and
encourages the purchase of multiple items.

Our street and strip center locations represent approximately 14% of
our store base and provide substantial opportunities for further penetration in
established markets.

Our outlet stores generally measure in excess of 5,000 square feet and
represent approximately 7% of our store base. Our outlet stores are generally
located in outlet centers and are strategically placed within each market to
liquidate markdown merchandise from nearby stores. We also sell an assortment of
full-priced merchandise in our outlet stores.

Our combo store prototype is approximately 6,000 square feet with a
double store front, doing business as The Children's Place and the babyPLACE.
The Children's Place store provides an expanded selection of big girl and big
boy assortments (size 4 - 14) and the adjoining babyPLACE store is dedicated to
an expanded selection of baby and toddler offerings (newborn to size 4). Combo
stores currently represent approximately 5% of our store base and during fiscal
2002, we plan to open or remodel approximately 20 additional stores into the
combo format. Our strategy is to open combo stores in the most productive malls,
street locations and strip centers.

To achieve uniform merchandise presentation and to maximize sales of
coordinated items, store management is provided monthly with detailed visual
floorsets that specify merchandise placement. Standardization of store design,
merchandise presentation and window displays also promotes effective usage and
productivity of selling space and maximizes customer convenience in merchandise
selection. By seeking a uniform appearance in store design and merchandise
presentation, we believe that we are able to maintain and enhance "The
Children's Place" brand image.

STORE OPERATIONS. Our stores are staffed by a store management team and
approximately 10 part-time sales associates with additional part-time associates
hired to support seasonal needs. Our store management teams spend a majority of
their work week on store selling floors, providing direction, motivation,
training and support to store personnel. To maximize selling productivity, we
engage in an ongoing process of training management and sales associates in the
areas of customer service, selling skills, merchandise presentation, procedures
and controls. In order to motivate our store operations management, we offer an
incentive compensation plan that awards bonuses for exceeding goals for sales,
payroll productivity and inventory shrinkage.

STORE EXPANSION PROGRAM

Over the last several years, we have been aggressively opening new
stores to capitalize on our business strengths and strong store economics. In
the last three fiscal years we increased our number of stores from 209 to 520,
opening 84, 108 and 121 stores in fiscal 1999, fiscal 2000 and fiscal 2001,
respectively. We closed one store in fiscal 2000 and one store in fiscal 2001.
We intend to continue our store expansion program and currently plan to open
approximately 130 stores in fiscal 2002, including approximately 30 stores in
Canada.

New stores, for which fiscal 2001 was their first full year of
operations, had average net sales of approximately $1.1 million. The average
investment for these stores, including capital expenditures (net of landlord
contribution), initial inventory (net of merchandise payables) and pre-opening
costs was approximately $414,000. In fiscal 2001, average store level operating
cash flow for these stores was approximately $260,000, yielding a cash on cash
return on investment of approximately 63%. Over the past four years, our new
stores have generated an average cash-on-cash return on investment of
approximately 81%.

Our expansion strategy focuses on mall, strip, street and outlet
locations. We conduct onsite visits and analyses of potential store sites,
taking into account the performance of our stores and other retailers in the
area, as well as, the demographics of the surrounding area. In mall locations,
we consider the store's location relative to mall traffic patterns and proximity
to other children's retailers.

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ELECTRONIC COMMERCE

We believe that our online store is an effective merchandise channel to
our existing customers and to generate new customers that may not have access to
our store locations. Although our on-line store has represented less than one
percent of our sales over the last two years, we believe our on-line store is an
integral part of our customer service strategy. In January 2001, we closed our
online store to improve its operational efficiency and to reduce costs by
bringing our e-commerce operations and fulfillment services in-house. We
reopened our online store in May 2001.

MARKETING

ADVERTISING AND PROMOTION. We strive to enhance our reputation and
image in the marketplace and build recognition and equity in "The Children's
Place" brand by advertising our image, product and value message through direct
mail and in-store marketing. Our direct mail marketing program is designed to
increase sales, promote brand loyalty and create customer excitement. We also
advertise our image through in-store photographs, signage and product displays.

PRIVATE LABEL CREDIT CARD. We view our private label credit card as an
important marketing and communication tool. Pursuant to a merchant services
agreement, private label credit cards are issued to our customers for use
exclusively at our stores and credit is extended to such customers on a
non-recourse basis to The Children's Place. Sales on the private label credit
card accounted for approximately 16% of our fiscal 2001 net sales, which
increased from 11% of fiscal 1999 net sales. We believe that our private label
credit card promotes affinity and loyalty among those customers who use the card
and facilitates communication with such customers through delivery of coupons
and promotional materials. Our customers using "The Children's Place" card
typically shop more frequently with a substantially higher average dollar sale
than our other customers.

INFORMATION TECHNOLOGY

Our information technology systems consist of a full range of
financial, merchandising, logistics, and product procurement systems that run on
a combination of legacy and proprietary software packages. These systems operate
on a multi-platform environment, which includes an IBM mainframe computer and
several mid-range computers. We view technology as an important tool in
efficiently supporting our rapid growth and maintaining a competitive industry
position.

We are committed to utilizing technology to further enhance our
competitive position. During fiscal 2001, we implemented an integrated
enterprise solution for our general ledger, accounts payable, human resources
and payroll systems, a new merchandising planning system and various store
systems to improve our productivity and competitive advantage. During fiscal
2002, we plan to further enhance our systems to improve our productivity and
accommodate our planned Canadian operations. We continually explore
opportunities in which technology can provide a competitive advantage.

LOGISTICS

We currently support our stores with an approximately 200,000 square
foot distribution center and corporate headquarters facility located in
Secaucus, New Jersey and an approximately 250,000 square foot distribution
center in Ontario, California, both of which are leased. Our distribution
centers utilize an automated warehouse system, which employs radio frequency
technology and automated conveyor systems. We expect that these distribution
centers should be able to support over 1,000 stores.

In addition, we also operate other leased facilities located near our
headquarters in Secaucus, New Jersey, which we use for e-commerce fulfillment,
distribution to local stores and ancillary office space. During fiscal 2002, we
plan to lease a distribution facility in the Toronto, Canada area. This facility
will manually cross dock merchandise for distribution to our planned Canadian
stores.

COMPETITION

The children's apparel retail business is highly competitive. We
compete in substantially all of our markets with GapKids, babyGap and Old Navy
(each of which is a division of The Gap, Inc.), The Gymboree Corporation, Too,
Inc., J.C. Penney Company, Inc., Sears, Roebuck and Co. and other department
stores that sell children's apparel and accessories, as well as discount stores
such as Wal-Mart Stores, Inc., Target Corporation, Kmart Corporation and Kids
"R" Us (a division of Toys "R" Us, Inc.). We also compete with a wide variety of
specialty

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stores, other national and regional retail chains, catalog companies and
internet retailers. One or more of our competitors are present in substantially
all of the areas in which we have stores.

We believe that the principal factors of competition in our marketplace
are perceived value, price, quality, merchandise assortment, brand name
recognition, customer service, and a friendly store environment. We believe that
we have been able to effectively compete in the children's apparel industry
because of our reputation in the marketplace and consistent merchandise offering
of high-quality, coordinated basic and fashion outfits for children at
consistent value prices, sold in a friendly environment.

TRADEMARKS AND SERVICE MARKS

"The Children's Place," "babyPLACE," "Place," "The Place," "TCP" and
certain other marks have been registered as trademarks and/or service marks with
the United States Patent and Trademark Office. The registration of the
trademarks and the service marks may be renewed to extend the original
registration period indefinitely, provided the marks are still in use. We intend
to continue to use and protect our trademarks and service marks and maintain
their registrations. We are taking steps to register our trademarks in certain
foreign countries. We believe our trademarks and service marks have received
broad recognition and are of significant value to our business.

EMPLOYEES

As of March 15, 2002, we had approximately 10,400 employees, of whom
approximately 700 are based at our distribution centers and corporate
headquarters. We have approximately 2,000 full-time store employees and
approximately 7,700 part-time store employees. None of our employees are covered
by a collective bargaining agreement. We believe our relations with our
employees are good.

EXECUTIVE OFFICERS

The following table lists the current officers of the Company:

RISK FACTORS

Investors in the Company should consider the following risk factors as
well as the other information contained herein.

INABILITY TO SUSTAIN AGGRESSIVE GROWTH STRATEGY

Our net sales have grown significantly during the past several years,
primarily as a result of the opening of new stores. We intend to continue to
pursue an aggressive growth strategy for the foreseeable future, and our future
operating results will depend largely upon our ability to open and operate new
stores successfully and to manage a larger business profitably. We anticipate
opening approximately 130 stores during fiscal 2002, which will include
approximately 30 stores in Canada.

We are subject to a variety of business risks generally associated with
rapidly growing companies. Our ability to open and operate new stores
successfully depends on many factors, including, among others, the

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availability of suitable store locations, the ability to negotiate acceptable
lease terms, the ability to timely complete necessary construction, the ability
to successfully integrate new stores into our existing operations, the ability
to hire and train store personnel and the ability to recognize and respond to
regional and climate-related differences in our customer preferences.

We cannot assure you that we will be able to continue to achieve our
planned expansion on a timely and profitable basis or that we will be able to
achieve results similar to those achieved in existing locations in prior
periods. In addition, as our business grows, we anticipate that we will not be
able to sustain the current annual growth rate of our store base of
approximately 30%. Operating margins may also be adversely affected during
periods in which we have incurred expenses in anticipation of new store
openings. We may not be able to sustain the cash-on-cash return we experienced
in fiscal 2001 of 63% for stores that were operating for their first full fiscal
year. Furthermore, we need to continually evaluate the adequacy of our store
management and our information and distribution systems to manage our planned
expansion. Any failure to successfully and profitably execute our expansion
plans could have a material adverse effect on our business.

We expect to spend approximately $50 to $60 million in fiscal 2002 on
capital expenditures, including our expansion into Canada. We believe that cash
generated from operations and funds available under our working capital facility
will be sufficient to fund our capital and other cash flow requirements for at
least the next 12 months. However, it is possible that we may be required to
seek additional funds for our capital and other cash flow needs, and we cannot
assure you that we will be able to obtain such funds.

SENSITIVITY TO ECONOMIC, REGIONAL AND OTHER BUSINESS CONDITIONS

Our business is sensitive to customers' spending patterns which, in
turn, are subject to prevailing regional and national economic conditions such
as consumer confidence, recession, interest rates and taxation. During fiscal
2001, we reported a comparable store sales decline of 8% due in part to the
difficult economic climate. If this economic climate is sustained, we will
continue to be at risk to comparable store sales declines. We are, and will
continue to be, susceptible to changes in regional economic conditions, weather
conditions, demographic and population characteristics, consumer preferences and
other regional factors.

POTENTIAL DISRUPTIONS IN RECEIVING AND DISTRIBUTION

Our merchandise is shipped directly from manufacturers through freight
consolidators to our distribution centers in Secaucus, New Jersey and Ontario,
California. Our operating results depend in large part on the orderly operation
of our receiving and distribution process, which depends on manufacturers'
adherence to shipping schedules and our effective management of our distribution
facilities. During the second quarter of 2002, we plan to open a distribution
center in the Toronto, Canada vicinity to support merchandise distribution for
our planned Canadian stores. We cannot assure you that we have anticipated, or
will be able to anticipate, all of the changing demands which our expanding
operations will impose on our receiving and distribution systems. We also cannot
assure you that we will not experience start-up delays or other difficulties
with our Canadian distribution center. Furthermore, it is possible that events
beyond our control, such as a military action, strike or other disruption, could
result in delays in delivery of merchandise to our stores. Any such event could
have a material adverse effect on our business.

NEED TO ANTICIPATE AND RESPOND TO MERCHANDISE TRENDS

Our continued success will depend in part on our ability to anticipate
and respond to fashion trends and consumer preferences. Our design,
manufacturing and distribution process generally takes up to one year, during
which time fashion trends and consumer preferences may change. Failure to
anticipate, identify or respond to future fashion trends may adversely affect
customer acceptance of our products or require substantial markdowns, which
could have a material adverse effect on our business.

RELIANCE ON INFORMATION TECHNOLOGY

We rely on various information systems to manage our operations and
regularly make investments to upgrade, enhance or replace such systems. Any
delays or difficulties in transitioning to these or other new systems, or in
integrating these systems with our current systems, or any other disruptions
affecting our information systems, could have a material adverse effect on our
business.

8

DEPENDENCE ON UNAFFILIATED MANUFACTURERS AND INDEPENDENT AGENTS

We do not own or operate any manufacturing facilities and therefore are
dependent upon independent third parties for the manufacture of all of our
products. Our products are currently manufactured to our specifications,
pursuant to purchase orders, by more than 150 independent manufacturers located
primarily in Asia. We have no exclusive or long-term contracts with our
manufacturers and compete with other companies for manufacturing facilities. In
addition, we have no formal written agreement with the Hong Kong-based trading
company through which we purchase approximately 40% of our products. We also
purchase approximately 20% of our products from a single agent in Taiwan and
approximately 10% of our products from a single agent in Turkey, which have
exclusive arrangements with us. Although we believe that we have established
close relationships with our trading company, independent agents and principal
manufacturers, the inability to maintain such relationships or to find
additional sources to cover future growth could have a material adverse effect
on our business.

RISKS OF USING FOREIGN MANUFACTURERS; POSSIBLE ADVERSE IMPACT OF UNAFFILIATED
MANUFACTURERS' FAILURE TO COMPLY WITH ACCEPTABLE LABOR PRACTICES

Our business is subject to the risks generally associated with
purchasing from foreign countries. Some of these risks are foreign governmental
regulations, political instability, currency and exchange risks, quotas on the
amounts and types of merchandise which may be imported into the United States
and Canada from other countries, disruptions or delays in shipments and changes
in economic conditions in countries in which our manufacturing sources are
located. We cannot predict the effect that such factors will have on our
business arrangements with foreign manufacturing sources. If any of these
factors rendered the conduct of business in a particular country undesirable or
impractical, or if our current foreign manufacturing sources ceased doing
business with us for any reason, our business could be materially adversely
affected. Our business is also subject to the risks associated with changes in
U.S. and Canadian legislation and regulations relating to imported apparel
products, including quotas, duties, taxes and other charges or restrictions on
imported apparel. We cannot predict whether such changes or other charges or
restrictions will be imposed upon the importation of our products in the future,
or the effect any such event would have on our business.

We require our independent manufacturers to operate in compliance with
applicable laws and regulations and our internal requirements. While our
purchasing guidelines promote ethical business practices, we do not control
these manufacturers or their labor practices. The violation of labor or other
laws by one of the independent manufacturers we use or the divergence of an
independent manufacturer's labor practices from those generally accepted as
ethical in the United States and Canada could have a material adverse effect on
our business.

EFFECT OF FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY ON INCOME

As is the case with many apparel retailers, we experience seasonal
fluctuations in our net sales and net income. Our net sales and net income are
generally weakest during the first two fiscal quarters, and are lower during the
second fiscal quarter than during the first fiscal quarter. For example, in
fiscal 2001, 24%, 18%, 28% and 30% of our net sales for stores open for the full
fiscal year occurred in the first, second, third and fourth quarters,
respectively. In fiscal 2001, we experienced a second quarter loss and expect to
experience a second quarter loss in fiscal 2002. It is possible that we will
continue to experience second quarter losses in future periods. Our first
quarter results are heavily dependent upon sales during the period leading up to
the Easter holiday and weak sales during this period could have a material
adverse effect on our business. Our third quarter results are heavily dependent
upon back-to-school sales and our fourth quarter results are heavily dependent
upon sales during the holiday season. Weak sales during either of these periods
could have a material adverse effect on our business.

Our quarterly results of operations may also fluctuate significantly
from quarter to quarter as a result of a variety of other factors, including
overall economic conditions and recession, the timing of new store openings and
related pre-opening and other start-up costs, net sales contributed by new
stores, increases or decreases in comparable store sales, weather conditions,
shifts in the timing of certain holidays and changes in our merchandise mix. Any
failure by us to meet our business plans for, in particular, the third and
fourth quarter of any fiscal year would have a material adverse effect on our
earnings, which in all likelihood would not be offset by satisfactory results
achieved in other quarters of the same fiscal year. In addition, because our
expense levels are based in part on expectations of future sales levels, a
shortfall in expected sales could result in a disproportionate decrease in our
net income.

9

CHANGES IN COMPARABLE STORE SALES RESULTS FROM PERIOD TO PERIOD

Numerous factors affect our comparable store sales results including,
among others, economic conditions and recession, weather conditions, fashion
trends, merchandise assortment, retail prices, the retail sales environment and
our success in executing our business strategy. During fiscal 2001, we reported
a comparable store sales decline of 8% due in part to the difficult economic
climate which caused a slowdown in store traffic. Our monthly comparable store
sales results have fluctuated significantly in the past and we anticipate that
our monthly comparable store sales will continue to fluctuate in the future.
Moreover, comparable store sales for any particular period may decrease in the
future. Comparable store sales results are often followed closely by the
investment community and significant fluctuations in such results may affect the
price of our Common Stock. Any such variations in our comparable store sales
results could have a material adverse effect on our business and on the market
price of our Common Stock.

RISK OF EXPANSION

Although we operate in 47 states, approximately 70% of our stores are
in the eastern half of the United States, with concentrations of stores in
metropolitan areas. In addition, as we implement our growth strategy in fiscal
2002 with our first international expansion into Canada, we will increase our
susceptibility to differences in demographic and population characteristics,
regional economic conditions, consumer preferences and other geographical
factors. As we open stores in more extremely hot and cold climates, our
merchandise assortments may need to more specifically address different climate
and weather-related conditions. We cannot assure you that, as we expand into new
regions, we will be able to achieve results comparable to those we have achieved
in prior periods in regions where we already conduct business.

RISK OF INTERNATIONAL EXPANSION

During fiscal 2002, we plan to open our first stores in Canada. We
cannot assure you we will be able to complete this planned expansion on a timely
and profitable basis or that we will be able to achieve results similar to those
achieved in existing domestic locations in prior periods. During fiscal 2002, we
expect to generate an operating loss from our Canadian operations. We cannot
assure you that we will be able to address in a timely fashion the additional
risks of international expansion such as governmental requirements over
merchandise importation, employment, taxation and multi-lingual requirements. As
a result of international expansion, we will be at increased risk to
fluctuations in foreign currencies. In addition, our technology systems and
corporate infrastructure may not be able to fully address the requirements of
international expansion.

FOREIGN CURRENCY FLUCTUATIONS

We conduct our business in U.S. dollars. However, because we purchase
substantially all of our products overseas, the cost of these products may be
affected by changes in the values of the relevant currencies. To date, we have
not considered it necessary to hedge against foreign currency fluctuations.
During fiscal 2002, the risk of foreign currency fluctuations will increase as
we open stores in Canada. Although foreign currency fluctuations have had no
material adverse effect on our business in the past, we cannot predict whether
such fluctuations will have such an effect in the future.

THREAT OF TERRORISM

We are dependent upon the continued popularity of malls as shopping
destinations and the ability of mall anchor tenants and other attractions to
generate customer traffic in the malls where our stores are located. Any
terrorist act that decreases the level of mall traffic or other shopping traffic
would have a material adverse effect on our business.

DEPENDENCE ON KEY PERSONNEL

The leadership of Ezra Dabah, our Chairman of the Board and Chief
Executive Officer, has been instrumental in our success. The loss of the
services of Mr. Dabah could have a material adverse effect on our business. We
have entered into an employment agreement with Mr. Dabah, but we cannot assure
you that we will be able to retain his services. In addition, other members of
management have substantial experience and expertise in our business and have
made significant contributions to its growth and success. The loss of services
of one or more of these individuals, or the inability to attract additional
qualified managers or other personnel as we grow, could

10

have a material adverse effect on our business. We are not protected by any
key-man or similar life insurance for any of our executive officers.

COMPETITION

The children's apparel retail business is highly competitive. We
compete in substantially all of our markets with GapKids, babyGap and Old Navy
(each of which is a division of The Gap, Inc.), The Gymboree Corporation, Too,
Inc., J.C. Penney Company, Inc., Sears, Roebuck and Co. and other department
stores that sell children's apparel and accessories, as well as discount stores
such as Wal-Mart Stores, Inc., Target Corporation, Kmart Corporation and Kids
"R" Us (a division of Toys "R" Us, Inc.). We also compete with a wide variety of
specialty stores, other national and regional retail chains, catalog companies
and internet retailers. One or more of our competitors are present in
substantially all of the areas in which we have stores. Many of our competitors
are larger than The Children's Place and have access to significantly greater
financial, marketing and other resources than we have. We cannot assure you that
we will be able to compete successfully against existing or future competition.

CONTROL BY CERTAIN STOCKHOLDERS

As of March 15, 2002, Ezra Dabah and certain members of his family
beneficially own 7,925,890 shares of our Common Stock, constituting
approximately 29.9% of the outstanding Common Stock. Two funds managed by
Saunders Karp & Megrue, L.P. ("SKM"), The SK Equity Fund, L.P. and SK Investment
Fund, L.P. (collectively, the "SK Funds"), own 6,704,053 shares or approximately
25.4% of our outstanding Common Stock. Under a stockholders agreement, Mr. Dabah
and such family members, the SK Funds and certain other stockholders, who own in
the aggregate a majority of our outstanding Common Stock, have agreed to vote
for the election of two nominees of the SK Funds and three nominees of Ezra
Dabah to our Board of Directors in any election of directors. As a result, the
SK Funds and Ezra Dabah are, and will continue to be, able to control the
election of our directors. In addition, if the SK Funds and Mr. Dabah were to
vote together, they would be able to determine the outcome of any matter
submitted to a vote of our stockholders for approval.

UNCERTAINTY OF NET OPERATING LOSS CARRYFORWARDS

We utilized $38.4 million and $1.6 million of our net operating loss
carryforwards ("NOLs") to offset taxable income that we earned in our 1998 and
1999 taxable years, respectively. As the amount and availability of these NOLs
are subject to review by the Internal Revenue Service, we cannot assure you that
the NOLs will not be reduced or their use limited as the result of an audit of
our tax returns. If the amount of these NOLs were reduced or their availability
limited, we could be liable for additional taxes with respect to our 1998 and
1999 taxable years. Any such reduction or restriction could have a material
adverse effect on our business.

STOCK PRICE VOLATILITY

Our Common Stock, which is quoted on the Nasdaq National Market, has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, our comparable
store sales results, announcements by other apparel retailers, the overall
economy and the condition of the financial markets could cause the price of our
Common Stock to fluctuate substantially.

ANTI-TAKEOVER PROVISIONS OF APPLICABLE DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS

Certain provisions of our Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
ByLaws (the "ByLaws") may have anti-takeover effects and may discourage, delay
or prevent a takeover attempt that a stockholder might consider in its best
interest. These provisions, among other things, (1) classify our Board of
Directors into three classes, each of which will serve for different three year
periods, (2) provide that only the Chairman of the Board of Directors may call
special meetings of the stockholders, (3) provide that a director may be removed
by stockholders only for cause by a vote of the holders of more than two-thirds
of the shares entitled to vote, (4) provide that all vacancies on our Board of
Directors, including any vacancies resulting from an increase in the number of
directors, may be filled by a majority of the remaining directors, even if the
number is less than a quorum, (5) establish certain advance notice procedures
for nominations of candidates for election as directors and for stockholder
proposals to be considered at stockholders' meetings, and (6) require a vote of
the holders of more than two-thirds of the shares entitled to vote in order to
amend the foregoing provisions and certain other provisions of the Certificate
of Incorporation and

11

ByLaws. In addition, the Board of Directors, without further action of the
stockholders, is permitted to issue and fix the terms of preferred stock which
may have rights senior to those of the Common Stock. Moreover, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law, as
amended (the "DGCL"), which would require a two-thirds vote of stockholders for
any business combination (such as a merger or sales of all or substantially all
of our assets) between The Children's Place and an "interested stockholder,"
unless such transaction is approved by a majority of the disinterested directors
or meets certain other requirements. In certain circumstances, the existence of
these provisions which inhibit or discourage takeover attempts could reduce the
market value of our Common Stock.

ITEM 2. -- PROPERTIES

We currently support our stores with an approximately 200,000 square
foot distribution center and corporate headquarters facility in Secaucus, New
Jersey and an approximately 250,000 square foot distribution center in Ontario,
California, both of which are leased. We expect that these distribution centers
should be able to support over 1,000 stores.

In addition, we also operate other leased facilities located near our
headquarters in Secaucus, New Jersey, which we use for e-commerce fulfillment,
distribution to local stores and ancillary office space. During fiscal 2002, we
plan to lease a distribution facility in the Toronto, Canada area.

All of our existing store locations are leased by us, with lease terms
expiring between 2002 and 2017 and with an average unexpired lease term of 7.9
years. The leases for most of our existing stores are for terms of ten years and
provide for contingent rent based upon a percentage of sales in excess of
specific minimums. Leases for future stores will likely include similar
contingent rent provisions.

ITEM 3. -- LEGAL PROCEEDINGS

We are involved in various legal proceedings arising in the normal
course of our business. In the opinion of management, any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
business.

ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

12

PART II

ITEM 5.-- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is listed on the Nasdaq National Market under the
symbol "PLCE." The following table sets forth the range of high and low closing
sales prices on the Nasdaq National Market of our Common Stock for the calendar
periods indicated.

On March 15, 2002, the last reported sale price of our Common Stock was
$34.00 per share. As of March 15, 2002, there were approximately 7,200 holders
of record of our Common Stock.

We have never paid dividends on our Common Stock and do not anticipate
paying dividends on our Common Stock in the foreseeable future. Our Board of
Directors presently intends to retain any future earnings of The Children's
Place to finance our operations and the expansion of our business. Our working
capital facility prohibits any payment of dividends. Any determination in the
future to pay dividends will depend upon our earnings, financial condition, cash
requirements, future prospects, covenants in our working capital facility and
any future debt instruments and such other factors as the Board of Directors
deems appropriate at the time.

13

ITEM 6. -- SELECTED FINANCIAL DATA

The following table sets forth certain historical financial and
operating data for The Children's Place. The selected historical financial data
is qualified by reference to, and should be read in conjunction with Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the financial statements and notes thereto included elsewhere in
this report. Certain prior fiscal year balances set forth below have been
reclassified to conform to fiscal 2001 presentation.

14

- ------------------------------
(1) All references to our fiscal years refer to the 52- or 53-week year ended
on the Saturday nearest to January 31 of the following year. For example,
references to fiscal 2001 mean the fiscal year ended February 2, 2002.
Fiscal 2000 was a 53-week year.
(2) The extraordinary loss in fiscal 1997 represented the write-off of
unamortized deferred financing costs and unamortized debt discount as a
result of the repayment of long-term debt in conjunction with our initial
public offering in September 1997.
(3) We define comparable store sales as net sales from stores that have been
open for more than 14 full months and that have not been substantially
remodeled during that time.
(4) For purposes of determining the comparable store sales increase, average
net sales per store and average net sales per gross square foot, fiscal
2000 results were recalculated based on a 52-week year.
(5) Average net sales per store represents net sales from stores open
throughout the full period divided by the number of such stores.
(6) Average square footage per store represents the square footage of stores
open on the last day of the period divided by the number of such stores.
(7) Average net sales per gross square foot represents net sales from stores
open throughout the full period divided by the gross square footage of
such stores.

15

ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED AS ITEM 14. THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES
AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE
IN THIS REPORT, PARTICULARLY IN "RISK FACTORS."

OVERVIEW

The Children's Place Retail Stores, Inc. is a specialty retailer of
apparel and accessories for children from newborn to twelve years of age. As of
March 15, 2002, we operated 543 stores in 47 states, located primarily in
regional shopping malls. We also sell our merchandise on our website. Over the
last several years, we have been aggressively opening new stores to capitalize
on our business strengths and strong store economics. During fiscal 1999, fiscal
2000 and fiscal 2001, we opened a total of 84, 108 and 121 new stores,
respectively. We closed one store in fiscal 2000 and one store in fiscal 2001.
We intend to continue our expansion program and currently plan to open
approximately 130 stores in fiscal 2002, which will include approximately 30
stores in Canada.

Our net sales have grown significantly during the past several years,
primarily as a result of new store openings. During fiscal 2001, we reported a
comparable store sales decline of 8% due in part to the difficult economic
climate which caused a slowdown in store traffic. We reported comparable store
sales growth of 15% and 4% during fiscal 1999 and fiscal 2000, respectively.
Despite the weak sales environment, net income increased 9% to $46.6 million in
fiscal 2001 from $42.7 million in fiscal 2000. We were able to achieve improved
profitability in fiscal 2001 through higher margins on our merchandise, a focus
on our inventory levels and expense control. Earnings per share also increased
8% to $1.73 per share in fiscal 2001 from $1.60 in fiscal 2000.

During fiscal 2002, we plan to focus our efforts on the opening of
approximately 130 stores, the start-up of our Canadian operations and
distribution facility, and the implementation of certain information system
initiatives, as well as an ongoing assessment of our administrative
infrastructure to support our growing business.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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. Actual results could differ from our estimates. The
accounting policies that we believe are the most critical to aid in fully
understanding and evaluating reported financial results include the following:

Revenue Recognition - Sales are recognized upon purchase by customers
at our retail stores or when shipped from our distribution center if the product
was purchased from our website. Actual return rates have historically been
within our expectations and the reserve established. However, in the unlikely
event that the actual rate of sales returns by customers increased
significantly, our operational results could be adversely affected.

Inventory Valuation - Merchandise inventories are stated at the lower
of average cost or market, using the retail inventory method. Under the retail
inventory method, the valuation of inventories at cost and the resulting gross
margins are calculated by applying a cost-to-retail ratio to the retail value of
inventories. At any one time, inventories include items that have been marked
down to our best estimate of their fair market value. We base our decision to
mark down merchandise based upon its current rate of sale, the season, age and
sell-through of the item. To the extent that our estimates differ from actual
results, additional markdowns may have to be recorded, which could reduce our
gross margins and operating results. Our success is largely dependent upon our
ability to gauge the fashion taste of our customers and provide a well-balanced
merchandise assortment that satisfies customer demand. Any inability to provide
the proper quantity of appropriate merchandise in a timely manner could increase
future markdown rates.

16

Litigation - We are involved in various legal proceedings arising in
the normal course of our business. In our opinion, any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
business.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
income statement data expressed as a percentage of net sales:

YEAR ENDED FEBRUARY 2, 2002 COMPARED TO YEAR ENDED FEBRUARY 3, 2001

Net sales increased by $69.6 million or 12% to $657.0 million during
fiscal 2001 from $587.4 million during fiscal 2000. Net sales for the 121 new
stores opened, as well as other stores that did not qualify as comparable
stores, contributed $118.4 million of the net sales increase. This net sales
increase was partially offset by an 8% comparable store sales decline in fiscal
2001, which decreased our net sales by $40.0 million. Comparable store sales
increased 4% in fiscal 2000. To more closely match the same period last year,
comparable stores sales calculations for fiscal 2001 have shifted last year's
sales by one week since fiscal 2000 was a fifty-three week year. In addition,
the extra week in fiscal 2000 contributed $8.8 million to fiscal 2000 net sales.

Our comparable store sales decline in fiscal 2001 was attributable in
part to a slowdown in store traffic caused by a weak economic climate. In
addition, sales of our folding "Yaak" scooter contributed $16.1 million to
fiscal 2000 sales. During fiscal 2001, sales of the Yaak folding scooter were
approximately $0.6 million. Excluding sales of the Yaak folding scooter,
comparable store sales decreased 5% during fiscal 2001.

Gross profit increased $31.7 million to $279.7 million during fiscal
2001 from $248.0 during fiscal 2000. As a percentage of sales, gross profit
increased 0.4% to 42.6% during fiscal 2001 from 42.2% during fiscal 2000. During
fiscal 2001, gross profit, as a percentage of net sales, increased due to higher
initial markups achieved through effective product sourcing. These increases
were partially offset by higher occupancy costs and higher markdowns. Occupancy
costs were higher, as a percentage of net sales, due to our comparable store
sales declines and increased occupancy costs from new stores that have not been
open long enough to leverage their rent through an established sales base. Our
markdowns were higher, as a percentage of net sales, due to the weak sales
environment which was caused in part by a difficult economic climate.

Selling, general and administrative expenses increased $20.3 million to
$176.1 million in fiscal 2001 from $155.8 million in fiscal 2000. Selling,
general and administrative expenses were 26.8% of net sales during fiscal 2001,
as compared with 26.5% of net sales during fiscal 2000. The increase, as a
percentage of net sales, was primarily due to higher store payroll and medical
costs, partially offset by lower marketing costs, and the leveraging of
corporate administrative expenses. In addition, fiscal 2000 included certain
one-time expenses.

17

Depreciation and amortization amounted to $27.6 million, or 4.2% of net
sales, during fiscal 2001, as compared to $20.9 million, or 3.6% of net sales,
during fiscal 2000. The increase in depreciation and amortization primarily was
a result of increases to our store base.

Interest expense, net, for fiscal 2001 was $0.3 million, or 0.1% of net
sales, as compared to $1.2 million, or 0.2% of net sales, during fiscal 2000.
The decrease in interest expense, net, was due to lower borrowings under our
working capital facility, lower interest rates and interest income recorded on
our investments.

Our provision for income taxes in fiscal 2001 was $29.2 million, as
compared to a provision for income taxes of $27.5 million in fiscal 2000. The
increase in our provision for income taxes during fiscal 2001 was due to our
increased profitability. Our effective tax rate was 38.5% and 39.1%, during
fiscal 2001 and fiscal 2000, respectively.

Fiscal 2001 net income increased to $46.6 million from $42.7 million in
fiscal 2000.

YEAR ENDED FEBRUARY 3, 2001 COMPARED TO YEAR ENDED JANUARY 29, 2000

Net sales increased by $165.9 million or 39% to $587.4 million during
fiscal 2000 from $421.5 million during fiscal 1999. Net sales for the 108 new
stores opened, as well as other stores that did not qualify as comparable
stores, contributed $142.9 million of the sales increase. Comparable store
sales, restated to reflect a comparable 52-week period, increased 4% and
contributed approximately $14.2 million of the increase in net sales. Comparable
store sales increased 15% in fiscal 1999. Sales for our folding Yaak scooter,
which was a trend item introduced in our stores in the third quarter of fiscal
2000, represented $16.1 million, or approximately 3% of net sales. In addition,
fiscal 2000 was a 53-week year, with the extra week contributing $8.8 million to
fiscal 2000 net sales.

Gross profit increased $67.7 million to $248.0 million during fiscal
2000 from $180.3 million in fiscal 1999. As a percentage of net sales, gross
profit decreased to 42.2% during fiscal 2000 from 42.8% during fiscal 1999. The
decrease in gross profit, as a percentage of net sales, was principally due to
higher markdowns, increased distribution and store occupancy costs, offset
partially by higher initial markups achieved through effective product sourcing
and the leveraging of our design, production and buying costs. Our increased
distribution costs were attributable to the distribution of merchandise ordered
from our e-commerce website and higher freight costs to ship product from our
New Jersey distribution center to an increased number of stores in the western
portions of the United States. These costs were partially offset by the
leveraging of payroll costs to operate our distribution center. Our increased
store occupancy costs resulted from our new stores that have not been open long
enough to leverage their rent through an established sales base.

Selling, general and administrative expenses increased $47.2 million to
$155.8 million in fiscal 2000 from $108.6 million in fiscal 1999. As a
percentage of net sales, selling, general and administrative expenses increased
to 26.5% of net sales during fiscal 2000 from 25.8% of net sales during fiscal
1999. During fiscal 2000, as a percentage of net sales, selling, general and
administrative expenses were unfavorably impacted by higher store payroll wage
rates, the settlement of executive severance agreements, the write-off of $0.7
million of intangible assets that were not part of our future e-commerce
strategy, and increased marketing costs, partially offset by the leveraging of
corporate administrative expenses.

Depreciation and amortization amounted to $20.9 million, or 3.6% of net
sales, during fiscal 2000, as compared to $13.8 million, or 3.3% of net sales,
during fiscal 1999. The increase in depreciation and amortization primarily was
a result of increases in our store base. In addition, we recorded a full year of
depreciation on our distribution center and corporate headquarters facility and
e-commerce assets during fiscal 2000. During fiscal 1999, depreciation commenced
on our distribution center and corporate headquarters during the third quarter
of 1999 and amortization of our e-commerce assets commenced in the fourth
quarter of 1999. These increases, as a percentage of net sales, were partially
offset by the leveraging of depreciation and amortization over a higher sales
base and by accelerated depreciation taken in fiscal 1999 in conjunction with
store re-fixturings and renovations.

Interest expense, net, for fiscal 2000 was $1.2 million, or 0.2% of net
sales, as compared to $0.4 million, or 0.1% of net sales, during fiscal 1999.
The increase in interest expense, net, was due to increased borrowings under our
working capital facility during fiscal 2000 to support our store growth.

18

Our provision for income taxes in fiscal 2000 was $27.5 million, as
compared to a provision for income taxes of $22.4 million during fiscal 1999.
The increase in our provision for income taxes during fiscal 2000 was due to our
increased profitability. Our effective tax rate was 39.1% and 39.0% for fiscal
2000 and fiscal 1999, respectively.

Fiscal 2000 net income increased to $42.7 million from $35.0 million in
fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

DEBT SERVICE/LIQUIDITY

During fiscal 2001, our primary uses of cash were financing new store
openings and providing for working capital, which primarily represented the
purchase of inventory. Our working capital needs follow a seasonal pattern,
peaking during the second and third quarters when inventory is purchased for the
back-to-school and holiday merchandise lines. We were able to meet our cash
needs principally by using cash flow from operations and borrowings under our
working capital facility. As of February 2, 2002, we had no long-term debt
obligations.

We currently have a working capital facility that provides for
borrowings up to $75 million (including a sublimit for letters of credit of $60
million). Foothill Capital Corporation acts as our agent bank for a syndicated
group of lenders on this facility. This working capital facility also contains
provisions to increase borrowings up to $100 million (including a sublimit for
letters of credit of $80 million), subject to sufficient collateralization and
the syndication of the incremental line of borrowing. The amount that can be
borrowed under our working capital facility depends upon our levels of inventory
and accounts receivable. Amounts outstanding under the facility bear interest at
a floating rate equal to the prime rate or, at our option, a LIBOR Rate plus a
pre-determined spread. The LIBOR spread is 1.25% to 2.50%, depending upon our
financial performance from time to time. Borrowings under the facility mature in
July 2003 and the facility provides for one year automatic renewal options. The
working capital facility contains certain financial covenants, including among
others, the maintenance of minimum levels of earnings and current ratios, and
imposes certain limitations on our annual capital expenditures, as well as the
prohibition on the payment of dividends. Credit extended under the working
capital facility is secured by a first priority interest in our present and
future assets, as well as the assets of our subsidiaries. We were in compliance
with all of the financial covenants under our working capital facility as of
February 2, 2002.

As of February 2, 2002 and February 3, 2001, there were no borrowings
and $3.3 million in borrowings under our working capital facility, respectively.
In addition, as of February 2, 2002 and February 3, 2001, we had outstanding
$9.4 million and $13.8 million, respectively, in letters of credit under our
working capital facility. Availability under the working capital facility as of
February 2, 2002 and February 3, 2001 was $57.2 million and $47.5 million,
respectively. The interest rates charged under the working capital facility were
4.75% and 8.50% per annum as of February 2, 2002 and February 3, 2001,
respectively.

CASH FLOWS/CAPITAL EXPENDITURES

Cash flows provided by operating activities were $86.8 million, $61.8
million and $38.4 million in fiscal 2001, fiscal 2000 and fiscal 1999,
respectively. In fiscal 2001, cash flows from operating activities increased
primarily as a result of lower inventory levels and increased operating
earnings. In fiscal 2000, cash flows from operating activities increased as a
result of an increase in operating earnings and increases in current
liabilities, partially offset by increased inventory to support our new store
growth.

Cash flows used in investing activities were $49.1 million, $55.2
million and $62.0 million in fiscal 2001, fiscal 2000 and fiscal 1999,
respectively. Cash flows used in investing activities relate primarily to store
openings and remodelings. In fiscal 2001, fiscal 2000 and fiscal 1999, we opened
121, 108 and 84 stores while remodeling 14, 14 and 11 stores, respectively. Cash
flows used in investing activities decreased in fiscal 2001 primarily due to
capital expenditures made in fiscal 2000 to equip and furnish our West Coast
distribution center and in fiscal 1999 to equip and furnish our Secaucus
distribution center and corporate headquarters facility, partially offset by
information system initiatives.

Cash flows used by financing activities were $0.6 million and $0.7
million in fiscal 2001 and fiscal 2000, respectively. During fiscal 1999, cash
flows provided by financing activities were $9.3 million. In fiscal 2001 and
fiscal 2000, cash flows used in financing activities reflected the net repayment
of borrowings under our working capital facility offset partially by funds
received from the exercise of employee stock options and employee stock
purchases.

19

We anticipate that total capital expenditures will approximate $50 to
$60 million in fiscal 2002, including our expansion into Canada. These
expenditures will relate primarily to the opening of approximately 130 stores,
the establishment of a distribution center in Canada, store remodelings,
hardware and software to support our information system initiatives, ongoing
store maintenance programs and ongoing administrative office and warehouse
equipment needs. We plan to fund these capital expenditures primarily with cash
flow from operations.

We believe that cash generated from operations and funds available
under our working capital facility will be sufficient to fund our capital and
other cash flow requirements for at least the next 12 months. In addition, as we
continue our store expansion program we will consider additional sources of
financing to fund our long-term growth.

Our ability to meet our capital requirements will depend on our ability
to generate cash from operations and successfully implement our store expansion
plans.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following tables summarize our contractual and commercial
obligations as of February 2, 2002:

(1) We expect to be released from standby letters of credit securing real
estate leases during fiscal 2002. No payment will be required for these
releases.

QUARTERLY RESULTS AND SEASONALITY

Our quarterly results of operations have fluctuated and are expected to
continue to fluctuate materially depending on a variety of factors, including
the timing of new store openings and related pre-opening and other startup
costs, net sales contributed by new stores, increases or decreases in comparable
store sales, weather conditions, shifts in timing of certain holidays, changes
in our merchandise mix and overall economic conditions.

Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school and holiday seasons. As is the
case with many retailers of apparel and related merchandise, we typically
experience lower net sales and net income during the first two fiscal quarters,
and net sales and net income are lower during the second fiscal quarter than
during the first fiscal quarter. Our first quarter results are heavily dependent
upon sales during the period leading up to the Easter holiday. Our third quarter
results are heavily dependent upon back-to-school sales and our fourth quarter
results are heavily dependent upon sales during the holiday season. We
experienced a loss in the second quarter of 2001 and expect to experience a
second quarter loss in fiscal 2002. Because of these fluctuations in net sales
and net income (loss), the results of operations of any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter.

The following table sets forth certain statement of operations data and
operating data for each of our last eight fiscal quarters. The quarterly
statement of operations data and selected operating data set forth below were
derived from our unaudited financial statements and reflect, in our opinion, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results of operations for these fiscal quarters.

20

ITEM 7A. -- QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14.

ITEM 9. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

21

PART III

ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by
reference to the sections entitled "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the 2001 Proxy
Statement to be filed with the Security and Exchange Commission. See also
Item 1.

ITEM 11. - EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by
reference to the sections entitled "Information Regarding the Board of Directors
- - Compensation of Directors" and "Executive Compensation" in the 2001 Proxy
Statement to be filed with the Security and Exchange Commission.

ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the 2001 Proxy Statement to be filed with the Security
and Exchange Commission.

ITEM 13. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by
reference to the sections entitled " Executive Compensation - Employment
Agreements," and "Compensation Committee Interlocks and Insider Participation"
and "Certain Relationships and Related Transactions" in the 2001 Proxy Statement
to be filed with the Security and Exchange Commission.

22

PART IV

ITEM 14. -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

The following documents are filed as part of this report:

Report of Independent Public Accountants
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001
Consolidated Statements of Income for each of the three fiscal years
ended February 2, 2002
Consolidated Statements of Changes in Stockholders' Equity for the
three fiscal years ended February 2, 2002
Consolidated Statements of Cash Flows for the three fiscal years ended
February 2, 2002
Notes to Consolidated Financial Statements

23

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED
FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND JANUARY 29, 2000
THE CHILDREN'S PLACE RETAIL STORES, INC.

24

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
The Children's Place Retail Stores, Inc.:

We have audited the accompanying consolidated balance sheets of The
Children's Place Retail Stores, Inc. (a Delaware corporation) and subsidiaries
(the "Company") as of February 2, 2002 and February 3, 2001, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended February 2, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Children's Place
Retail Stores, Inc. and subsidiaries as of February 2, 2002 and February 3,
2001, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended February 2, 2002, in conformity with
accounting principles generally accepted in the United States.

Arthur Andersen LLP

New York, New York
February 28, 2002

25

THE CHILDREN'S PLACE RETAIL STORES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.

26

THE CHILDREN'S PLACE RETAIL STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.

27

THE CHILDREN'S PLACE RETAIL STORES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED, JANUARY 29, 2000,
FEBRUARY 3, 2001 AND FEBRUARY 2, 2002
(IN THOUSANDS)

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.

28

THE CHILDREN'S PLACE RETAIL STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.

29

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Children's Place Retail Stores, Inc., ("the Company,") is a
specialty retailer of apparel and accessories for children from newborn to
twelve years of age. The Company designs, sources and markets its products under
"The Children's Place" brand name for sale exclusively in its stores and on its
website. As of February 2, 2002, the Company operated 520 stores in 46 states,
located primarily in regional shopping malls. The Company also has offices in
Asia which enables the Company to capitalize on new sourcing opportunities,
respond to changing merchandise trends and ensure product quality assurance.

FISCAL YEAR

The Company's fiscal year is a 52-week or 53-week period ending on the
Saturday nearest to January 31. The results for fiscal 2001, fiscal 2000 and
fiscal 1999 represent the 52-week period ended February 2, 2002, the 53-week
period ended February 3, 2001 and the 52-week period ended January 29, 2000,
respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 estimates made by and assumptions
used by management.

CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to
current year presentation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories, which consist primarily of finished goods, are stated at
the lower of average cost or market, calculated using the retail inventory
method.

REVENUE RECOGNITION

The Company recognizes revenue when its customers take possession of
the merchandise. An appropriate reserve for estimated sales returns is recorded
and is reflected in accrued expenses in the accompanying consolidated balance
sheets. The Company's policy with respect to gift cards is to record revenue as
the gift cards are redeemed for merchandise. Prior to their redemption, gift
cards are recorded as a liability.

During the fourth quarter of fiscal 2000, the Company applied the
provisions of the Emerging Issues Task Force 00-10, "Shipping and Handling Fees
and Costs," ("EITF 00-10"), which requires that all amounts billed to customers
for shipping and handling, be classified as revenue and the costs incurred for
such shipping and handling, be classified as costs of goods sold. Prior to the
application of EITF 00-10, the Company recorded the amounts billed to its
website customers for shipping and handling as a reduction of its cost of goods
sold. The impact of this reclassification increased net sales by approximately
$212,000 in fiscal 2001, $428,000 in fiscal 2000 and $0 in fiscal 1999.

COST OF SALES

In addition to the cost of inventory sold, the Company includes its
buying, distribution and occupancy expenses in its cost of sales.

30

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, except for store fixtures
and equipment under capital leases which are recorded at the present value of
the future lease payments as of lease inception. Property and equipment is
depreciated on a straight-line basis based upon their estimated useful lives,
which range from three to ten years. Amortization of property and equipment
under capital leases and leasehold improvements is computed on a straight-line
basis over the term of the lease or the estimated useful life, whichever is
shorter.

During fiscal 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). In accordance with SOP 98-1, internal use software
and other related costs are capitalized. External direct costs of materials,
consulting services and payroll costs of employees working solely on the
application development stage of the project are also capitalized in accordance
with SOP 98-1. These capitalized costs are amortized based upon their estimated
useful lives, which range from three to seven years, commencing with when the
system is placed in service. Training and travel costs related to systems
implementations are expensed as incurred. The Company capitalized approximately
$1,180,000, $788,000 and $798,000 in programming and development costs of
employees in fiscal 2001, fiscal 2000 and fiscal 1999, respectively.

DEFERRED FINANCING COSTS

The Company capitalizes costs directly associated with acquiring
third-party financing. Deferred financing costs are included in other assets and
are amortized over the term of the indebtedness. As of February 2, 2002,
unamortized deferred financing costs represent the cost of acquiring the
Company's working capital facility and were approximately $259,000, net of
accumulated amortization of $192,000. As of February 3, 2001, unamortized
deferred financing costs were approximately $259,000, net of accumulated
amortization of $130,000.

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company continually evaluates the carrying value and the economic
useful lives of its long-lived assets based on the Company's operating
performance and the expected undiscounted future net cash flows and adjusts the
carrying value of assets which may not be recoverable. The Company does not
believe that any impairment exists as of February 2, 2002 in the recoverability
of its long-lived assets.

PRE-OPENING COSTS

Store pre-opening costs, which consist primarily of payroll, supply and
marketing expenses, are expensed as incurred and are included in selling,
general and administrative expenses.

ADVERTISING COSTS

The Company expenses the cost of advertising when the advertising is
first run or displayed. Included in selling, general and administrative expenses
for fiscal 2001, fiscal 2000 and fiscal 1999 are advertising costs of
approximately $12,049,000, $12,943,000 and $9,218,000, respectively.

INCOME TAXES

The Company computes income taxes using the liability method. This
standard requires recognition of deferred tax assets and liabilities, measured
by enacted rates, attributable to temporary differences between financial
statement and income tax basis of assets and liabilities. Temporary differences
result primarily from accelerated depreciation and amortization for tax purposes
and various accruals and reserves being deductible for future tax periods.

31

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Values of Financial Instruments," ("SFAS 107") requires entities to
disclose the fair value of financial instruments, both assets and liabilities,
recognized and not recognized in the balance sheets, for which it is practicable
to estimate fair value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. Fair value is based on quoted market prices for the same or
similar financial instruments.

As cash and cash equivalents, accounts receivable and payable, and
certain other short-term financial instruments are all short-term in nature,
their carrying amount approximates fair value.

ACCOUNTING FOR STOCK BASED COMPENSATION

The Company accounts for its 1996 Stock Option Plan (the "1996 Plan"),
its 1997 Stock Option Plan (the "1997 Plan") and its Employee Stock Purchase
Plan (the "ESPP") under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Refer to Note 8. -- Stock
Option and Purchase Plans for pro forma disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").

NET INCOME PER COMMON SHARE

The Company reports its earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128"),
which requires the presentation of both basic and diluted earnings per share on
the statements of income.

In accordance with SFAS 128, the following table reconciles income and
share amounts utilized to calculate basic and diluted net income per common
share:

Antidilutive options consist of the weighted average of stock options
for the respective periods ended February 2, 2002, February 3, 2001 and January
29, 2000 that had an exercise price greater than the average market price during
the period. Such options are therefore excluded from the computation of diluted
shares.

DERIVATIVE INSTRUMENTS

In June 1999, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), subsequently
amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Changes in the derivative's fair value should be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement or other
comprehensive income and requires that a company must formally document,
designate and assess the effectiveness of transactions that qualify as hedging.

32

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Effective February 4, 2001, the Company adopted SFAS No. 133, as
amended. The adoption of SFAS No. 133, as amended, did not have a material
effect on the Company's consolidated financial statements, as the Company has
not entered into any derivative contracts.

FOREIGN CURRENCY TRANSLATION

The Company has determined that the local currency of its Hong Kong
subsidiary is the functional currency. In accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," the assets and
liabilities denominated in foreign currency are translated into U.S. dollars at
the current rate of exchange existing at period-end and revenues and expenses
are translated at average monthly exchange rates. Related translation
adjustments are reported as a separate component of stockholders' equity. The
effect of exchange rate changes on cash is insignificant.

NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 changes the accounting for business combinations, requiring that
all business combinations be accounted for using the purchase method and is
effective for all business combinations initiated after June 30, 2001. SFAS 142
specifies the financial accounting and reporting for acquired goodwill and other
intangible assets. Goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001.

SFAS 142 requires that the useful lives of intangible assets acquired
on or before June 30, 2001 be reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives should be tested for impairment. Goodwill recognized on or
before June 30, 2001 shall be tested for impairment as of the beginning of the
fiscal year in which SFAS 142 is initially applied in its entirety. The Company
anticipates that the adoption of SFAS 141 and SFAS 142 will not have a material
impact on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets," ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001, and addresses financial
accounting and reporting for the impairment of disposal of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of segment of a business. The Company
plans to adopt the standard at the beginning of fiscal 2002, and does not expect
that the adoption of SFAS 144 will have a material impact on its results of
operations, financial position or cash flows.

2. SHORT-TERM BORROWINGS

The Company has a working capital facility (the "Foothill Credit
Facility") with Foothill Capital Corporation ("Foothill Capital"). The Foothill
Credit Facility provides for up to $75 million in borrowings which includes a
sublimit of up to $60 million in letters of credit. Foothill Capital acts as our
agent bank for a syndicated group of lenders on this facility. This working
capital facility also contains provisions to increase borrowings up to $100
million (including a sublimit for letters of credit of $80 million), subject to
sufficient collateralization and the syndication of the incremental line of
borrowing. The amount that can be borrowed under the working capital facility
depends on the Company's levels of inventory and accounts receivable.

The Foothill Credit Facility expires in July 2003 and provides for one
year automatic renewal options. The Company had no outstanding borrowings and
$3.3 million outstanding under the Foothill Credit Facility as of February 2,
2002 and February 3, 2001, respectively. Letters of credit outstanding as of
February 2, 2002 and

33

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SHORT-TERM BORROWINGS (CONTINUED)

February 3, 2001 were $9.4 million and $13.8 million, respectively. Availability
as of February 2, 2002 and February 3, 2001 was $57.2 million and $47.5 million,
respectively.

The Foothill Credit Facility also contains certain financial covenants,
including, among others, the maintenance of minimum levels of earnings and
current ratios and imposes certain limitations on the Company's annual capital
expenditures, as defined in the Foothill Credit Facility, as well as a
prohibition on the payment of dividends. As of February 2, 2002, the Company was
in compliance with all of its covenants under the Foothill Credit Facility.
Noncompliance with these covenants could result in additional fees or could
affect the availability of the facility.

Amounts outstanding under the Foothill Credit Facility bear interest at
a floating rate equal to the prime rate or, at the Company's option, a LIBOR
Rate plus a pre-determined spread. The LIBOR spread is 1.25% to 2.50% depending
on the Company's financial performance from time to time. The interest rate
charged under the Foothill Credit Facility was 4.75% and 8.50% as of February 2,
2002 and February 3, 2001, respectively. In addition, the Company was also
required to pay an anniversary fee of $93,750, $93,750 and $37,500 during fiscal
2001, fiscal 2000 and fiscal 1999, respectively.

Borrowing activity under the Foothill Credit Facility was as follows
(dollars in thousands):

3. ACCRUED EXPENSES, INTEREST AND OTHER CURRENT LIABILITIES

Accrued expenses, interest and other current liabilities is comprised
of the following (dollars in thousands):

34

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. COMMITMENTS AND CONTINGENCIES

The Company leases all of its stores and distribution facilities, and
certain office equipment, store fixtures and automobiles, under leases expiring
at various dates through 2017. Certain leases include options to renew. The
leases require fixed minimum annual rental payments plus, under the terms of
certain leases, additional payments for taxes, other expenses and additional
rent based upon sales.

Rent expense is as follows (dollars in thousands):

Future minimum annual lease payments under the Company's operating
leases at February 2, 2002, are as follows (dollars in thousands):

5. LITIGATION

The Company is involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, any ultimate
liability arising out of such proceedings, will not have a material adverse
effect on the Company's financial position or results of operations.

6. INCOME TAXES

Components of the Company's provision for income taxes consisted of the
following (dollars in thousands):

35

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INCOME TAXES (CONTINUED)

A reconciliation between the calculated tax provision on income based
on the statutory rates in effect and the effective tax rate follows (dollars in
thousands):

7. STOCKHOLDERS' EQUITY

The Company's stockholders' equity is comprised of the following:

8. STOCK OPTION AND PURCHASE PLANS

STOCK OPTION PLANS

The Company accounts for its stock option plans in accordance with the
provisions of SFAS 123. Accordingly, no compensation expense has been recognized
for stock-based compensation, since the options

36

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK OPTION AND PURCHASE PLANS (CONTINUED)

granted were at prices that equaled or exceeded their estimated fair market
value at the date of grant. If compensation expense for the Company's stock
options issued in fiscal 2001, fiscal 2000 and fiscal 1999 had been determined
based on the fair value method of accounting, the Company's net income would
have been reduced to the pro forma amounts indicated below for the three fiscal
years in the period ended February 2, 2002:

The fair value of issued stock options were estimated on the date of
grant using the Black-Scholes option pricing model, incorporating the following
assumptions:

The Company has two stock option plans: the 1996 Plan and the 1997
Plan. The 1996 Plan authorized the granting of incentive stock options with
respect to 1,743,240 shares of Common Stock. The 1997 Plan was authorized and
amended to grant options with respect to 2,500,000 shares of Common Stock. As of
February 2, 2002, there were 57,300 shares available for grant under the 1996
Plan and 425,300 shares available for grant under the 1997 Plan.

Both the 1996 Plan and the 1997 Plan are administered by the Board of
Directors. Options granted under the 1996 Plan and the 1997 Plan have exercise
prices established by the Board of Directors provided that the exercise price of
incentive stock options may not be less than the fair market value of the
underlying shares at the date of grant. The 1996 Plan and the 1997 Plan also
contain certain provisions that require the exercise price of incentive stock
options granted to stockholders owning greater than 10% of the Company be at
least 110% of the fair market value of the underlying shares. Unless otherwise
specified by the Board of Directors, options vest at 20% a year over a five year
period.

Changes in common shares under option for the three fiscal years in the
period ended February 2, 2002 are summarized below:

37

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK OPTION AND PURCHASE PLANS (CONTINUED)

The following table summarizes information regarding options
outstanding at February 2, 2002:

STOCK PURCHASE PLANS

The Company's ESPP is authorized to issue up to 360,000 shares of
Common Stock for employee purchase through payroll deductions at 85% of fair
market value. All employees of the Company, who have completed at least 90 days
of employment and attained 21 years of age, are eligible to participate, except
for employees who own Common Stock or options on such Common Stock which
represents 5% or more of the Company. During fiscal 2001, fiscal 2000 and fiscal
1999, there were 20,679 shares, 25,702 shares and 11,659 shares issued under the
ESPP.

9. SAVINGS AND INVESTMENT PLAN

The Company has adopted The Children's Place 401(k) Savings and
Investment Plan (the "401(k) Plan"), which qualifies under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The 401(k) Plan is a defined
contribution plan established to provide retirement benefits for all employees
who have completed one year of service with the Company and attained 21 years of
age.

The 401(k) Plan is employee funded up to an elective annual deferral
and also provides an option for the Company to contribute to the 401(k) Plan at
the discretion of the 401(k) Plan's trustees. During fiscal 2001, fiscal 2000
and fiscal 1999, the Company matched the lesser of 50% of the participant's
contribution or 2.5% of the participant's compensation. During fiscal 2001,
fiscal 2000 and fiscal 1999, the Company's matching contributions to the 401(k)
Plan were approximately $888,000, $605,000 and $367,000, respectively.

38

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table summarizes the quarterly financial data for the
periods indicated (dollars in thousands, except for per share amounts):

11. RELATED PARTY TRANSACTIONS

SKM FINANCIAL ADVISORY SERVICES

In 1996, the Company entered into a management agreement with SKM which
provides for the payment of an annual fee of $150,000, payable quarterly in
advance, in exchange for certain financial advisory services. This management
agreement remains in effect until SKM or any of its affiliates' total ownership
of the Company's Common Stock is less than 10% on a fully diluted basis.
Pursuant to the management agreement, the Company incurred fees and expenses of
approximately $160,000, $150,000 and $151,000 during fiscal 2001, fiscal 2000
and fiscal 1999, respectively.

STOCKHOLDERS AGREEMENT

The Company and certain of its stockholders, who as of February 2, 2002
own in the aggregate a majority of the Common Stock, are parties to a
Stockholders Agreement (the "Stockholders Agreement"). The Stockholders
Agreement places certain limitations upon the transfer, in privately negotiated
transactions, of shares of Common Stock beneficially owned by Ezra Dabah and the
SK Funds. In addition, the Stockholders Agreement provides that (1) so long as
Ezra Dabah, together with members of his family, beneficially owns shares
representing at least 25% of the shares of Common Stock owned by such parties on
the date of the Stockholders Agreement, the stockholders party to the
Stockholders Agreement will be obligated to vote all shares as to which they
have voting rights in a manner such that the Board of Directors will at all
times include three directors nominated by Ezra Dabah and (2) so long as the SK
Funds beneficially own shares representing at least 25% of the shares of Common
Stock owned by such parties on the date of the Stockholders Agreement, the
stockholders party to the Stockholders Agreement will be obligated to vote all
shares as to which they have voting rights in a manner such that the Board of
Directors will at all times include two directors nominated by the SK Funds.
Should the number of directors comprising the Board of Directors be increased,
nominees for the remaining director positions will be designated by the Board of
Directors.

39

THE CHILDREN'S PLACE RETAIL STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. RELATED PARTY TRANSACTIONS (CONTINUED)

The Stockholders Agreement provides that so long as the SK Funds
beneficially own shares representing at least 25% of the outstanding Common
Stock, the Company will not, without the affirmative vote of at least one
director nominated by the SK Funds, engage in specified types of transactions
with certain of its affiliates (not including the SK Funds), take action to
amend the ByLaws or Certificate of Incorporation or increase or decrease the
size of the

entire Board of Directors. The Stockholders Agreement also provides that certain
specified types of corporate transactions and major corporate actions will
require the approval of at least two-thirds of the members of the Board of
Directors.

Under the terms of the Stockholders Agreement, the rights of any party
thereunder will terminate at the time that such party's Common Stock constitutes
less than 25% of the shares of Common Stock owned by such party on the date of
the Stockholders Agreement. All the provisions of the Stockholders Agreement
will terminate when no party to the Stockholders Agreement beneficially owns
shares representing at least 25% of the outstanding Common Stock owned by such
party on the date of the Stockholders Agreement.

MERCHANDISE FOR RE-SALE

During fiscal 1999, the Company purchased approximately $565,000 in
footwear from Nina Footwear Corporation. Stanley Silverstein, a member of the
Company's Board of Directors and Ezra Dabah's father-in-law, owns Nina Footwear
Corporation with his brother.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain of its
executive officers which provide for the payment of severance up to three times
the officer's salary and certain benefits following any termination without
cause.

EXECUTIVE OFFICERS

On or about April 15, 2000, the Company made loans to seven executive
officers ranging from $200,000 to $500,000. The aggregate amount of these loans
totaled $2.2 million. The loans matured on or about April 15, 2001 and bore
interest at the prime rate as quoted by Chase Manhattan Bank. The loans were
secured by the principal residences of these executive officers. With the
exception of one loan, the executive loans were repaid prior to their maturity.
In April 2001, the Company extended the term on one executive loan to April 15,
2002. As of February 2, 2002, this loan had principal and accrued interest
outstanding totaling approximately $539,000.

40

(a) (2) FINANCIAL STATEMENT SCHEDULES

Financial statement schedules have been omitted because they are not
required or are not applicable.

(a)(3) EXHIBITS

3.1* Amended and Restated Certificate of Incorporation of the
Company.
3.2* Amended and Restated ByLaws of the Company.
4.1* Form of Certificate for Common Stock of the Company.
9.1* Amended and Restated Stockholders Agreement, dated as of
September 18, 1997.
10.1* 1996 Stock Option Plan of The Children's Place Retail Stores,
Inc.
10.2* 1997 Stock Option Plan of The Children's Place Retail Stores,
Inc.
10.3* The Children's Place Retail Stores, Inc. 401(k) Plan.
10.4* Form of The Children's Place Retail Stores, Inc. Employee
Stock Purchase Plan.
10.5* The Children's Place Retail Stores, Inc. Management Incentive
Plan.
10.8* Employment Agreement dated as of June 27, 1996 between the
Company and Ezra Dabah.
10.10* Form of Indemnification Agreement between the Company and the
members of its Board of Directors.
10.12* Form of Amended and Restated Registration Rights Agreement,
dated as of September 18, 1997.
10.17* Buying Agency Agreement dated September 17, 1996 between the
Company and KS Best International.
10.18* Advisory Agreement dated June 28, 1996 between the Company and
Saunders Karp & Megrue, L.P.
10.19** Service Agreement, between the Company and AST StockPlan,
Inc., dated June 8, 1998.
10.20*** Lease for a distribution center and corporate headquarters
facility between the Company and Hartz Mountain Associates,
dated June 30, 1998.
10.21*** Software Purchase and license agreement between the Company
and Trimax Inc. dated August 14, 1998.
10.22**** Amendment to a lease for a distribution center and corporate
headquarters facility between the Company and Hartz Mountain
Associates, dated November 20, 1998.
10.23+ Second Amended and Restated Loan and Security Agreement
between the Company and Foothill Capital Corporation, dated
July 5, 2000.
10.24++ Amended and Restated Merchant Services Agreement between the
Company and Hurley State Bank, dated as of July 1, 2000.
10.25++ Lease Agreement between the Company and Haven Gateway LLC,
dated as of August 17, 2000.
10.26++ Lease Agreement between the Company and Hartz Mountain
Associates, dated as of October 31, 2000.
21.1 Subsidiaries of the Company
23.1 Consent of Independent Public Accountants
99.1 Letter to Commission pursuant to Temporary Note 3T

* Incorporated by reference to the registrant's Registration Statement on
Form S-1 (No. 333-31535). Exhibit numbers are identical to the exhibit
numbers incorporated by reference to such registration statement.

** Incorporated by reference to the registrant's quarterly report on Form
10-Q for the period ended May 2, 1998. Exhibit 10.19 was filed
previously as Exhibit 10.1 in such quarterly report.

*** Incorporated by reference to the registrant's quarterly report on Form
10-Q for the period ended August 1, 1998. Exhibit 10.20 was filed
previously as Exhibit 10.2 and Exhibit 10.21 was filed previously as
Exhibit 10.3 in such quarterly report.

**** Incorporated by reference to registrant's quarterly report on Form 10-Q
for the period ended October 31, 1998. Exhibit 10.22 was filed
previously as Exhibit 10.5 in such quarterly report.

+ Incorporated by reference to registrant's quarterly report on Form 10-Q
for the period ended July 29, 2000. Exhibit 10.23 was filed previously
as Exhibit 10.1 in such quarterly report.

++ Incorporated by reference to registrant's quarterly report on Form 10-Q
for the period ended October 28, 2000. Exhibit 10.24 was filed

41

previously as Exhibit 10.2 in such quarterly report, Exhibit 10.25 was
filed previously as Exhibit 10.3 in such quarterly report and Exhibit
10.26 was filed previously as Exhibit 10.4 in such quarterly report.

(b) REPORTS ON FORM 8-K

No reports were filed.

42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

THE CHILDREN'S PLACE RETAIL STORES, INC.
By:

/s/ Ezra Dabah
---------------------------
Ezra Dabah
Chairman of the Board and
Chief Executive Officer
April 8, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.