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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended August 3, 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
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)
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 the number of shares outstanding 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 September 10, 2002:
26,507,275 shares.
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED AUGUST 3, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: PAGE
----
Consolidated Balance Sheets....................................................... 1
Consolidated Statements of Income................................................. 2
Consolidated Statements of Cash Flows............................................. 3
Notes to Consolidated Financial Statements....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risks....................... 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 10
Item 4. Submission to a Vote of Security Holders.......................................... 10
Item 6. Exhibits and Reports on Form 8-K.................................................. 10
Signatures................................................................................. 11
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AUGUST 3, 2002 FEBRUARY 2, 2002
-------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 31,705 $ 45,191
Accounts receivable....................................................... 17,506 11,895
Inventories............................................................... 62,261 59,095
Prepaid expenses and other current assets................................. 18,986 11,997
Deferred income taxes..................................................... 4,551 3,847
----------- -----------
Total current assets................................................... 135,009 132,025
Property and equipment, net................................................... 159,645 144,657
Deferred income taxes......................................................... 5,332 5,332
Other assets.................................................................. 816 835
------------ ------------
Total assets........................................................... $300,802 $282,849
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable.......................................................... $ 29,169 $ 22,177
Taxes payable............................................................. 179 6,195
Accrued expenses, interest and other current liabilities.................. 35,790 26,311
---------- ----------
Total current liabilities.............................................. 65,138 54,683
Other long-term liabilities................................................... 12,169 11,160
---------- ----------
Total liabilities...................................................... 77,307 65,843
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized; 26,504,808 shares
and 26,372,144 shares issued and outstanding, at August 3, 2002 and
February 2, 2002, respectively............................................ 2,650 2,637
Additional paid-in capital.................................................... 97,686 95,982
Translation adjustments....................................................... (281) (12)
Retained earnings............................................................. 123,440 118,399
--------- ---------
Total stockholders' equity............................................. 223,495 217,006
--------- ---------
Total liabilities and stockholders' equity............................. $300,802 $282,849
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------- ----------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net sales............................................ $128,295 $116,318 $301,342 $276,779
Cost of sales........................................ 91,909 75,499 185,828 167,798
--------- --------- -------- --------
Gross profit......................................... 36,386 40,819 115,514 108,981
Selling, general and administrative expenses......... 44,597 40,613 90,970 81,865
Depreciation and amortization........................ 8,441 6,473 16,711 12,342
--------- --------- -------- --------
Operating (loss) income.............................. (16,652) (6,267) 7,833 14,774
Interest (income) expense, net....................... (118) 112 (364) 142
--------- --------- -------- --------
(Loss) income before income taxes.................... (16,534) (6,379) 8,197 14,632
(Benefit) provision for income taxes................. (6,367) (2,487) 3,156 5,706
---------- --------- -------- --------
Net (loss) income ................................... $ (10,167) $ (3,892) $ 5,041 $ 8,926
========== ========= ======== ========
Basic net (loss) income per common share............. $(0.38) $ (0.15) $0.19 $0.34
Basic weighted average common shares outstanding..... 26,492 26,245 26,460 26,203
Diluted net (loss) income per common share .......... $(0.38) $ (0.15) $0.19 $0.33
Diluted weighted average common shares outstanding... 26,492 26,245 27,219 26,922
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
2
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
----------------------
AUGUST 3, 2002 AUGUST 4, 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $5,041 $8,926
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 16,711 12,342
Deferred financing fee amortization................................... 30 31
Loss on disposals of property and equipment........................... 325 226
Deferred taxes........................................................ (688) 152
Deferred rent......................................................... 1,201 1,011
Changes in operating assets and liabilities:
Accounts receivable................................................... (5,611) (7,672)
Inventories........................................................... (3,166) (495)
Prepaid expenses and other current assets............................. (6,989) (9,712)
Other assets.......................................................... (11) 298
Accounts payable...................................................... 6,992 (3,691)
Accrued expenses, interest and other current liabilities.............. (2,047) 2,956
----------- -----------
Total adjustments.................................................. 6,747 (4,554)
----------- -----------
Net cash provided by operating activities.................................... 11,788 4,372
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases and lease acquisition....................... (26,704) (25,783)
---------- ----------
Net cash used in investing activities........................................ (26,704) (25,783)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases....................... 1,699 1,348
Borrowings under revolving credit facility................................... 13,228 313,235
Repayments under revolving credit facility................................... (13,228) (291,382)
---------- ---------
Net cash provided by financing activities.................................... 1,699 23,201
---------- ---------
Effect of exchange rate on cash.............................................. (269) (9)
---------- ---------
Net (decrease) increase in cash and cash equivalents.................. (13,486) 1,781
Cash and cash equivalents, beginning of period........................ 45,191 8,141
----------- ---------
Cash and cash equivalents, end of period..................................... $31,705 $9,922
========== ===========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest..................................... $60 $485
Cash paid during the period for income taxes................................. 14,735 15,404
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
3
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information. Certain information
and footnote disclosures required by GAAP for complete financial statements have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's financial position, results of operations and cash flow for the
periods indicated, and have been prepared in a manner consistent with the
audited financial statements as of February 2, 2002. These financial statements
should be read in conjunction with the audited financial statements and
footnotes for the fiscal year ended February 2, 2002 included in the Company's
Annual Report on Form 10-K for the year ended February 2, 2002 filed with the
Securities and Exchange Commission. Due to the seasonal nature of the Company's
business, the results of operations for the twenty-six weeks ended August 3,
2002 and August 4, 2001 are not necessarily indicative of operating results for
a full fiscal year.
2. NET (LOSS) INCOME PER COMMON SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the following table reconciles net (loss) income and share
amounts utilized to calculate basic and diluted net income per common share.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net (loss) income (in thousands)..... $(10,167) $(3,892) $5,041 $8,926
========= ======== ====== ======
Basic shares......................... 26,492,003 26,244,775 26,459,877 26,202,865
Dilutive effect of stock options..... 0 0 758,970 719,392
---------- ---------- ---------- ----------
Dilutive shares...................... 26,492,003 26,244,775 27,218,847 26,922,257
========== ========== ========== ==========
Antidilutive options................. 1,062,377 929,148 299,974 216,225
The net loss per share presented in the consolidated statements of
income for the thirteen weeks ended August 3, 2002 and the thirteen weeks ended
August 4, 2001, excludes the dilutive effect of stock options, which would be
antidilutive as a result of the net loss.
Antidilutive options consist of the weighted average of stock options
for the respective periods ended August 3, 2002 and August 4, 2001 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.
3. COMPREHENSIVE (LOSS) INCOME
The following table presents the Company's comprehensive income:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net (loss) income (in thousands)..... $(10,167) $(3,892) $5,041 $8,926
Translation adjustments.............. (269) (7) (269) (9)
------------ ------------ ---------- -----------
Comprehensive (loss) income.......... $(10,436) $(3,899) $4,772 $8,917
======== ======== ========= ======
4
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. 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.
5. CANADIAN ACQUISITION
On May 1, 2002, the Company acquired the leases for 23 stores and
other assets from Au Coin des Petits/Young Canada, the children's division of
Comark, Inc. for an immaterial amount. The Company successfully negotiated to
extend the terms of all the acquired leases to provide for full lease terms
of approximately 10 years. The stores are based in regional malls located in
the provinces of Ontario and Quebec. The Company converted the acquired
locations into The Children's Place stores and reopened 13 stores in the
second quarter of fiscal 2002. The remaining 10 stores opened in August 2002.
To facilitate this expansion, the Company has leased an approximately 30,000
square foot distribution center in Mississauga, Ontario. The Company also
entered into a $10 million (Canadian Dollar) facility with Toronto Dominion
Bank for its Canadian subsidiary that is secured by a standby letter of
credit.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supersedes 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 APB 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" and establishes accounting and reporting standards for the
impairment or disposal of long-lived assets. SFAS No. 144 requires that those
assets be measured at the lower of carrying amount or fair value less cost to
sell. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity that will be eliminated from the ongoing operations
of the entity in a disposal transaction. The adoption of this new principle did
not have a material impact on the Company's results of operations or financial
position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company will adopt the provisions of SFAS No. 145
upon its effective date and does not expect it to have a material effect on the
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes that
the adoption of this Statement will not have a significant impact on its results
of operations or financial position.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q 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" IN THE BUSINESS SECTION OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED FEBRUARY 2, 2002. 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
QUARTERLY REPORT ON FORM 10-Q 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
UNAUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q AND THE ANNUAL AUDITED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED FEBRUARY 2, 2002 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
income statement data expressed as a percentage of net sales:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 71.6 64.9 61.7 60.6
-------- -------- -------- --------
Gross profit.................................... 28.4 35.1 38.3 39.4
Selling, general and administrative expenses.... 34.8 34.9 30.2 29.6
Depreciation and amortization................... 6.6 5.6 5.5 4.5
--------- --------- --------- ---------
Operating (loss) income......................... (13.0) (5.4) 2.6 5.3
Interest (income) expense, net.................. (0.1) 0.1 (0.1) -
--------- --------- --------- ---------
(Loss) income before income taxes............... (12.9) (5.5) 2.7 5.3
(Benefit) provision for income taxes............ (5.0) (2.2) 1.0 2.1
--------- ----------- --------- ----------
Net (loss) income............................... (7.9)% (3.3)% 1.7% 3.2%
========= ========== ========= ==========
Number of stores, end of period................. 600 481 600 481
THIRTEEN WEEKS ENDED AUGUST 3, 2002 (THE "SECOND QUARTER 2002") COMPARED TO
THIRTEEN WEEKS ENDED AUGUST 4, 2001 (THE "SECOND QUARTER 2001")
Net sales increased by $12.0 million, or 10%, to $128.3 million during
the Second Quarter 2002 from $116.3 million during the Second Quarter 2001.
During the Second Quarter 2002, we opened 46 new stores, including 13 stores in
Canada. Net sales for the 46 new stores, as well as the other stores that did
not qualify as comparable stores, contributed $20.9 million of our net sales
increase. This net sales increase was partially offset by a 9% comparable store
sales decline in the Second Quarter 2002, which decreased our net sales by $8.9
million. Comparable store sales decreased 16% during the Second Quarter 2001.
During the Second Quarter 2002, our comparable store sales decline
resulted from low inventory levels and a merchandise mix that was too heavily
skewed to fashion merchandise. Our comparable store sales decline was also
unfavorably impacted by a slowdown in store traffic that was caused in part by
the difficult economic climate. As a result, we experienced a lower average
transaction size and a lower transaction count than the Second Quarter 2001.
Although we sold more units per transaction during the Second Quarter 2002 than
the Second Quarter 2001, the average retail price was lower as a result of the
aggressive markdowns taken to clear our summer merchandise.
6
During the four weeks ended August 31, 2002, we experienced a 16%
comparable store sales decline, as compared to a 9% comparable store sales
decline in the four weeks ended September 1, 2001. Sales continued to be
unfavorably impacted by lower back to school inventory levels, lower average
unit retails, and lower store traffic.
Gross profit decreased by $4.4 million to $36.4 million during the
Second Quarter 2002 from $40.8 million during the Second Quarter 2001. As a
percentage of net sales, gross profit decreased 6.7% to 28.4% during the Second
Quarter 2002 from 35.1% during the Second Quarter 2001. The decrease in gross
profit, as a percentage of net sales, was principally due to substantially
higher markdowns taken to clear summer merchandise and higher occupancy costs,
partially offset by higher initial markup achieved through lower product costs
from our manufacturers. Occupancy costs were higher, as a percentage of net
sales, due to our comparable store sales decline and increased occupancy costs
from new stores that have not been open long enough to leverage their rent
through an established sales base.
Selling, general and administrative expenses increased $4.0 million to
$44.6 million during the Second Quarter 2002 from $40.6 million during the
Second Quarter 2001. Selling, general and administrative expenses were 34.8% of
net sales during the Second Quarter 2002, as compared with 34.9% during the
Second Quarter 2001. As a percentage of net sales, selling, general and
administrative expenses were comparable to the Second Quarter 2001, although we
experienced a comparable store sales decline in the Second Quarter 2002. The
Second Quarter 2002 received a benefit from insurance proceeds and management
cost cutting initiatives, which were partially offset by higher medical benefit
costs, start-up costs from our expansion into Canada and higher store payroll.
The benefit from insurance proceeds approximated $1.1 million, or 0.8% of net
sales. Store payroll, as a percentage of net sales, was unfavorably impacted by
our comparable store sales decline.
Depreciation and amortization amounted to $8.4 million, or 6.6% of net
sales, during the Second Quarter 2002, as compared to $6.5 million, or 5.6% of
net sales, during the Second Quarter 2001. The increase in depreciation and
amortization primarily was a result of increases to our store base and increased
software amortization.
During the Second Quarter 2002, we recorded net interest income of $0.1
million, or 0.1% of net sales, due to our net cash investment position. During
the Second Quarter 2002, we had no borrowings under our working capital facility
other than letters of credit. During the Second Quarter 2001, we recorded
interest expense of $0.1 million, or 0.1% of net sales, due to borrowings under
our working capital facility.
Our benefit for income taxes for the Second Quarter 2002 was $6.4
million, as compared to a $2.5 million benefit in the Second Quarter 2001. Our
effective tax rate was 38.5% and 39.0% during the Second Quarter 2002 and the
Second Quarter 2001, respectively.
We recorded net losses of $10.2 million and $3.9 million during the
Second Quarter 2002 and the Second Quarter 2001, respectively.
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 COMPARED TO TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001
Net sales increased $24.5 million, or 9%, to $301.3 million during the
twenty-six weeks ended August 3, 2002 from $276.8 million during the twenty-six
weeks ended August 4, 2001. Net sales for the 80 stores opened during the
twenty-six weeks ended August 3, 2002, as well as the other stores that did not
qualify as comparable stores, contributed $49.6 million of the net sales
increase. This net sales increase was partially offset by a 10% comparable store
sales decline in the twenty-six weeks ended August 3, 2002, which decreased our
net sales by $25.1 million. Comparable store sales decreased 8% during the
twenty-six weeks ended August 4, 2001. During the twenty-six weeks ended August
3, 2002, our comparable store sales decline was attributable to low inventory
levels and a merchandise mix that was too heavily skewed to fashion merchandise.
Our comparable store sales decline was also unfavorably impacted by a slowdown
in store traffic that was caused in part by the difficult economic climate.
Gross profit increased by $6.5 million to $115.5 million during the
twenty-six weeks ended August 3, 2002 from $109.0 million during the twenty-six
weeks ended August 4, 2001. As a percentage of net sales, gross profit decreased
1.1% to 38.3% during the twenty-six weeks ended August 3, 2002 from 39.4% during
the twenty-six weeks ended August 4, 2001. The decrease in gross profit, as a
percentage of net sales, was principally due to higher occupancy costs and
higher markdowns, partially offset by a higher initial markup achieved through
lower product costs from our manufacturers. Occupancy costs were higher, as a
percentage of net sales, due to our comparable store sales decline and increased
occupancy costs from new stores that have not been open long enough to leverage
their rent through an established sale base.
Selling, general and administrative expenses increased $9.1 million to
$91.0 million during the twenty-six weeks ended August 3, 2002 from $81.9
million during the twenty-six weeks ended August 4, 2001. Selling, general and
administrative expenses were 30.2% of net sales during the twenty-six weeks
ended August 3, 2002 as compared with 29.6% of net sales during the twenty-six
7
weeks ended August 4, 2001. As a percentage of net sales, selling, general and
administrative expenses increased due to higher store payroll, medical benefit
costs and start-up costs from our expansion into Canada, partially offset by a
benefit received from insurance proceeds and management cost cutting
initiatives. Store payroll, as a percentage of net sales, was unfavorably
impacted by our comparable store sales decline.
Depreciation and amortization amounted to $16.7 million, or 5.5% of net
sales, during the twenty-six weeks ended August 3, 2002, as compared to $12.3
million, or 4.5% of net sales, during the twenty-six weeks ended August 4, 2001.
The increase in depreciation and amortization primarily was a result of
increases to our store base, increased software amortization and increased
depreciation on our E-commerce assets.
During the twenty-six weeks ended August 3, 2002, we recorded net
interest income of $0.4 million, or 0.1% of net sales, due to our net cash
investment position. During the twenty-six weeks ended August 3, 2002, we had no
borrowings under our working capital facility other than letters of credit.
During the twenty-six weeks ended August 4, 2001, we recorded interest expense
of $0.1 million due to borrowings under our working capital facility.
Our provision for income taxes for the twenty-six weeks ended August 3,
2002 was $3.2 million, as compared to a $5.7 million provision during the
twenty-six weeks ended August 4, 2001. Our effective tax rate was 38.5% and
39.0% during the twenty-six weeks ended August 3, 2002 and the twenty-six weeks
ended August 4, 2001, respectively.
We recorded net income of $5.0 million and $8.9 million during the
twenty-six weeks ended August 3, 2002 and the twenty-six weeks ended August 4,
2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
DEBT SERVICE/LIQUIDITY
Our primary uses of cash are financing new store openings and providing
for working capital, which principally represents 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
seasons. We have been able to meet our cash needs principally by using cash
flows from operations and seasonal borrowings under our working capital
facility. As of August 3, 2002, we had no long-term debt obligations.
Our working capital facility provides for borrowings up to $75 million
(including a sublimit for letters of credit of $60 million). As of August 3,
2002, we had no borrowings under our working capital facility and had
outstanding letters of credit of $23.3 million. Availability under our
working capital facility was $51.7 million. The maximum outstanding letter of
credit usage under our working capital facility during the twenty-six weeks
ended August 3, 2002 was $24.4 million. As of August 3, 2002, we were in
compliance with all of our covenants under our working capital facility.
We amended our working capital facility to provide for direct
borrowings of our Canadian subsidiary. We have also entered into a $10 million
(Canadian dollar) facility with Toronto Dominion Bank for our Canadian
subsidiary that is secured by a standby letter of credit. As of August 3, 2002,
we had no borrowings under our Canadian facility.
CASH FLOWS/CAPITAL EXPENDITURES
During the twenty-six weeks ended August 3, 2002, operating activities
provided $11.8 million in cash flow as compared to $4.4 million in cash flow
provided by operating activities during the twenty-six weeks ended August 4,
2001. During the twenty-six weeks ended August 3, 2002, cash flows provided by
operating activities increased primarily as a result of increases in current
liabilities and decreases in current assets.
Cash flows used in investing activities were $26.7 million and $25.8
million in the twenty-six weeks ended August 3, 2002 and the twenty-six weeks
ended August 4, 2001, respectively. Cash flows used in investing activities
primarily represented capital expenditures for new store openings and
remodelings.
In the twenty-six weeks ended August 3, 2002 and the twenty-six
weeks ended August 4, 2001, we opened 80 and 81 stores, respectively. During
the Second Quarter 2002, we also opened an approximately 30,000 square foot
distribution center in Mississauga, Ontario to support our Canadian
operations. In the twenty-six weeks ended August 3, 2002, we remodeled 2
stores and converted 3 stores into our combo format. During the twenty six
weeks ended August 4, 2001, we remodeled 8 stores. During fiscal 2002, we
plan to open a total of approximately 130 stores, remodel 6 stores and
convert 6 stores to our combo format. We also plan to close 2 stores during
the remainder of fiscal 2002. Capital expenditures also include hardware and
software to support our information systems initiatives, along with ongoing
8
store, office and distribution equipment needs. We anticipate that total capital
expenditures during fiscal 2002 will approximate $50 to $60 million, including
our expansion into Canada. We plan to fund these capital expenditures primarily
with cash flows from operations.
Cash flows provided by financing activities were $1.7 million during
the twenty-six weeks ended August 3, 2002 as compared to $23.2 million provided
by financing activities in the twenty-six weeks ended August 3, 2001. During the
twenty-six weeks ended August 3, 2002, cash flows provided by financing
activities reflected funds received from the exercise of employee stock options
and employee stock purchases. During the twenty-six weeks ended August 4, 2001,
cash flow provided by financing activities reflected net borrowings under our
working capital facility and funds received from the exercise of employee stock
options and employee stock purchases.
We believe that cash on hand, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 6, 2002.
The following matters were voted on by the stockholders:
1. Election of two Directors. Messrs. Dabah and Megrue were
elected to the Company's Board of Directors for terms expiring
in 2005. The results of the voting were as follows: 24,864,865
votes in favor of Mr. Dabah, with 700,593 votes withheld;
25,276,430 votes in favor of Mr. Megrue, with 289,028 votes
withheld.
2. Approval of an amendment to the Company's 1997 stock option
plan to increase by 1,500,000 the number of shares available
for issuance thereunder. The result of the vote was 20,853,924
in favor, 875,474 against, and 13,399 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- --------------------------------------------------------------
10.2 Lease Agreement as of August 21, 2000 between Orion Properties
LTD., and Orlando Corporation and HMV Canada, Inc. Together
with, Consent to Assignment as of April 5, 2002 between the
Company and Orion Properties LTD., and Orlando Corporation and
HMV Canada, Inc. Together with, Assignment of Lease as of
April 10, 2002 between the Company and HMV Canada, Inc.
(b) REPORTS ON FORM 8-K
Changes in Registrant's Certifying Accountant, dated July 15, 2002.
10
SIGNATURES
Pursuant to the requirements 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.
Date: September 17, 2002
By: /s/ EZRA DABAH
----------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 17, 2002 By: /s/ SETH L. UDASIN
-----------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
11
CERTIFICATIONS
I, Ezra Dabah, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Children's
Place Retail Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 17, 2002
By: /s/ EZRA DABAH
----------------------------------
Chairman of the Board and
Chief Executive Officer
I, Seth L. Udasin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Children's
Place Retail Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 17, 2002
By: /s/ SETH L. UDASIN
------------------------------
Vice President and
Chief Financial Officer
12
CERTIFICATIONS
I, Ezra Dabah, Chairman and Chief Executive Officer of The Children's
Place Retail Stores, Inc. (the "Company"), pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, do hereby certify as follows:
1. The quarterly report of the Company on Form 10-Q for the period ended
August 3, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such quarterly report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 17day of September,
2002.
By: /s/ EZRA DABAH
--------------------------------------
Chairman of the Board and
Chief Executive Officer
I, Seth L. Udasin, Vice President and Chief Financial Officer of The
Children's Place Retail Stores, Inc. (the "Company"), pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, do hereby certify as follows:
1. The quarterly report of the Company on Form 10-Q for the period ended
August 3, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such quarterly report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 17day of September,
2002.
By: /s/ SETH L. UDASIN
---------------------------------
Vice President and
Chief Financial Officer
13